EPR Properties (NYSE:EPR) Q4 2023 Earnings Call Transcript
EPR Properties (NYSE:EPR) Q4 2023 Earnings Call Transcript February 29, 2024
EPR Properties isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Fourth Quarter 2023 EPR Properties Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Brian Moriarty, Senior Vice President, Corporate Communications. Please go ahead.
Brian Moriarty: Okay. Thank you, Victor. Thanks for joining us today for our fourth quarter 2023 and year-end earnings call and webcast. Participants on today's call are Greg Silvers, Chairman and CEO; Greg Zimmerman, Executive Vice President and CIO; and Mark Peterson, Executive Vice President and CFO. We'll start the call by informing you that this may include forward-looking statements as defined by the Private Securities Litigation Act of 1995, identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate or other such comparable terms. The company's actual financial condition and the results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of those factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q.
Additionally, this call will contain references to certain non-GAAP measures, which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most materially comparable GAAP measures are included in today's earnings release and supplemental information furnished to the SEC under Form 8-K. If you wish to follow along, today's earnings release supplemental and earnings call presentation are all available on the Investor Center page of the company's website, www.eprkc.com. Now I'll turn the call over to Greg Silvers.
Gregory Silvers: Thank you, Brian. Good morning, everyone, and thank you for joining us on today's fourth quarter and year-end 2023 earnings call and webcast. 2023 was a year of meaningful progress as we delivered strong earnings growth, executed our investment spending, delivered sector-leading total shareholder return, and positioned the company to achieve sustainable growth in the coming years. During the year, we saw a sustained level of strong performance in our non-theatre portfolio as evidenced by a consistent 2.6 times coverage level. Additionally, we were pleased to see over 20% growth in 2023 North American box office revenues versus the previous year. This growth translates to an increased coverage level of 1.7 times in our theatre portfolio, which is squarely in line with pre-COVID coverage levels.
It's important to highlight that we achieved this coverage level even as 2023 box office revenues were down approximately 20% from 2019. This coverage data reflects the strength of our theatre portfolio along with the sustained trend of increased food and beverage per cap spending and along with operating efficiencies implemented by our tenants. This coverage data is also consistent with our anticipation that we would achieve pre-COVID theatre coverage levels prior to reaching pre-COVID box office levels. While last year's strikes will interrupt the linear annual growth in box office revenues due to title delays, the quality of our portfolio continues to endure and positions us well for a very favorable-looking 2025 film slate. Our investments during the year provided increased diversification and highlight our ability to source what are non-marketed opportunities.
We ended the year with positive momentum in our investment spending. And as we move into 2024, we will continue to leverage this strength while remaining disciplined in our capital deployment and delivering reliable earnings growth. Our investment pipeline includes investments across our target property types with both new and existing relationship-based customers. We are also announcing a 3.6% increase in our monthly dividend to common shareholders. Considering our 2024 earnings guidance, along with our dividend yield, we are positioned to deliver strong returns. While our equity remains at historically discounted price levels, the fundamentals of our business continue to strengthen, and our thesis on experiential real estate remains intact.
Consumers have demonstrated consistent demand for the experiences our customers have to offer. And we look forward to again delivering for our customers and shareholders in 2024. Now I'll turn the call over to Greg Zimmerman to go over the business in greater detail.
Gregory Zimmerman: At year-end, our total investments were approximately $6.8 billion, with 359 properties that are 99% leased, excluding properties we intend to sell. During the quarter, our investment spending was $133.9 million, bringing the total investment spending for 2023 to $269.4 million. 100% of the spending was in our Experiential portfolio. Our Experiential portfolio comprises 289 properties with 50 operators and accounts for 93% of our total investments or approximately $6.3 billion and at the end of the quarter, was 99% leased. Our Education portfolio comprises 70 properties with 8 operators, and, at the end of the quarter, was 100% leased. Turning to coverage. The most recent data provided is based on a September trailing 12-month period.
Overall portfolio coverage for the trailing 12 months continues to be strong at 2.2 times. Trailing 12-month coverage for theatre is 1.7 times, with box office at $8.8 billion for the same period. Our theatre coverage reporting assumes that the Regal deal was in place for the entire trailing 12-month period. For comparison, our Q3 theatre coverage was 1.4 times on a trailing 12-month box office of $8.1 billion. Trailing 12-month coverage for the non-theatre portion of our portfolio is 2.6 times. Now I'll update you on the operating status of our tenants. Our theatre coverage is at 2019 levels, even though North American box office remains well below 2019 levels. We continue to see sustained increases in food and beverage spending and spending on premium large-format screens.
