Good day, ladies and gentlemen, and welcome to the EPR Properties Q3 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would like to introduce your host for today’s conference, Brian Moriarty, Vice President of Communications. Sir, you may begin.

Thank you, operator, and thanks to all that are joining us today. As always, I’ll start the call by informing you that this call may include forward-looking statements as defined in the Private Securities Litigation Act of 1996, identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate, or other comparable terms. In particular, we will be discussing our announced agreement with CNL Lifestyle Properties and our expectations with respect to that transaction. The company’s actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements, and you should consider the cautionary statements we have provided in the materials in this presentation. Discussion of these 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, Form 10-K and 10-Q. Now, I’ll turn the call over to the company President and CEO, Greg Silvers.

Thank you, Brian, and good morning to everyone. 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 today are the company’s CFO, Mark Peterson; and CIO, Jerry Earnest. I will start by stating that today’s call will run longer than our traditional earnings call, as we will be providing an overview of our just-announced CNL transaction during the call. This is obviously a significant transaction for the company, and it’s important for us to communicate the key elements of the transaction in some detail. With that, I’ll get started on today’s headlines. Today’s first headline, strong quarter supported by ongoing solid fundamentals. We are pleased to report another quarter of solid top-line results as is demonstrated by our quarterly revenue growth of 16%, as compared to the same quarter previous year. This strength is also translated to our earnings, as well, as we delivered a 5% increase in our adjusted FFO per share versus the prior period. Additionally, we saw meaningful investment spending across each of our primary investment segments. Next, investing in large high-quality portfolio of recreation assets which complements our expertise. As reported in our press release, we have entered into a definitive purchase and sell agreement with CNL Lifestyle Properties and funds affiliated with Och-Ziff Real Estate for an investment of approximately $700 million in the recreation segment. We are extremely pleased to announce this transaction, which is the culmination of a lengthy and disciplined process of underwriting, due diligence, and negotiations. The agreement provides for the company’s investment in a portfolio of high-quality ski and attractions assets and builds on our expertise in the recreation segment. In addition to our expectation of immediately accretive earnings, the acquisition will further diversify our portfolio with…

Thank you, Greg. During the third quarter of 2016, investment spending was $155.1 million, bringing year-to-date investment spending to $526.9 million. The quarter’s strong spending pays for flexible momentum and balance among our three primary investment segments. Our investment results confirm our thesis that a focused approach with defined segments provides us with the expertise in relationships to allow us to access quality opportunities that deliver consistent and reliable results. In the entertainment segment, the theater exhibition business has posted solid growth throughout the year. Box office revenues are up 3% year-to-date over last year, slightly ahead of expectations for 2016. As we have emphasized throughout the year, the final determination of 2016 will in large part, be based upon the fourth quarter. Last year’s phenomenal success of the reboot of the Star Wars brand took box office receipts to an all-time record. The fourth quarter contains many promising films, however, none of them are currently generating the excitement of The Force Awakens. With that said, we expect the full year to be flat to up 2%, which bodes extremely well for 2017 when we are more optimistic about the film slate. For the quarter, investment spending in our entertainment segment totaled $33.9 million consisting primarily the acquisition of one theater and spending on two build-to-suit theaters, the redevelopment of six existing theaters, and the investment in two build-to-suit family entertainment centers. The current investment climate for megaplex theaters, particularly with the expanded amenity format remains a strong contributor to our investment spending pipeline. Our theater portfolio contains 22 renovated theaters with the expanded amenity format and an additional 28 theater renovations are in process or planned. We still see quality opportunities within the entertainment segment with the exhibitors’ ongoing migration to the expanded amenity theater format. In the recreation…

