U.S. Markets closed

Edited Transcript of EPR earnings conference call or presentation 26-Feb-19 1:30pm GMT

Q4 2018 EPR Properties Earnings Call

Kansas City Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of EPR Properties earnings conference call or presentation Tuesday, February 26, 2019 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brian Moriarty

EPR Properties - VP of Corporate Communications

* Gregory K. Silvers

EPR Properties - President, CEO & Director

* Mark Alan Peterson

EPR Properties - Executive VP, CFO & Treasurer

================================================================================

Conference Call Participants

================================================================================

* Alexei Siniakov

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Collin Philip Mings

Raymond James & Associates, Inc., Research Division - Analyst

* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Michael Albert Carroll

RBC Capital Markets, LLC, Research Division - Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - VP and Senior Analyst

* Robert Chapman Stevenson

Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Year-End 2018 EPR Properties Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to introduce Mr. Brian Moriarty, Vice President of Corporate Communications. You may begin.

--------------------------------------------------------------------------------

Brian Moriarty, EPR Properties - VP of Corporate Communications [2]

--------------------------------------------------------------------------------

All right. Thank you, and thanks to everyone for joining us today for our fourth quarter and 2018 year-end earnings call.

I'll start the call today by informing you that this call may include forward-looking statements as defined in the Private Securities Litigation 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 of results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of these factors that could cause results to differ materially from these forward-looking statements that are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q.

Now with that, I'll turn the call over to company President and CEO, Greg Silvers.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Brian, and good morning, everyone. Welcome to our fourth quarter and year-end 2018 earnings call. I'd like to remind everyone that slides are available to follow along via our website at www.eprkc.com.

With me on the call is today is the company's CFO, Mark Peterson.

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [4]

--------------------------------------------------------------------------------

Good morning.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [5]

--------------------------------------------------------------------------------

Who will review the company's financial summary. First, as always, I'll get started with our quarterly headlines, then discuss the business in greater detail.

Our first headline is the strong fourth quarter caps a successful year. In 2018, we delivered record results, with both total revenue and FFO, as adjusted per share, increasing by 22% versus the prior year.

Solid performance from our existing investments was enhanced by the $71.3 million in prepayment fees received from payouts of approximately $280 million of noneducation-related mortgage notes. Certainly, a strong return by any measure.

Second, investment spending regains momentum. During 2018, we were disciplined in our approach to capital allocation as we executed a capital recycling plan and prudently redeployed that capital. As the year progressed, our cost of capital returned to levels which allowed us to achieve reasonable spreads in pursuing accretive investments. And we accelerated our growth during the back half of the year.

We also began to broaden our investments in the experiential space, which we've highlighted as having a substantial future potential. I'll have more on this topic as I review our investment spending in more detail.

Third, tenant segment's broadly strong and a new tenant for CLA properties. 2018 was a record year for the box office, with revenues reaching $11.9 billion, an increase of over 7% versus the prior year and up over 4% versus the previous record year set in 2016. Additionally, attendance was up over 6%.

Overall, 2018 provided further affirmation that theater exhibition remains as the dominant out-of-home entertainment option.

In our Recreation segment, our ski properties are demonstrating solid performance, supported by early and sustained snows across the U.S.

Separately, we are pleased to announce that we've entered into an agreement with Children's Learning Adventure, which will allow us to execute on a plan to transition all 21 of our CLA properties.

Furthermore, we're excited to announce that we've signed leases with Crème de la Crème to become our tenant on all 21 of these properties.

Fourth, monthly dividend increase. Subsequent to the end of the quarter, we increased our monthly common dividend for 2019 by over 4%. This equates to a $4.50 annual dividend and represents our ninth consecutive year with a substantial dividend increase. Having successfully executed our significant capital recycling plan in 2018, this increase demonstrates the ongoing strength of our investment portfolio.

Fifth, introducing 2019 guidance. Our 2000 (sic) [2019] FFO as adjusted per share guidance range is $5.30 to $5.50. The midpoint of this range reflects over 4% earnings growth when we exclude the noneducation-related prepayment fees received in 2018. Additionally, the company's investment spending guidance range is $600 million to $800 million, with disposition proceeds expected to total from $100 million to $200 million.

We are pleased to be starting the year back on offense. As we broaden our aperture for expansion and experiential real estate, we are also uniquely positioned with the core organizational competencies to identify and underwrite strong opportunities to drive accretive growth.

Now I'll discuss the business in greater detail. At the end of the fourth quarter, our investments were over $6.8 billion, with 394 properties in service that were 99% occupied. During the quarter, investment spending was $217 million, bringing us to a total of $572 million year-to-date.

Our proceeds from dispositions were $71.7 million, bringing us to a total of over $471 million year-to-date.

Additionally, our company level rent coverage was at 1.92x, nicely above the 1.74x average we've seen over the past 3 years, and highlights the strength and consistency of our operators' businesses.

Now I'll provide an update on our 3 segments. At quarter-end, our Entertainment portfolio included approximately $3 billion of total investments, with 170 properties in service in 22 operators. Our occupancy was 98% and our rent coverage was 1.92x.

As I previously referenced, North American box office revenues were up 7.4% in 2018 versus the prior year and set a new all-time record. The industry pundits expect 2019 to be another strong year. While it is very difficult to predict which quarters will outperform or underperform, we believe that Q1 will likely be very soft due to the tough comparisons to a 2018 Q1, which had the blockbuster show of the year, Black Panther. 2019 has a very promising film line up from Disney, including Captain Marvel, Dumbo, Avengers: Endgame, Aladdin, Toy Story 4, and STAR WARS Episode 9. These films are expected to drive strong second and fourth quarters at the box office for 2018 strength was in the first and third quarters.

Investment spending in our Entertainment segment totaled $27.2 million, which included a $14.9 million theater acquisition, with the balance consisting primarily of build-to-suit developments and redevelopment of megaplex theaters, entertainment retail centers and family entertainment centers.

During the fourth quarter we received $28 million in disposition proceeds, including a $4 million prepayment fee and the remaining $24 million outstanding balance on a mortgage note receivable secured by the observation deck of the John Hancock Tower in Chicago, Illinois.

At quarter-end, our Recreation portfolio included $2.3 billion of total investments with 3 properties under development, 80 properties in service and 18 operators. Our occupancy was 100%, and our rent coverage was approximately 2.12x.

Shifting to operator performance. For those of us not living in Florida have experienced a challenging winter season, this is exactly what our ski tenants like to see. Their year-to-date admissions and revenues are up 13% and 8%, respectively, through January.

Investment spending in our Recreation segment totaled approximately $159.5 million, which included a $68.5 million investment in 2 unconsolidated joint ventures that purchased 2 recreation-anchored lodging properties in St. Pete Beach, Florida. $21.9 million on the Kartrite waterpark in the Catskills, with the balance consisting primarily of the City Museum in St. Louis, Missouri, and build-to-suit developments of golf entertainment complexes and attractions.