Our portfolio is well positioned to capitalize on these trends. As we have previously discussed, we are actively refining our overall portfolio by continuing to diversify our holdings and increasing our non-theatre investments. We are also focused on reducing our number of theatres and improving the quality and coverage of our theatre portfolio. In Q4, we took steps on both fronts. In our Q3 call, we noted an impairment of $20.9 million related to a likely restructuring with a small regional chain. In Q4, we finalized a restructuring agreement with Escape theatres with whom we had four theatres. Pursuant to this agreement, we terminated a lease for one underperforming theatre in exchange for a $2.5 million termination fee, and entered into a percentage rent deal with a recapture rate for another.
For the remaining two theatres, we reduced rent, enhanced the percentage rent component and required the exhibitor to spend a minimum of $1 million per theatre from its own funds to improve each theatre within one year. In addition, in Q4, we sold two small market and underperforming Alamo Drafthouses operated by franchisees to the operator. We now have two Alamo Drafthouse theatres, both corporately owned, one in San Francisco and the other in Austin. Turning to box office and the state of the industry. 2023 North American box office was $8.9 billion, a 21% increase over 2022. Q4 total box office was $1.9 billion. Because the Regal resolution as a percentage rent component and because we now have seven managed theatres, we will provide our view of 2024 North American box office gross each quarter.
Based on a review of box office estimates from industry analysts and our own independent analysis, we are estimating 2024 North American box office gross to be in the range of $8 billion to $8.4 billion. We are cautiously optimistic that as the year progresses, more titles will be released than anticipated as studios ramp up production coming out of the delays caused by the writers and actor strikes. While it's too early to provide estimates for 2025, we are confident it will be a significant improvement over 2024. As we have said repeatedly, the box office gross is directly tied to the number of titles released. Given the strong performance of major titles in 2023, consumers clearly want to see movies and theatres. And importantly, our high-quality theatre portfolio continues to outperform the industry.
Turning now to an update on our other major customer groups. We continue to see good results and ongoing consumer demand across all segments of our drive-to value-oriented destinations. Increases in fixed costs, including labor, insurance and taxes, continue to pressure EBITDARM for many of our operators. In some locations, we are seeing some pullback in attendance from post-COVID highs. Nonetheless, our non-theatre coverage remains healthy at 2.6 times, the same as we reported on our Q3 call. Our Eat & Play assets continued their strong performance with portfolio revenue up in 2023 over 5% and EBITDARM up 6% over 2022. Topgolf completed a self-funded refresh of four of our venues in 2023 and three more are scheduled for 2024. Our cultural portfolio performed very well in 2023 and with increased revenue and significant increases in attendance.
For many of our attractions offerings, attendance was up in 2023 over 2022. Our Murrieta Hot Springs Resort operated by our partner at the very successful Springs Resort in Pagosa Springs opened to the public in early February and is already receiving accolades. Condé Nast Traveler recently ranked it as one of the best new wellness retreats in the world for 2024. Murrieta Hot Springs is midway between Los Angeles and San Diego, and boasts over 50 natural hot springs polls and water features, along with numerous historic buildings on 46 acres. Further rooms and amenities will come online through the spring and summer. At the Springs Resort in Pagosa Springs, progress continues on the expansion with completion expected mid-2025. Midway through the 2023, 2024 ski season, year-over-year revenue was essentially flat across the ski portfolio, primarily reflecting challenging weather conditions in November and December at all of our resorts other than Alyeska Resort in Alaska.
Room renovations continue at Alyeska, and we are very pleased with the performance of the Nordic Spa. In our Experiential Lodging portfolio, revenue and EBITDARM increased year-over-year from 2022 to 2023. Our Margaritaville Hotel Nashville, proximate to all of Nashville's famous downtown destinations, had an excellent 2023, with significant increases in all metrics. Our Beachcomber and Bellwether resorts in St. Petersburg had year-over-year increases in occupancy and revenue, but there was some pressure on RevPAR and EBITDARM. Our Camp Margaritaville RV resorts in Pigeon Forge and Breaux Bridge, Louisiana showed strong year-over-year revenue gains. At Jellystone Warrens, we also saw solid revenue growth as we are seeing positive returns from our completed redevelopment program.