Thank you, Jerry. I’m going to first go over our earnings for the quarter. Then after Greg discusses the CNL transaction, I’ll be back with you to review our outlook for the remainder of the year and 2017. I’d like to remind everyone on the call that our quarterly investor supplemental can be downloaded from our website. Now turning to the first slide. Net income for the third quarter increased to $51.6 million or $0.81 per share from $44.2 million or $0.76 per share in the prior year. FFO increased to $78.2 million or $1.22 per share from $67.4 million or $1.15 per share in the prior year. FFO is adjusted for the quarter increased to $78.8 million versus $68.3 million in the prior year, and was $1.23 per share for the quarter versus $1.17 per share in the prior year, an increase of 5%. Before I walk through the key variances, I want to discuss certain of the adjustments to FFO to come to FFO as adjusted. First, pursuant to a tenant purchase option, we completed the sale of one public charter school during the quarter for net proceeds of $5.4 million and recognized a gain on the sale of $549,000. As I have discussed previously, we add back to FFO the portion of the gain on sale related to a termination fee to come to FFO as adjusted. Second, we had two gains during the quarter that are back out of FFO to come to FFO as adjusted. One is an additional insurance recovery gain we recorded related to the fire at one of our metro ski resorts, which I discussed in our last call. This gain is included in other income and totaled $1.8 million for the third quarter. The other gain excluded from FFOs adjusted for…

Thank you, Mark. Before we begin on the transaction, I want to spend a second on three core principles that guided our team as we began this process. Number one, underwriting determines value. It’s not what we could pay, but what we should pay. Number two, we self-limited our ski exposure to approximately 10% of our portfolio. And number three, where necessary, we revised or entered into new leases to reflect our underwriting, and several of the rent figures presented today reflect signed agreements that will become effective upon closing. Our unique industry knowledge and relationships permitted this result. Now let me walk you through the transaction. The first couple of pages of the presentation are the disclaimers that Brian referenced in his introduction, and I encourage you to read those at your leisure. But let’s begin on page four, which discusses the overall transaction. As you will see, it is a, approximately $700 million transaction, which includes EPR acquiring the Northstar California Ski Resort and Attractions portfolio along with providing 65% of debt financing to funds affiliated with Och-Ziff Real Estate for the remainder of the ski portfolio. We anticipate an early Q2 2017 closing for this transaction following shareholder approval by CNL Lifestyles. Our outcomes are, as we see there, that we will acquire $456 million worth of assets comprised of the aforementioned Northstar Ski Resort along with 15 attraction assets, and we will provide a $244 million secured financing of five years in initial duration or 65% LTV to OZ for approximately – for their acquisition of 14 ski and mountain lifestyle resorts for approximately $374 million. The next page lays out the sources and uses both for the overall transaction and for EPR. And, as you can see, the top of the transaction, this is an…

Thank you, Greg. Turning to the next slide, we are pleased to announce that we are increasing our guidance for 2016 and FFO is adjusted per share to a range of $4.75 to $4.82 from a range of $4.72 to $4.82. As Jerry stated, we are maintaining our guidance for investment spending at a range of $650 million to $700 million. Guidance for 2016 is detailed on Page 30 of our supplemental. Note that we are increasing our guidance for 2016 disposition proceeds by about $125 million at the midpoint to a range of $215 million to $290 million. Dispositions through the end of third quarter totaled nearly $90 million, and we anticipate another $125 million to $200 million during the fourth quarter of 2016, including $85 million of expected sales of public charter schools leased to Imagine. Now turning to the next slide, we are providing guidance for 2017 FFOs adjusted per share of $5.05 to $5.20, or just over 7% growth at the midpoint over prior year, and guidance for investment spending of $1.3 billion to $1.35 billion. Both of these estimates include the CNL transaction closing in early second quarter 2017. Additionally, this earnings guidance takes into account the significant amount of asset dispositions in 2016 I discussed earlier, as well as expected additional dispositions in 2017, which we are guiding to a range of $150 million to $200 million. The disposition range for 2017 includes another $50 million of expected sales in the first quarter of public charter schools leased to Imagine, as well as other public charter school sales pursuant to tenant purchase options and certain entertainment assets. The next slide provides some additional perspectives on the impact on the CNL transaction on our guidance for 2017 FFO as adjusted per share. As structured, the…

Thank you, Mark. I want to thank everyone that joined us today. We’ve presented a significant amount of information, but I want to leave you with three main themes. One, we announced a planned $700 million transaction that demonstrates our core strengths of discipline underwriting and industry knowledge, and if successfully closed, we will deliver material accretion even with the consideration being 90% equity. We are – two, we are actively managing our portfolio both in terms of risk and capital recycling. And, three, we are executing both of the above points while also maintaining our existing business investment pipeline and delivering a planned 7% increase in earnings. With that, I’ll open it up for questions.