Our new recreation-anchored lodging properties are regional destination beach hotels located in St. Pete Beach, which is a Florida resort city located on a barrier island. As I mentioned, they will be held in 2 joint ventures, with EPR owning 65% and our partner, [Gencom], owning the remaining 35% and running the hotel operations through an affiliated company. The investments will be unconsolidated joint ventures due to our equal sharing of key decision-making authority with our partner. The properties uniquely own their beachfront, which allows for expansion of the enhanced experience that consumers desire, including the ability to bring entertainment and provide food and beverage service right on the beach. The properties have a combined 258 rooms, and our partner brings years of experience, operating recreation-anchored lodging properties for an impressive roster of institutional properties.

Additionally, our partnership anticipates launching a $24 million investment program later this year that will introduce new amenities to the properties, which will drive revenue growth over a longer-term investment horizon. We will fund our 65% share of this investment, and have included this in our investment spending budget.

Please note that we now have 5 recreation-anchored lodging properties. We began investing in this property type with the Camelback resort and built on the success earlier this year with the Pagosa Springs resort. Both of these investments are under triple-net leases with their respective operators.

I would like to comment on the structure behind our investments in the Kartrite waterpark hotel in the Catskills and the St. Pete's beach joint ventures. Both assets will initially be held in the traditional REIT lodging structure with a third-party management company that will employ the staff and actively run the day-to-day operations. However, it is our intent upon stabilization of these properties to convert these investments into a more traditional triple-net lease or debt structure. We believe that it will be in our advantage to wait until the properties have ramped up and have an operating history upon which to establish a long-term rental payment.

Our intent is to continue to be a net lease company. We are utilizing the REIT lodging structure as a bridge through stabilization to our desired outcome, and we intend to limit investments with this type of lease structure to 10% or less of our total portfolio. We are confident that these type of investments will allow us to broaden our portfolio of high-quality experiential assets and drive attractive shareholder returns.

The City Museum in downtown St. Louis is a highly interactive and artistic children's museum with a 20-year history of delighting guests and generating a stable stream of cash flows. The museum delivers an immersive experience that engages all of a person's senses and delivers an interactive path of discovery. Check it out on Instagram or look at over the 8,000 Google reviews on it.

The property demonstrates the variety of experiential assets that exist in the marketplace, and that can and should be part of our portfolio. City Museum's 20-year history of durability, along with consistent and reliable cash flows across diverse economic cycles, demonstrates the value of experiential assets. Our intention is to pursue additional experiential museum properties that share similar performance characteristics.

At quarter-end, our Education portfolio included over $1.4 billion of total investments, with 5 properties under development, 143 properties in service, and 59 operators. Our occupancy was 98%, and our rent coverage was 1.48x.

Investment spending in our Education segment totaled approximately $16.4 million, primarily consisting of build-to-suit developments and redevelopments of public charter schools and Early Childhood Education centers.

During the fourth quarter, we received $42.3 million in disposition proceeds, including $3.4 million of prepayment fees. The remaining $38 million outstanding on mortgage notes secured by 4 charter schools and a land parcel of approximately $0.9 million for the sale of an Early Childhood Education property.

In February 2019, we entered into agreements with Children's Learning Adventure, providing for the purchase and sale of certain assets associated with the businesses located at our 21 operating CLA properties, whereby we can nominate a replacement operator or take an assignment and transfer of the assets from CLA. The closings will occur on a school-by-school basis as we satisfy various closing conditions, which include our replacement operator obtaining the licenses and permits necessary to operate the schools. The outside date is March 31, 2020. And any schools that have not transferred to a replacement operator by this date will be surrendered by CLA. The aggregate cash consideration is anticipated to be approximately $15 million, which includes approximately $3.5 million for equipment utilized in the operations of our schools.

CLA has agreed to lease and operate each of the 21 properties for an aggregate of approximately $1 million per month of minimum rent until the transfer or surrender of each property. CLA is required to follow motion this week with a bankruptcy court, and the court's approval is a condition to the effectiveness of our agreements with CLA.

We believe that Crème de la Crème will be an exceptional operator of these properties. And their long-term success will allow us to meaningfully grow our rental stream from the $1 million per month that we anticipate during this transition period. As in -- also in February, we entered into triple-net leases with all of our 21 properties with Crème de la Crème, a premium early childhood education operator that operates nationally. These leases are contingent upon EPR delivering possession of the properties and include different rent structures based on whether or not CLA delivers the in-place operations of the school. Additionally, Crème will buy the CLA equipment that I referenced earlier in exchange for a note.

Moving to our investment spending guidance, we're introducing our 2019 guidance range of -- investment spending guidance range of $600 million to $800 million, and our disposition guidance range of $100 million to $200 million. Both of these guidance ranges reflect a return to levels more consistent with the last several years of our experience without any large individually significant acquisitions or dispositions and stable capital markets.

With that, I will turn it over to Mark for a discussion of the financials.

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [6]

--------------------------------------------------------------------------------

Thank you. Greg. I'd like to remind everyone on the call that our quarterly investors' supplemental can be downloaded from our website.

Now turning to the first slide. Net income for the fourth quarter was $48 million or $0.65 per share compared to $54.7 million or $0.74 per share in the prior year.

FFO was $97.7 million compared to $78 million in the prior year. FFO, as adjusted for the quarter, increased to $105.1 million versus $95.9 million in the prior year, and was $1.39 per share versus $1.29 per share in the prior year, an increase of 8%.

Before I walk through the key variances, I want to explain the financial impact of 3 items, which are excluded from FFO's adjusted. First, we recognized $5.9 million of severance expense, including $3.2 million of accelerated vesting of common shares related to the termination of the agreement with our former Senior Vice President and CIO and another employee. We expect to have an announcement of a new CIO soon.

Second, we recognize an impairment charge of $10.7 million related to our guarantees of $24.7 million in bonds secured by leasehold interests and improvements at 2 theaters in Louisiana. The operator of these theaters obtained a special bond financing, post Hurricane Katrina, under our program to spur new investment in the affected area. No further losses are anticipated on these guarantees as the charge booked approximates the difference between the estimated market value of our collateral, and the outstanding debt should these assets in debt eventually come on to our balance sheet.

Note that this is not expected to have much impact on our 2019 results, as the interest on the debt we would take on is about equal to the rent we would likely charge a new tenant. It should also be noted that these are the only 2 off-balance sheet debt guarantees we have in our portfolio.

Lastly, transaction costs were $1.6 million for the quarter, and $1.3 million of this related to preopening expenses in connection with the Kartrite indoor waterpark hotel. As Greg explained, we currently own and operate this investment in a traditional REIT lodging structure. I will discuss how the Kartrite and certain other recreation-anchored lodging investments impact our 2019 guidance in a bit.