Finally, we are underway with a substantial redevelopment at our most recent acquisition, Jellystone Kozy Rest, scheduled to be completed in time for the summer season. Our Education portfolio continues to perform well, with year-over-year increases across the portfolio through Q3 of 6% in revenue, 15% in EBITDARM, and 2% in enrollment. As we indicated last year, our KinderCare portfolio is subject to a rent reset retroactive to January 1, but calculated in the first quarter. We also anticipate receiving one additional KinderCare location back to sell in 2024. Turning to a quick update on capital recycling. During the quarter, in addition to the sale of our two Alamo Drafthouse franchise theatres to the operator that I mentioned earlier, we sold the second of our vacant former Regals and the fourth of the five KinderCare properties we took back in 2023.
The fifth vacant KinderCare location is under a signed purchase and sale agreement. Net proceeds for all transactions in the quarter were $22.2 million, and we recognized a net loss on sale of $3.6 million. Disposition proceeds for 2023 totaled $57.2 million. Subsequent to the end of the quarter, we sold another of our vacant former Regal theatres, and now have sold three, with eight remaining to sell. Of those, we have either a signed purchase and sale agreement or a signed letter of intent for three. Beyond the vacant former Regal theatres, we have one remaining vacant AMC theatre, which is under a signed purchase and sale agreement, and the vacant Escape theatre we terminated in Q4. After the close of the quarter, we sold both of our Titanic museums in Pigeon Forge, Tennessee and Branson, Missouri to a private equity firm at a 6% cap rate on in-place income for a combined $45 million in net proceeds and a gain on sale of approximately $17 million.
The cap rate and gain demonstrate the value of our Experiential investments. Finally, we are issuing 2024 disposition guidance in the range of $50 million to $75 million. During Q4, our investment spending was $133.9 million, and for all of 2023 totaled $269.4 million. In Q4, we closed on the funding of $77 million in convertible mortgage financing for the Mirbeau Companies' collection of award-winning Mirbeau Inn & Spa resorts in Skaneateles and Rhinebeck, New York and Plymouth, Massachusetts. EPR has the option to convert the mortgage financing to a traditional sale-leaseback structure. The deal also includes additional commitments of $47.1 million to finance future projects. Mirbeau's unique assets have received numerous national awards from Conde Nast Traveler, Wine Spectator, Forbes and U.S. News & World Report.
We couldn't be more thrilled with our partnership with the Mirbeau Companies and the [ Dower [ph] and Dalpas [ph] as they expand their award-winning Mirbeau brand. This partnership once again demonstrates our unparalleled ability to source deals because of our deep knowledge and reputation in the industry. In the quarter, we also closed on a $9.4 million acquisition of our second Movement climbing gym and third overall climbing gym in Belmont, California, 20 miles south of San Francisco. Movement is a quality operator and this real estate is excellent. Finally, subsequent to the end of the quarter, we closed on a build-to-suit financing for our sixth and ready carting location, this one in the greater Kansas City area. The total commitment is $35 million, with $8.8 million funded at closing.
Cap rates exceeded 8%, which creates compelling long-term value. As I mentioned, our total investment spending for 2023 was $269.4 million, entirely in our Experiential portfolio. A number of these transactions will be funded through 2024 and 2025. We're extremely pleased with the quality of the Experiential investments we made in 2023, while we continued to exercise discipline in our investment spending. In 2023, with Mirbeau, we added three unique and award-winning properties and developed a new partnership for growth. We developed our second natural hot springs resort with Murrieta Hot Springs and continued the expansion of the Springs resort. We opened a new Topgolf in densely populated King of Prussia, Pennsylvania and added to our growing investment in climbing gyms.
We substantially completed the renovation of our Jellystone Warrens RV Park and successfully rebranded our Cajun Palms RV Resort to Margaritaville, Breaux Bridge. We continued our renovation and reinvestment in our Alyeska Resort in Alaska. The cadence of investments heading into 2024 is strong. As always, our performance and pipeline are driven by the hard work of our investments and underwriting team, leveraging our unmatched network of tenants and partners. We're issuing investment spending guidance for funds to be deployed in 2024 in a range of $200 million to $300 million. Through year-end, we have committed approximately $240 million for Experiential development and redevelopment projects that have closed but are not yet funded to be deployed over the next two years.