Thank you. [Operator Instructions] And our first question comes from Rob Stevenson from Janney. Your line is open.

Good morning. Greg, given that CNL is in liquidation mode, I mean, how prepared are you to have potentially 8 million to 9 million shares coming back at you in the first part of the year when this deal closes? And are you going to put some sort of buyback program in place with dispositions or something, in case, the stock starts trading sloppily around that?

Well, I’d say, Rob, thanks for the questions. We’re talking with our advisors right now. As you can imagine, we’ve looked at previous examples of this and how things have traded. I think, as we get closer to that, we’ll begin to discuss what kind of strategies that we’ll look at. But I think everything is on the table to protect our shareholders. But we will – right now at this point, I think, it’s early to kind of lay out that strategy. But know that we have – we are talking with our advisors about that and we have looked at previous examples and seen how things have traded afterwards. But I think we will have more thoughts on that as we get closer to it.

Okay. And then sort of given the all-or-none nature of this transaction since CNL is in liquidation mode. Is there anything in the portfolio that you are going to own initially that doesn’t sort of fit long-term, where you needed to take it down in order to get the deal done and maybe you put it out to the market over the next year or something like that, that doesn’t fit with the core recreation portfolio?

Sure. Yes, and if you go back and look at the slides, there will be a footnote that we’ve referenced five small FECs that are kind of less than $10 million in total that we anticipate that upon closing, we will move to sell, but it’s not significant. But there are a few small assets that we think don’t fit the core of our portfolio that are insignificant and came along with the deal, but that we will dispose of shortly.

Okay. And then just lastly, you – in the slide deck, you had a sort of pro forma as to where the various businesses will wind up being in terms of assets and NOI. What – as you go forward, where is the goal? What’s still too high and what’s still too low in terms of your optimal mix going forward? And where should we be expecting more of the investment to come?

I would tell you that next year of that – of the planned non-CNL investment, it’s fairly balanced. So we would see that that would continue to be consistent kind of with that. I think, as we’ve said many times before, the education track has got a higher growth trajectory. But we continue to find really strong opportunities in our entertainment sector as evidenced by the portfolio deal that we’ve done. We’ve got a significant number of planned redevelopments in the theaters for the high amenity. So I think you will see that balance. Now, what we have done, Rob, and you’ve heard us mention it today, we’ve imposed some self restrictions on our ski exposure and our Topgolf exposure. But other than that, I think, we’re just looking at quality transactions within those three segments.

Okay. And I lied, one more – one last one. Is there any stock for – is there a bottom to which EPR can trade at and not sort of break this deal? I know that there’s a limit to how many shares could be issued. But is there also something in there, where if the stock price goes down to $60 or something like that, that there is a right to void the transaction?

It’s not drafted that way in the agreement. So I think it would be – there would be -- if they changed their vote or changed their recommendation, there would be a penalty that would come out as a result of that, Rob.

Okay. Thanks, guys.

Thank you.

And our next question comes from Nick Joseph with Citigroup. Your line is open.

Thanks. Just going back to the potential overhang from the last question, why did you decide to over-equitize in this deal instead of doing this deal as part cash and part stock and then do a secondary or a forward or use your ATM to further deleverage?

Hi, Nick, I think for us, again, there is two prongs to this. One, I think it allowed us to kind of control the deal and control the narrative and issue kind of almost as Mark said, fully fund our 2017 equity needs as we going forward. But also and we’ll have to see how it trades, we’ve had some initiatives. We’re trying to increase our retail shareholder base and see if that actually – how sticky that ends up being. But again, with those two backdrops going into what is some higher volatility being able to fully fund our 2017 equity needs and potentially increasing our retail shareholder base, we actually thought those were two very good positives. And then we controlled that with the collar mechanism, so we have – we think a very controlled execution that we can monitor, we can respond to, if we need to, but it allows us a good execution.

Just to add to that, if you take a blended equity issuance rate, think about overnights and ATM and blend that together, we’d probably save in round terms probably $35 million in stock issuance costs. So it’s significant in terms of savings, in terms of what we’re issuing the equity at.

Thanks. And then just on the loan for the ski hills. If you think about the downside risk to that and if you get – put the ski assets eventually, how do you think about your potential exposure to ski hills at that point?