Now let me walk through the key line item variances for the quarter versus the prior year. Our total revenue increased 13% compared to the prior year to $166.5 million. Within the revenue category, rental revenue increased by $22.1 million versus the prior year to $145.5 million. This increase resulted from rental revenue related to new investments as well as Endeavor Schools exercising with the right to convert their $143 million mortgage note into a master lease arrangement during the first quarter of 2018.

Additionally, we recognized $3 million in rental revenue from Children's Learning Adventure during the quarter related to their required payments under the monthly lease agreement. This represents an increase of $12 million versus the prior year, which included the reversal of straight line revenue of $9 million.

Tenant reimbursements included in revenue were $3.9 million for the quarter versus $4.1 million for the prior year. Additionally, percentage rents for the quarter, also included in rental revenue, increased to $5 million versus $3.1 million in the prior year. The increase of $1.9 million related to several of our Recreation investments as well as additional percentage rents from private schools.

Mortgage and other financing income was $20.5 million for the quarter, an increase of approximately $3.1 million versus the prior year. The increase was due primarily to prepayment fees received of $4 million related to the payoff of the remaining mortgage note secured by the John Hancock Observatory and $3.4 million related to charter school mortgage note payoffs versus $0.8 million of prepayment fees received in the prior year. This increase was partially offset by the impact of Endeavor Schools' lease conversion, as I mentioned earlier, as well as the sale of 4 Imagine Schools in July that were classified as investment in direct financing leases.

On the expense side, our property operating expense decreased by approximately $4 million versus the prior year, primarily due to $4.6 million less expense booked related to CLA. If you recall, we booked $6 million in bad debt expense related to CLA in the fourth quarter of 2017. This quarter, we reported a net $1.4 million of property tax expense related to CLA that we do not expect to be reimbursed during the transition of Crème de la Crème.

G&A expense increased to $12.2 million for the quarter compared to $9.6 million in the prior year, primarily due to an increase in payroll and benefit costs, including incentive compensation.

Finally, there were no termination fees related to charter schools included in gain on sale and added back to FFO as adjusted for the quarter versus $13.3 million of such termination fees in the prior year.

Now turning to our full year results on the next slide. Our total revenue increased 22% versus the prior year to a record $700.7 million. And FFO, as adjusted per share, also increased 22% versus prior year to $6.10, another record for EPR.

Note that prepayment and termination fees totaled $76.6 million in 2018. In addition to fees received from the disposition of public charter school assets, these fees include a total of $71.3 million or $0.93 per share of noneducation fees related to the payoff of mortgage notes by [Asbury] and the owners of the John Hancock Observatory. Prepayment and termination fees totaled $20.9 million in 2017 and related solely to public charter schools.

Turning to the next slide where we use some of the company's key credit ratios. As you can see, our coverage ratios continue to be strong, with fixed charge coverage at 3.3x, debt service coverage at 3.8x, interest coverage at 3.8x and our net debt-to-adjusted EBITDA ratio was 5.5x at quarter-end. Note that each of these ratios exclude all fees.

Our net debt-to-gross assets was 43% on a book basis and 37% on a market basis.

We increased our monthly dividend by over 6% in 2018. And our FFO as adjusted payout ratio was 78% for the quarter and 71% for the year. The lower payout ratios than usual were due to the impact of the fees I discussed earlier.

Our previously announced monthly common share dividend for 2019 is well covered and represents an annualized increase of over 4%, consistent with our expected growth and FFO as adjusted per share, excluding the noneducation-related fees in 2018.

Now let's turn to the next slide for capital markets and liquidity update. At quarter-end, we had total outstanding debt of $3 billion, of which $2.9 billion is either fixed-rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 4.6%.

We had $30 million outstanding at quarter-end on our $1 billion line of credit and $5.9 million of unrestricted cash on hand.

We are pleased to have a weighted average debt maturity of approximately 7 years, and no debt maturities until 2022, which is a great position to be in, given the potential of rising interest rates.

Subsequent to year-end, we issued approximately 490,000 common shares under our direct share purchase plan for net proceeds of $35.6 million, averaging $70.68 per share. The DSPP plan continues to be a very low cost and effective way to raise common equity.

Our balance sheet liquidity position are very strong, and this puts us in a great position for 2019.

Turning to the next slide. We're introducing guidance for 2019. FFO as adjusted per share of $5.30 to $5.50, and guidance for investment spending of $600 million to $8 million -- to $800 million.

Disposition proceeds are expected to total $100 million to $200 million for 2019. Excluding the noneducation-related prepayment fees of $71.3 million in 2018 or $0.93 per share, the midpoint of our FFO as adjusted per share guidance for 2019 reflects over 4% growth.

Before concluding, I would like to give some additional details regarding 2019 guidance. As Greg mentioned, during the fourth quarter, we invested $68.5 million or $29.5 million net of pro rata debt assumed, in 2 unconsolidated joint ventures that own and operate recreation anchored-lodging properties in St. Pete Beach, Florida. These unconsolidated joint ventures utilize the traditional REIT lodging structure, and we'll be investing in these properties over the next 2 years. Due to these ongoing investments, 2019 guidance includes only a small impact on FFO related to these properties. We expect the return on these joint ventures and joint venture interest to significantly increase as investments are completed in 2020.

Additionally, the Kartrite indoor waterpark is also owned and operated through a traditional REIT lodging structure and its grand opening is planned for the spring. Because we own 100% of this investment, it will be consolidated on our books, and as a result, we will be recording the revenue and operating expenses of this waterpark hotel.

In addition, in our 2019 guidance, we have included as transaction costs approximately $7 million of preopening costs for this project, which will be excluded from FFO as adjusted.

Finally, as the property will be ramping up in 2019, our guidance assumes no contribution to FFOs adjusted after the opening date.

As Greg also mentioned, we are working towards an orderly transition of our 21 open CLA properties to Crème de la Crème. We have included approximately $12 million in rental revenue relating to these properties in 2019 guidance.

Additionally, related to the transition of Crème de la Crème from CLA, we have included $11 million of the approximately $15 million in consideration to CLA as transaction costs in our 2019 guidance, which will be excluded from FFO as adjusted.

Some other items to note related to [2000] guidance and related timing. Mortgage prepayment fees are expected to be much lower in 2019 as we currently expect a range of $2.9 million to $3.9 million, with just under $1 million of this expected to occur in the first quarter.

Termination fees related to purchase options exercised by public charter school tenants are expected to increase in 2019 and we currently expect a range of $12 million to $16 million. Termination fees in the first quarter are expected to be approximately $5 million.

Percentage rents and participating interests are expected to be similar to last year, in the range of $9.5 million to $11.5 million.

Also, with respect to timing, similar to last year, we expect such amounts to be heavily weighted to the back half of the year.

Lastly, G&A expense is expected to decrease in 2019 to a range of $45 million to $47 million due to lower legal fees and payroll costs primarily related to stock grant and amortization.

Guidance for 2019 is detailed on Page 30 of our supplemental.

Turning to the next slide. I thought it might be helpful to put this all together for you and reconcile the midpoint of 2019 FFO as adjusted per share guidance to our actual Q4 results.