We anticipate approximately $140 million of that $240 million will be deployed in 2024, and that amount is included at the midpoint of our 2024 guidance range. In most of our Experiential categories, we continue to see high-quality opportunities for both acquisition and build-to-suit redevelopment and expansion. We have a robust pipeline with new and existing customers and concepts. Given our cost of capital, we will continue to maintain discipline and to fund those investments primarily from cash on hand, cash from operations proceeds from dispositions and with our borrowing ability under our unsecured revolving credit facility. I now turn it over to Mark for a discussion of the financials.
Mark Peterson: Thank you, Greg. Today, I will discuss our financial performance for the fourth quarter and the year, provide an update on our balance sheet, and close with introducing 2024 guidance. We had another strong quarter of results with FFO as adjusted $1.18 per share versus $1.25 in the prior year, and AFFO of $1.16 per share compared to $1.27 in the prior year. Note that out-of-period deferral collections from cash basis customers included in income were $0.6 million versus $6.2 million in the prior year, resulting in a decrease versus prior year of $0.07 per share. I'm pleased to report that as of year-end, we have collected all accrued deferred amounts related to the pandemic. The remaining off-balance sheet amount of $12 million relates to only two tenants, one with the balance of approximately $26 million that has been paying based upon an agreed-upon schedule which concludes in 2024, and the other with a balance of approximately $11.4 million with payment depending on exceeding an EBITDA threshold.
We believe the fact we have been paid back over $150 million of deferred rents since the pandemic, in addition to current rents, speaks to the strength of our tenants' businesses and validates our approach in managing through that challenging time. We work closely with each of our tenants to develop plans that work with their businesses and help position them for longer-term success. Now moving to the key variances by line item. Total revenue for the quarter was $172 million versus $178.7 million in the prior year. Within total revenue, rental revenue decreased by $3.9 million versus the prior year. The positive impact of net investment spending in the current and prior years and the $2.5 million lease termination fee recognized during the fourth quarter of 2023 that Greg discussed were more than offset by the reduction in out-of-period deferral collections that I just mentioned as well as a reduction in rental revenue related to the Regal restructuring that took place in August.
Additionally, percentage rents for the quarter increased to $6.2 million versus $5 million in the prior year, primarily due to increased revenue at two attraction properties acquired in June of 2022. Recall that percentage rents are expected to be recognized for the first time for theatres under the Regal master lease beginning in midyear 2024. I will have more on percentage rents when I discuss our 2024 guidance. The increase in mortgage and other financing income of $1.9 million was due to additional investments in mortgage notes during the year. Both other income and other expense relate primarily to our consolidated operating properties, including the Cartwright Hotel and Indoor Water Park and seven operating theatres. However, other income for the fourth quarter of 2022 included $9.1 million of sales participation income.
The offsetting increase in other income and the increase in other expense compared to the prior year was due primarily to the additional five theatres surrendered by and previously leased to Regal, which have been operated by third parties on EPR's behalf since early August. On the expense side, G&A expense for the quarter increased to $13.8 million versus $13.1 million in the prior year, due primarily to higher payroll costs, including noncash share-based compensation as well as an increase in professional fees. Interest expense net for the quarter decreased by $1.5 million compared to the prior year due to an increase in interest income on short-term investments and an increase in capitalized interest on projects under development. Now shifting to full year results.
FFO as adjusted was $5.18 per share versus $4.69 in the prior year, an increase of about 10%. And AFFO was $5.22 per share compared to $4.89 in the prior year, an increase of about 7%. As shown on the next slide, both 2022 and 2023 results benefited from out-of-period deferral collections from cash basis customers recognized in income of about $0.24 and $0.48 per share, respectively. Excluding these collections from both years, FFO as adjusted per share still grew by nearly 6% and nearly 5% when you also exclude the lease termination fees recognized in all of 2023 totaling $3.4 million. Turning to the next slide, I'll review some of the company's key credit ratios. As you can see, our coverage ratios continue to be strong with fixed charge coverage at 3.2 times, and both interest and debt service coverage ratios at 3.8 times.