Starting with the Q4 actual reported FFOAA per share result of $1.39 multiplied by 4, you get $5.56. As prepayment and termination fees reported in Q4 multiplied by 4 are higher than that expected for 2019, due primarily to the prepayment fee received in Q4 related to John Hancock Observatory, you must subtract out $0.16.

Second, as I mentioned earlier, although we expect percentage rents and participating interest to be about the same as in the prior year, they are much higher in the fourth quarter than any other quarter. So you must subtract $0.13 to get to the proper annual total for this item.

Third, as I also mentioned, for the Kartrite, we have included 0 contribution post opening in 2019. The capitalized interests will be significantly lower post opening than the run rate booked in the fourth quarter. And less significantly, there'll be some new costs that begin in 2019 related to the infrastructure bonds previously issued. Thus, you must subtract an additional $0.08 for this.

On the positive side, you need to add $0.04 for the lower expected G&A total in 2019 in the fourth quarter x4, and then about $0.17 for the estimated impact and net investing and tenant activity, rent [costs], financing and other smaller items.

To conclude, I want to make a few points about the new lease accounting standard that became effective on January 1. Due to certain operating ground leases, and other lease arrangements, we will book right of use and straight-line receivable assets totaling between $235 million and $245 million and a corresponding operating lease liability of the same amount in the first quarter 2019.

Also, because in substantially all cases the ground lease costs are passed on to our tenants, we will begin recording such amounts as both rental revenue and property operating expense in 2019 and going forward. That amount is expected to between $22 million and $24 million for 2019.

In addition, certain other costs paid directly by us and reimbursed by our tenants under triple-net leases such as property taxes will require a similar growth of our revenue expense in equal amounts in future income statements, again with no expected net impact. This amount is less significant and expected to be between $8 million and $10 million.

Now with that, I'll turn it back over to Greg for his closing remarks.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [7]

--------------------------------------------------------------------------------

Thank you, Mark. Before we get to questions, I want to summarize our thoughts today.

2018 was about capital recycling and being prudent capital allocators. And while we are proud of our success, we are excited about our announcement today of a resolution of CLA and our intent to again ramp-up our investment spending.

As Mark mentioned, we anticipate making an announcement about a new Chief Investment Officer in the near future, which combined with the strength of our talent and the depth of our opportunities, should translate into productive results for our shareholders for this year and beyond.

With that, let's open it up for questions. Tiffany?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from Nick Joseph with Citi.

--------------------------------------------------------------------------------

Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [2]

--------------------------------------------------------------------------------

The St. Pete hotels, what does the $25 million of planned upgrades entail and what return on that spend are you targeting?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [3]

--------------------------------------------------------------------------------

Again, I think what we're looking at, Nick, is more food and beverage and entertainment options, as we've talked about. This is a unique property where you add the -- we own the beach. We can actually serve and provide a level of entertainment right directly on the beach. And we see that this -- these facilities already derive over 60% of their revenue from food and beverage. And we see ways to enhance that. So again, I would think that we would be hoping for kind of low-double-digit returns on that investment.

--------------------------------------------------------------------------------

Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [4]

--------------------------------------------------------------------------------

And then with the return to larger net acquisition growth this year, what does guidance assume in terms of equity issuance?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [5]

--------------------------------------------------------------------------------

Again, I think you look at -- and Mark can speak to this, but I would think we're traditionally a 60-40 issuer and if you take out where our dispositions are and then apply that 60-40 balance on that, that would probably be -- cut in line, Mark?

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [6]

--------------------------------------------------------------------------------

Yes. Just to elaborate on that. We have investment spending of $600 million to $800 million. So kind of $700 million at the midpoint. Disposition is $100 million to $200 million. So that's $500 million to $600 million of capital required. And as Greg said, if you kind of do the math on that at a, say a little less than 60% equity, that implies in excess of $250 million of equity. And we do have that in the plan. And we have planned to raise that via direct share purchase plan or perhaps a bigger offering. I will say that we do have a note maturity related to Schlitterbahn of $180 million. We haven't assumed that paying off, but that is a possibility. And obviously, that would reduce that need for equity going forward. By the way, on the debt side, we have a lot of capacity on our line of credit. So we'd probably -- the way things are looking, we'd probably just be using our line of credit to fund the debt portion of that incremental net investment of $500 million to $600 million.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

And our next question comes from Craig Mailman with KeyBanc Capital Markets.

--------------------------------------------------------------------------------

Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [8]

--------------------------------------------------------------------------------

Just on the CLA transition to Crème de la Crème. I mean, could you talk a little bit more about any downtime associated with the leases? Or any kind of -- how you guys are thinking about the cash flows this year? I know you said maybe a little bit more than $1 million a month that you're currently getting. Could you kind of give us maybe what the lease entails relative to currently what you're getting from CLA? And maybe also relative to I think, the $20-ish million that you originally signed, the deal with CLA? Just kind of curious what the recovery is.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [9]

--------------------------------------------------------------------------------

Yes. Sure. I think this year and in through March of next year is really a transition period. So I would kind of target that kind of $12 million range, meaning about -- because at any one time we're transitioning these over. And part of the agreement, Craig, was to not overwhelm an operator and give Crème the chance to really be successful and to not try to take on all of these at once but kind of orderly migrate them to -- from CLA to Crème. I think, as we go forward, we've structured these leases with percentage rents that we've always said that we think that based on that 20 that we can get back to you know kind of a 70%, 75% recovery, so you think can that $12 million go to the $14 million to $15 million range as they begin to ramp up. We think that's directionally where this will be headed. But I would think over the next 12 months, I would plan on that kind of $12 million because at any one time, some will be being operated by CLA, some will be in Crème and will be in that transition.

But our goal was for this to be orderly to not be disruptive to teachers and students. And we feel like we've structured a deal that will allow for that transition and cause the least disruption possible.

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [10]

--------------------------------------------------------------------------------

And as I mentioned, we included in our guidance that $12 million estimate as well.

--------------------------------------------------------------------------------

Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [11]

--------------------------------------------------------------------------------

Right. And just a clarification. I think $3.5 million of $15 million is for kind of equipment?

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [12]

--------------------------------------------------------------------------------

Right.

--------------------------------------------------------------------------------

Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [13]

--------------------------------------------------------------------------------

And is that basically the note amount that you guys are going to have out to Crème de la Crème? And kind of what does it yield on that?

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [14]

--------------------------------------------------------------------------------

That's correct. And it's at a 7% yield.

--------------------------------------------------------------------------------

Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [15]

--------------------------------------------------------------------------------

And then just, Mark, going back to the Schlitterbahn note potentially. Can you remind us where that yield is? I can look this up, but just curious.

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [16]

--------------------------------------------------------------------------------

It's about an 8 -- yes, about an 8%.

--------------------------------------------------------------------------------

Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [17]

--------------------------------------------------------------------------------

So you if you guys were to use that to finance investments there will be a little bit less accretion on that kind of $180 million then you could do -- just do in the DSPP?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [18]

--------------------------------------------------------------------------------

Yes. It depends upon the transaction and how you deploy it. But again, there could be a little -- could be a push. It should not be measurably different relative to -- but I mean, as opposed to if we issued equity, depending upon our price, it could not be as attractive as issuing equity.

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [19]

--------------------------------------------------------------------------------

It's probably a couple of pennies impact if it pays off and then we reduce our equity needs. So it's probably a couple of pennies. It's not that significant because it mostly replaces equity as a plan.

--------------------------------------------------------------------------------

Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [20]

--------------------------------------------------------------------------------

And then just last one for me. As you guys have kind of evolved the portfolio from primarily theaters to now education and some other retail kind of assets and now a little bit more this lodging that could be 10%. I mean, I guess just the thought process, number one, on a little bit more of I guess destination-type attractions or some of this lodging at this point in the cycle. And the volatility that doing some of these traditional lodging structures, at least in the interim could kind of introduce to earnings. Just kind of the thought process on that evolution and the risk reward of doing that.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [21]

--------------------------------------------------------------------------------

And, Craig, the only thing I would say is that chance -- I think this is consistent with our focus on what we think of our experiential assets. And let me assure you that we actually went back on these assets or these types of assets and looked how they performed during different economic cycles. If you look at how these assets have performed, they've performed quite well. These are drive-to destinations, which is consistent with our theme that we've had across the board. And I think, again, we keep going back to the comment that these experiential assets are where consumers are wanting to spend their money, where they're frequenting. And we see them actually as very stable. And that we're very comfortable that this portfolio that we're building. And like I said, I reference City Museum. It's a 20-year history. Go back and look at how well this is during the recession. And these are assets that perform and performed well during these periods. And therefore, rather than volatility, we think we're introducing stability.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

And our next question comes from Rob Stevenson with Janney.

--------------------------------------------------------------------------------

Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [23]

--------------------------------------------------------------------------------

Mark, other than the $7 million of Cartwright preopening cost that you're excluding from FFO as adjusted in the $11 million from CLA Crème that you're doing, that $18 million, is there anything else material that you're -- that the GAAP between FFO, NAREIT and FFO adjusted?

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [24]

--------------------------------------------------------------------------------

Well, we do have the add back for termination fees and so forth that we typically have on the Trevor school side. But I pointed out that transaction costs just because that's much larger than normal. We typically have some transaction costs, but certainly those 2 events, the Cartwright preopening and then the CLA consideration will increase that. As far as the difference, I think it's kind of the ordinary stuff, the different routine FFO and FFO as adjusted other than that.

--------------------------------------------------------------------------------

Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [25]

--------------------------------------------------------------------------------

Okay. And the $7 million of Cartwright preopening cost, it's all on the first half of the year?

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [26]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [27]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [28]

--------------------------------------------------------------------------------

Okay. And then on the Crème stuff is throughout the year?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [29]

--------------------------------------------------------------------------------

Yes. Periodically, it's -- I mean, again, as you can imagine we structure this to incentivize the orderly transition, so...

--------------------------------------------------------------------------------

Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [30]

--------------------------------------------------------------------------------

Okay. And then do you have any assets currently with Crème before this new deal?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [31]

--------------------------------------------------------------------------------

We do not. We did not. We had a relationship there, talking to them and they came to the table interested. I mean, they operate larger-sized children's centers. So this was a natural fit for their type and size of business with the facilities that we have.

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [32]

--------------------------------------------------------------------------------

Rob, I know you keep track. Sorry. I was going to give you a little more guidance on that transaction cost. That $7 million, because I know you track FFO NAREIT. That $7 million is -- since it opened in the spring is primarily first quarter. So I want to give you a little more guidance on that. And then the CLA amount that $11 million is probably more weighted to the back half of the year just the way that transition goes. So just wanted to help you out a little bit on the timing of those 2 things.

--------------------------------------------------------------------------------

Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [33]

--------------------------------------------------------------------------------

Okay. And then just back to Crème. I mean, when you take a look them versus your other early childhood operators in the portfolio excluding CLA, I mean, what -- how do they sort of stack up and compare? And sort of what's the expectations there operationally? I mean, are they at the top end of the operating spectrum? Are they sort of middle-of-the-road? How should we be thinking about them as an operator within your overall early childhood operating portfolio?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [34]

--------------------------------------------------------------------------------

I would say consistent with their name, they're at the top end. They are highly thought of and offer a premier experience, which we thought, Rob, partnered well with what we think were our premier facilities. As I said, this kind of felt like a natural fit with their kind of upper level kind of focus and their ability to deliver outstanding kind of performance and reviews. And I think if -- when people go out and look at them, they will see that alignment between our facilities and their operations.

--------------------------------------------------------------------------------

Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [35]

--------------------------------------------------------------------------------

Okay. And then just last one for me. In terms of -- if you guys look at other lodging opportunities, are you guys willing to go Caribbean, Mexico all-inclusives and things of that nature? Or was this more or less a unique opportunity for you and mostly consistent with staying in the U.S.?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [36]

--------------------------------------------------------------------------------

I would say where we're at is these are what we think of as recreation-anchored lodging that's the way we look at it. That's really kind of what we're looking at in what I would say the U.S. This is not -- if you look at where we've been with waterpark hotels, where these type of things. I don't think this is going to be this big. As I said, we're not going to become a lodging REIT. These are unique assets that have unique opportunities to exploit what we think are recreation or entertainment options. And those are quite unique compared to the lodging world. So I think these are what we think are tuck-in opportunities to an experiential portfolio but not a driving force.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

And our next question comes from Collin Mings with Raymond James.

--------------------------------------------------------------------------------

Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [38]

--------------------------------------------------------------------------------

Just given the JV structure on the properties here in St. Pete, how should we think about your appetite for additional joint venture deals, particularly as you look at maybe some property types that are outside of your traditional buckets?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [39]

--------------------------------------------------------------------------------

I think, that's always an interesting kind of way for us to look at to derisk those, to share kind of capital to create alignment and to present an ability for us to execute and combine our expertise on those recreation entertainment availability and what we can bring to the table with someone who also has that unique lodging experience. So I think, Collin, we looked at it as a way to not only derisk our investment but create alignment and we also had to find someone who saw the vision that we did of -- at some point in time converting these more into a traditional structure. So it will take -- it takes the right partner but we have to create kind of alignment of interest and we think we've done that.

--------------------------------------------------------------------------------

Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [40]

--------------------------------------------------------------------------------

Okay. So it sounds like you're open to it but it'll be pretty selective.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [41]

--------------------------------------------------------------------------------

Yes, always.