Our net debt to adjusted EBITDA was 5.3 times for the quarter. Additionally, our net debt to gross assets was 39% on a book basis at year-end. Lastly, our common dividend continues to be very well covered with an AFFO payout ratio for the fourth quarter of 71%. Now let's move to our balance sheet, which is in great shape. At quarter-end, we had consolidated debt of $2.8 billion, all of which is either fixed-rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 4.3%. In addition, our weighted average consolidated debt maturity is over four years was only $136.6 million due in 2024, which we anticipate paying off using our line of credit. We had $78.1 million of cash on hand at quarter-end and no balance drawn on our $1 billion revolver, which puts us in an enviable position given the continued difficult backdrop of the capital markets.
We are pleased to be announcing our 2024 FFO as adjusted per share guidance of $4.76 to $4.96. Note that given the timing of expected percentage rents, which are heavily weighted to the last three quarters of the year as in the past, as well as the fact that the first quarter is the off-season for many of our operating properties, including all of our RV parks, we expect results for the first quarter of 2024 to be lower than the full year divided by four, by about $0.09 per share. As we have discussed previously, given our current cost of capital, we have consciously decided to limit our near-term investment spending. We are providing our 2024 investment spending guidance of $200 million to $300 million. And as in 2023, we do not anticipate the need to raise additional capital to fund these amounts.
We are also providing our guidance for disposition proceeds for 2024 of $50 million to $75 million, percentage rent and participating interest of $12 million to $16 million, and G&A expense of $52 million to $55 million. The midpoint of guidance for percentage rents and participating interest reflects an increase of about $2 million versus the prior year. This increase is primarily related to the percentage rents expected from theatres subject to the Regal master lease and is offset by certain properties that have base rent increases in 2024 causing the breakpoint for percentage rents to go up, as well as the cultural property that was sold in February that had percentage rents in 2023. The midpoint of G&A guidance reflects a decrease from prior year of about $3 million.
This is primarily due to a decrease in expected noncash stock grant amortization and, to a lesser degree, the decrease in legal costs associated with the Regal bankruptcy settlement in 2023. Note that this G&A guidance does not include -- does not reflect the $0.02 to $0.03 per share charge expected to be recognized in Q1 related to an executive retirement. This charge is substantially noncash and will also be excluded from FFO as adjusted and AFFO. On the next slide, guidance for our consolidated operating properties is provided by giving a range for other income and other expense. In addition, we are providing guidance for our operating JVs, both equity and loss from JVs per GAAP, which, of course, is after our share of depreciation, as well as the expected contribution from JVs to FFO as adjusted.
The midpoint of guidance for both our consolidated operating properties as well as our operating JVs implies an increase in FFO as adjusted versus 2023. Guidance details can be found on Page 24 of our supplemental. On the next slide, I thought it would be helpful to illustrate the anticipated impact on growth in FFO as adjusted per share for 2024 at the midpoint of guidance, when you remove the impact of out-of-period cash basis deferral collections from 2023 of $36.4 million or $0.48 per share and the amount expected for 2024 of $0.6 million or $0.01 per share. As you can see on the schedule, FFO as adjusted per share growth without deferral collections from 2023 to 2024 are expected to grow -- is expected to grow by 3.2%. The expected growth is just over 4% when also excluding the impact of lease termination fees recognized in 2023 of $3.4 million.
This is consistent with what I said last quarter when I mentioned we could grow our earnings at about 4% without the need to access the capital markets and while maintaining our targeted debt-to-EBITDA range of 5 to 5.6 times. Finally, based on expected 2024 performance, we are pleased to announce a 3.6% increase in our monthly dividend, beginning with the dividend payable April 15 to shareholders of record as of March 28. We expect our 2024 dividend to be well covered with an AFFO per share payout ratio of about 70% at the midpoint of guidance. Now with that, I'll turn it back over to Greg for his closing remarks.
Gregory Silvers: Thank you, Mark. Today's report reflects the continued strengthening of our portfolio, with theatre coverage returning to pre-pandemic levels. The quality of our portfolio has allowed us to collect over $150 million deferred rents, including all accrued amounts related to the pandemic. Additionally, our guidance demonstrates our ability to continue to grow even in a capital-constrained environment. Finally, I want to take a minute to acknowledge the retirement of Craig Evans, our General Counsel and Secretary. Craig and I have worked together for many years, and he has served as a trusted adviser and respected member of the EPR executive team. His accomplishments are too numerous to mention, but his efforts are much appreciated, and we wish him all the best in his retirement. Now let's open it up for questions. Victor, are you there?
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