--------------------------------------------------------------------------------

Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [42]

--------------------------------------------------------------------------------

Okay. And then, you touched on the museum deal in the quarter and just appetite to do more deals on that front. Just maybe update us on where you stand as far as moving forward like live performance venue investment opportunity. I know that's kind of another area that you guys have highlighted of potential growth going into the future?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [43]

--------------------------------------------------------------------------------

Sure. I would say right now, our opportunity set and the level and depth of what we're talking to as far as opportunities have never been greater. There is a lot of transaction opportunity as we expand and talk to people about the aperture of this experiential portfolio. And so while we don't have anything to -- beyond what we've said, we're constantly seeing where the consumer is moving and spending their dollars and want to spend their dollars. And we think that's going to create new opportunities. We think that investors want exposure to these macro trends that we're taking advantage of. And we think we are uniquely positioned to not be just what is not theaters, not just attractions, but the entire experiential focus. And so we're working hard at it, Collin. And we think there'll be new and exciting announcements to come that will continue this focus on all things experiential.

--------------------------------------------------------------------------------

Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [44]

--------------------------------------------------------------------------------

Okay. And then maybe just on the investment spend number. Any initial thoughts on, kind of, the mix kind of if you look at the pipeline right now as far as what that might look like in terms of acquisitions versus a development or other spending?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [45]

--------------------------------------------------------------------------------

Right. I think it will be weighted more towards the acquisition side this year. I mean last year it ended up being about 50% acquisition. I think it could be higher this year and it will be more focused in our Entertainment and Recreation segments. As I said, we're spending a lot of time on our experiential segments. Those 2. And seeing a lot of receptivity both from opportunities and from appreciation from investors. So I think, acquisition -- more acquisition weighted and more weighted in those 2 areas.

--------------------------------------------------------------------------------

Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [46]

--------------------------------------------------------------------------------

Okay. One last for me, just following on that plan and I'll it over. Just is there anything in particular that kind of is driving as you think about what areas you want to focus in on why that's -- lend itself for you guys to be a little bit more focused on acquisitions versus the development or some other investment? Why does it lend itself more towards acquisitions?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [47]

--------------------------------------------------------------------------------

I just think right now construction costs are rising at a very pretty rapid pace. And I think it's -- that acquisition opportunities are probably just more prevalent than the level of spread that we used to achieve on a risk-adjusted basis on development is not quite as attractive right now as it is on acquisitions.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

And our next question comes from Michael Carroll with RBC Capital Markets.

--------------------------------------------------------------------------------

Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [49]

--------------------------------------------------------------------------------

Greg, I wanted to see if we can talk about CLA and from Crème de la Crème again real quick. And I believe in the press release, you're talking about the initial rental rates for Crème de la Crème would depend largely on if in-place operations are transitioned to them. I mean, what's your expectations there? Do you -- and I guess, what does CLA have to do to ensure an orderly transition of the operations and do you expect that there is risks that they won't transition those?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [50]

--------------------------------------------------------------------------------

Well, again, this is -- and I think it's written, Michael, in fairness, any time you're doing something over time, there is a risk that, that breaks apart. We don't anticipate that. But I think, the nature of the business that we're in says things happen. If people have -- if we get sideways, we've structured this deal to incentivize that and payments are structured to incentivize that. So we anticipate that it will be orderly and it will be a natural and easy transition. But the nature of public disclosure is you've got to account for what if something goes wrong. And so you see some of that language in there, but that's not our anticipation.

--------------------------------------------------------------------------------

Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [51]

--------------------------------------------------------------------------------

Okay. I mean, you're talking about the rent stream from the new operator. I know Mark said I think, $12 million is included in the 2019 guidance. How is the lease written to account for ramp-ups? Is there a variable amount that they include? Or if they achieve certain operational hurdles then the rent stream goes up? Is it written fix that it goes up $2 million every year? I mean, how is that written?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [52]

--------------------------------------------------------------------------------

No. It's a great question, Michael. It's actually written that there is -- you've got it both ways. There is a ramp-up that's based upon on how well the properties do. And then there is a reset of the property rent in several years when stabilization has occurred. So I think, we try to incorporate both of those concepts to allow for them to introduce their concept, to make any adjustments that they need to do, to ramp these up to levels that we've seen them do and then to reset that more to a fixed-rent level.

--------------------------------------------------------------------------------

Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [53]

--------------------------------------------------------------------------------

So what is the stabilized rental rate that could be achieved if everything goes as planned over the next few years?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [54]

--------------------------------------------------------------------------------

I think, $15 million, $16 million, which would get us 80% -- 75% to 80% of our original rate.

--------------------------------------------------------------------------------

Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [55]

--------------------------------------------------------------------------------

Great. And then, how should we think about the TRS structure? Are you going to keep it as a TRS structure? Or would you eventually switch that to a triple-net lease structure over time?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [56]

--------------------------------------------------------------------------------

Our goal is to get it to a more triple-net kind of lease structure.

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [57]

--------------------------------------------------------------------------------

CLA is...

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [58]

--------------------------------------------------------------------------------

CLA will be triple net. I think he's referring to...

--------------------------------------------------------------------------------

Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [59]

--------------------------------------------------------------------------------

I'm assuming the lodging.

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [60]

--------------------------------------------------------------------------------

Yes. If you're asking about recreational lodging, we would -- as Greg mentioned, hope to transition that to triple net down the road, but CLA is triple net.

--------------------------------------------------------------------------------

Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [61]

--------------------------------------------------------------------------------

Yes. I was referring to lodging. Great. And [continuing], I guess, last question related to the Schlitterbahn loans. I know you don't expect the repayment of those this year. But you said there's a possibility that occurring. I guess what would have to happen for that to actually occur? Would it need to be able to refinance those bonds with the government agencies or how do we think about that?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [62]

--------------------------------------------------------------------------------

Let me jump in on that, Michael. It's Greg. I think there's a lot of avenues that they could pursue. They could recap their entire business. They could refinance that if they were to able to access the bond financing that is available in Kansas and pay that. So we just allow for I mean again, a variety of scenarios that we have to account for. And I think that's why Mark said we don't -- we're not planning for that but it is a possibility.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Ki Bin Kim with SunTrust.

--------------------------------------------------------------------------------

Alexei Siniakov, SunTrust Robinson Humphrey, Inc., Research Division - Associate [64]

--------------------------------------------------------------------------------

This is Alexei, Ki Bin's associate. My first question relates to CLA. Just want to make sure I understand the situation correctly. So the tenant currently pays a minimum rent of $1 million per month or $12 million per year, which is what you have in your 2019 guidance. But I understand that the tenant does not pay property taxes. So what is that property tax leakage on an annual basis?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [65]

--------------------------------------------------------------------------------

No. They will -- depending upon who is operating the property will pay the property taxes. So there should not be leakage on that number.

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [66]

--------------------------------------------------------------------------------

Either CLA or the new tenant will pay...

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [67]

--------------------------------------------------------------------------------

Depending on where they are at in the transition.

--------------------------------------------------------------------------------

Alexei Siniakov, SunTrust Robinson Humphrey, Inc., Research Division - Associate [68]

--------------------------------------------------------------------------------

I see. Okay. And then my second question relates to the 2 theater assets where you recorded an impairment on the bond guarantee. Who is the operator there? And if it comes to that, how difficult do you think it will be to find a suitable replacement for those locations?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [69]

--------------------------------------------------------------------------------

Again, the operator on that was -- it was Southern Theaters on that, which is they only operate 2 properties. Currently, they have a management agreement with Regal, who is operating that. And to give a little bit of color on that so that everybody understands, this is was a very unique opportunity in which these were bonds that were associated with the Katrina catastrophe and some rebuilding of New Orleans. Due to the nature of the bonds, the ability to do reinvestment in the properties was very difficult just because putting additional capital or using different ways to get that was complicated. So however, again, there was -- all the theaters in that market amenitized. And so they were -- their attendance was greatly affected. And so when we looked at that and looked at the level of debt on those, we felt like there was a need to make the charge that we did to rightsize that investment relative to our guarantee.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

And our next question is a follow-up from Nick Joseph with Citi.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [71]

--------------------------------------------------------------------------------

It's Michael Bilerman speaking. Greg, when you talked about the 10%, what falls into that 10%? Is that a bucket where you going to have a certain amount of transition assets, whether they'd be lodging or something else that eventually rolled to a net lease structure? I mean how should we think about that 10% that you referenced.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [72]

--------------------------------------------------------------------------------

I would -- what we reference is -- was recreational lodging assets that are not in a triple-net structure.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [73]

--------------------------------------------------------------------------------

And the eventuality is that those, just like the beach Primrose and asset you bought, that eventually your intent is to transition those to a net lease structure.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [74]

--------------------------------------------------------------------------------

That's correct...

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [75]

--------------------------------------------------------------------------------

Any one moment in time, you're not going to have more than your balance sheet $8 billion today, $800 million in transition assets?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [76]

--------------------------------------------------------------------------------

That is correct.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [77]

--------------------------------------------------------------------------------

And then, how -- from a -- and I understand that these 2 assets of St. Peter doing a high amount of SNB. But relative to whether it's a waterpark, the ski hills, the casino, it still is a hotel in a hotel market that just happens to have a handful of restaurants, right? People are still going there probably to vacation rather than to go ski, go to the casino, go to waterpark so on a sort of rank order of a recreational activity, it's more an extension of a vacation right? Being eating and drinking rather than the actual recreational activity of going to the slot machines, going down the waterslide, going to ski. So I'm just trying to better understand the entry into more traditional lodging.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [78]

--------------------------------------------------------------------------------

Right. I think you're thinking about in terms of traditional lodging. But what if you put a wave park right there on the beach that you have? There are things that you can do to introduce new recreational or entertainment concepts given the fact that you own the beach, that you have a lot more optionality as far as creating more destination.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [79]

--------------------------------------------------------------------------------

Well, that's a lift in the $24 million, right? These hotels need a lot of probably uplift.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [80]

--------------------------------------------------------------------------------

And we're working through all the planning of all of that. But we think there is a lot of potential to add, again, more recreation and entertainment concepts.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [81]

--------------------------------------------------------------------------------

And then, what happens if you transition this to a net lease? Is your partner -- do you have a buy out on your partner share? Does your buyer continue with an operating subject to the 65% being a net lease to you? What -- how will this unfold?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [82]

--------------------------------------------------------------------------------

Yes. We have kind of the traditional kind of buyer -- buy rights kind of pre-negotiated on the transaction.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [83]

--------------------------------------------------------------------------------

And at what point is that -- when we say stabilization, what's the expectation about when these assets either this or even the Cartwright would transition to a full net lease?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [84]

--------------------------------------------------------------------------------

I mean, I think, we would think it's somewhere in a 3-year time horizon.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [85]

--------------------------------------------------------------------------------

And how do you view sort of the accretion dilution, right? As arguably being in the equity position getting the full operational EBITDA and then transitioning to a lease structure which arguably is going to be set at a coverage ratio that's going to be much less than the EBITDA, right? Different security.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [86]

--------------------------------------------------------------------------------

Right, obviously.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [87]

--------------------------------------------------------------------------------

But how do you think about that transition from an FFO perspective which could be a dilutive event?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [88]

--------------------------------------------------------------------------------

Again, like I said, you're exactly correct, but that, in some ways, we're going to get, hopefully, what we're planning on is some lift to that and then given the fact that we're doing these or doing that one in a JV we think that we will have the ability that when we ramp as we're ramping up, when we set this, that it will not be as dilutive. It has the potential, there is no doubt that relative to that risk that taking -- setting lower levels with rent but we think from an investor standpoint that risk reward has been more of a fixed income instrument as opposed to carrying the volatility of the P&L, that's a trade we're willing to make.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [89]

--------------------------------------------------------------------------------

And how should we think about the security of the operator lodging and net lease -- leased assets, this typically not worked that well due to the volatility in that business? And I can understand you just talked a little bit of the stability and some of the more recreational aspects. In many times what has protected the leasehold interest is a some sort of corporate backstop from the operator. So how should we think about those aspects to protect EPR shareholders in event of very weak operations?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [90]

--------------------------------------------------------------------------------

Again, I think it is -- it will be some combination of really strong coverage and corporate backstop to make that work. I think your insights are spot on, Michael, in the sense that you look at the coverage levels that we have set in some of our recreational-anchored lodging, which are near 2x. So there is substantial free cash flow beyond our rent payment, which creates very strong incentives for the operator or the tenant, in that case.

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [91]

--------------------------------------------------------------------------------

And you mentioned it, we do expect -- and I think it's the key less volatility with these investments than in traditional lodging. Because we looked over it at a long term and there is, in fact, less volatility in these assets than you would see in traditional lodging.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [92]

--------------------------------------------------------------------------------

Right. Is there split on those 2 assets? I know there's 2 assets. What's the split between rent count between the 2? And sort of the value between the 2? And were you going to anticipate the spend ?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [93]

--------------------------------------------------------------------------------

Yes. But again, we'll have more on that. I don't think on the call we're ready to go into all the detail on that investment spend. And we'll be working with our partner on rolling that out.

--------------------------------------------------------------------------------

Operator [94]

--------------------------------------------------------------------------------

In our next question comes from John Massocca with Ladenburg Thalmann.

--------------------------------------------------------------------------------

John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [95]

--------------------------------------------------------------------------------

Particularly, given that you now own Cartwright front lease initially in kind of nonlease structure. What -- can you still remind us what some of the other drivers potentially to that waterpark asset are besides the casino property there? And just kind of how reliant do you feel that waterpark is on the casino? And maybe what prevents someone from going in and opening a similar indoor waterpark-type establishment down the road closer to the nicer New York area that kind of cut you off upriver, if you will?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [96]

--------------------------------------------------------------------------------

Again, I -- like I said, I don't think it's that significantly tied in to the casino. I think there are other drivers up in the area, whether it's the music festivals in that area. There's a lot of things going on in the Catskills. I think likewise to what we see in the Poconos, there are people, there are multiple waterpark operators that operate in that area but it's truly about the execution in the property that drive the fundamental success of the property. And when we opened that property here in the spring, I think we will invite everyone here up to see. And I think it will be readily apparent why we we're going to be successful there. This is an outstanding property in a very bucolic setting, which offers the latest state-of-the-art kind of waterpark hotel that I think are -- is -- that the public is going to embrace. So we feel that it's well positioned relative to the marketplace. And with a depth of population in and around it, we think it will be very successful.

--------------------------------------------------------------------------------

John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [97]

--------------------------------------------------------------------------------

Okay. And then switching gears to the investment you made in St. Louis. Quick clarifying point that is on a net lease?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [98]

--------------------------------------------------------------------------------

That is. Yes.

--------------------------------------------------------------------------------

John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [99]

--------------------------------------------------------------------------------

Okay. And are there -- you guys talked about maybe more opportunities to do other acquisitions in the kind of recreational museum space. How is the underwriting different for those properties? And what may be your kind of the yields on these properties or the yield specifically on the St. Louis asset you purchased?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [100]

--------------------------------------------------------------------------------

Again, I don't know that we -- I think the yields are consistent with what we've done in that space. So I think those are -- I think, I -- we look at these relatively like any sort of attraction in that broad speed, in the sense of what are the drivers, what's the history. The good thing about these, John, is that most of them have long-term historical performance that you're able to underwrite and see kind of what is the refreshment, the new sort of innovation that's coming into this. Again, it's a very unique asset in the sense that it's been embraced by the creative and artistic community of St. Louis. And so you actually have this evolving exhibition as artist continue to add to and enhance the experience. So as we said, it's a very visual and sensory-type experience. And I think it's only grown over the years. And it's truly a creative outlet for the community. But it's also one of the most highly attended attractions in the city. So I think, those are the type of drivers that we're looking for in future investments, be they this one or in any sort of community.

--------------------------------------------------------------------------------

John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [101]

--------------------------------------------------------------------------------

And I mean, kind of on a going-forward basis, when you look at coverages on these type of assets is let's say some of them maybe doesn't have the history of the asset that you bought in St. Louis. Is there a thought of maybe just because it's a little newer in the portfolio, taking a little less risk on the rent in putting in a little more coverage. Was that the case here?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [102]

--------------------------------------------------------------------------------

No. I mean, this -- I mean, we went into this. This has high coverage. So let's -- I don't want to concede that. These are high-coverage assets. But always, when something has less history, if that translates to more risk, we're either lowering our investment to drive higher coverage or getting other kind of concessions to account for that risk. I mean, what we are in the business of is trying to create durable and long-lasting reliable cash flows. And so however we need to structure that, either by high coverage or by additional credit, we're going to do.

--------------------------------------------------------------------------------

John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [103]

--------------------------------------------------------------------------------

Okay. And then one last one. On the impaired assets in Louisiana. If you get them kind of out from under this loan structuring, is there a potential to amenitize them and kind of maybe get them more on par with the other theater product in their markets or...

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [104]

--------------------------------------------------------------------------------

At least one of the assets, I think one of the assets we believe that's directionally what we will do. The other asset probably is more of a challenge given the fact that candidly, the entire property that is what has it really returned to its -- to what the expectation would be with reinvestment in the city.

--------------------------------------------------------------------------------

Operator [105]

--------------------------------------------------------------------------------

And our next question is from Nick Joseph with Citi.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [106]

--------------------------------------------------------------------------------

It's Michael Bilerman, again. Greg, over the years, we've spent an inordinate amount of time talking about PVOD on these calls and the potential impact and shortening their release window. Of late I think the discussion is probably going to be more about streaming. And you look at, while Roma didn't win the best picture, didn't win a lot of awards. Netflix definitely has changed the game a little bit in that arena, putting that content and extraordinarily, very limited release to get the Oscar nominations but releasing it on streaming. And I'm sure you're acutely aware of what's happening with Disney Plus. How do you think the evolution of streaming in that content may impact movie theaters?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [107]

--------------------------------------------------------------------------------

It's actually a really good point. I think -- first of all, Roma is, for those who haven't seen, it's a fantastic movie but it's grossed less than $1 million in the U.S. So again it's not that but I actually would direct your attention...

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [108]

--------------------------------------------------------------------------------

Netflix added 100 million subscribers in the last quarter so...

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [109]

--------------------------------------------------------------------------------

I don't think they launched -- I don't think they added those for Roma. But let's talk about what -- ENY just did a study, which I will -- we'll share this with you -- we'll have this coming out, which if -- and this is independent of the theater operators which actually proves the point that we're talking about. If you look at the highest peak, the highest content streamers are actually the highest attendees of movie theaters. So we see this as -- we frame this as competing interest when they're actually complementary interests. And I think, this is latest data and we'll probably have this out, I'm looking at Brian, out on our website here in the next week or so, which will show that, again, those who are streaming more -- 8 hours or more a week are actually the highest moviegoers as a populous. So I think the data, which is -- again, we think that these are complementary issues and are not conflicting issues. And like I said, we now have independent third-party data that is proving this point.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [110]

--------------------------------------------------------------------------------

It's just a question of whether more content gets onto streaming platforms in lieu of releasing in full theater, right, where that just becomes Disney puts more movies but they are going to make the Disney Plus rather than into the theater and at some point is to cannibalize each other.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [111]

--------------------------------------------------------------------------------

Right. And again, and they're -- I would again point you to Iger's point of that he is a supporter of, and continues to favor, first-run exhibition in the theaters.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [112]

--------------------------------------------------------------------------------

And did you find some of the theater operators wouldn't show Roma for the exact point of the PVOD discussion? I guess, what are your most recent discussions with them on the streaming services and films that are being released like that?

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [113]

--------------------------------------------------------------------------------

Again, I think most operators -- and this is because of the fact that it's -- it was a very good movie. Don't get me wrong. Most operators, because it -- Roma came out as a first-run exhibition, Netflix had an exclusive window within that. They didn't show it because it didn't gross. It didn't make money. So they -- it's not because of the fact that it wasn't -- if it will make money and they have an exclusivity window, they will show it.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [114]

--------------------------------------------------------------------------------

Right. So it's the exclusivity window that's I guess debating on how long and what that should be.

--------------------------------------------------------------------------------

Operator [115]

--------------------------------------------------------------------------------

'

And at this time, showing no questions in queue. I'd like to turn the call back over to Greg Silvers for closing remarks.

--------------------------------------------------------------------------------

Gregory K. Silvers, EPR Properties - President, CEO & Director [116]

--------------------------------------------------------------------------------

Well again, thank you, everyone for attending, and we look forward to talking with you in a few months at the end of our first quarter.

--------------------------------------------------------------------------------

Mark Alan Peterson, EPR Properties - Executive VP, CFO & Treasurer [117]

--------------------------------------------------------------------------------

Thank you, everyone.

--------------------------------------------------------------------------------

Operator [118]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.