I actually think we feel like, again, if we get them back, I mean, when we model that 10%, we think that includes our loan amount. And like I said, we are 2.5 cover there over 3 times from an EBITDAR standpoint, very strong and maybe getting closer to 4. So we feel very good about the place that we are at. So if we look through OZ Real Estate and look to the underlying tenant, we think we have a very, very strong position. We did that purposely, we wanted to be very conservative in our approach. And the overall exposure, if that still maintains that kind of 10% level.

Thanks. Congratulatoins.

Thank you, Nick.

And our next question comes from Anthony Paolone from JPMorgan. Your line is open.

Thank you and congratulations on the transaction.

Thanks, Tony.

I think, Greg, you may have mentioned or alluded to that you all got to maybe rework some of the leases. One, did I hear that right? And then, two, can you just give a little bit more color on what you had to do to kind of get comfortable and how many leases you changed and so forth?

Sure. There were a significant – I don’t know that we disclosed it. But there were a significant number of leases that we did rework to get to kind of the coverages and the structures that we like. Remember, we want really strong seasonal reserve protection, meaning, they’re paying for their entire year during the period of time of which they’re productive. We wanted strong maintenance CapEx reserves. We wanted strong coverage. So we actually have several of these. Actually the other point I would make is, we wanted cross-collateralization. So with those sort of underlying frameworks of how we do business, we actually went in and either restructured or entered into new lease agreements that will become effective upon closing that allows us to achieve those goals of strong coverage, credit protections, seasonal reserves, maintenance CapEx, and cross-collateralization to allow us to do that. And I would say that our expertise in this area and with our relationships, we’re probably one of the few people who could have structured that deal, know the parties, know where things are at, and we were, again, go back. If you look kind of and just from a numbers point, seven of these properties were managed by CNL. They didn’t have a lease, so we were able to kind of structure those and put those in our format.

Importantly, we book – the value we attributed was on restructured rents, not current rents, so that created those great coverage’s that Greg went over.

Right. And you gave those coverage numbers based on, I guess, the last five years. How did some of, perhaps the more cyclical assets like ski resorts and so forth perform in the downturn? Because if I recall, when you went into ski originally, you wanted to stay with the more municipal type properties because of just the cyclicality risk and you kind of now move a bit more into resorts, I’m curious how some of these larger assets performed and how you got comfortable with that?

Yes, I think that’s – those – the ones that we are purchasing performed within the range of what we were talking about, when we’ve always talked about that kind of 125 to 225. And so the actual mortgage assets, if you look at our coverage, it was well within the rate, because it’s actually better, because we’ve got someone in front of us. So we were always, I would say, a net range, that 2.5 didn’t mitigate that much because, again, it’s the EBITDAR coverage that actually has more volatility on that end. But ours would have stayed above the 2.5 times throughout that underwriting period.

Okay. And then are there contractual bumps in the properties you’re buying in the new leases?

Yes, and these are, as we say, for most of that portfolio, there is – and these are kind of initial cash rents.

Okay. And then on the sales pipeline, outside of Imagine and it sounds like a few noncore properties that are being picked up with the CNL deal. What all is in the pipeline? And can you give us a sense of cash and GAAP expected cap rates on the sales?

Yes, I mean, outside of Imagine, we’ve got, as we talked about some entertainment assets, whether they are moving towards the – and we have those kind of range. Again. Mark referenced some of the pad sites where we’re getting very aggressive kind of 6’s cap rates that bids to some entertainment assets that are very long in the tooth in their lease, maybe have less than three to four years of lease life, and we’re probably in the kind of – approaching 9 on those. But from a risk perspective, we think it’s – they will – we will – we can make significant value out of those. But from managing that portfolio, that’s the right approach.

Okay. Thank you.

Thank you, Tony.

[Operator Instructions] Our next question comes from Jordan Sadler from Keybanc Capital Markets. Your line is open.

Good morning. I’m here with Craig Melman as well. On that follow-up on that last cap rate question, did you give the number on what Imagine will look like on the dispo’s?

We did not – and, Jordan, currently that deal has not closed. So I’d rather not reference that until we actually have that closed. Let us talk to you when we get back at year-end in February to disclose that.

Okay. That makes sense to me. Is there any way you could give us a blended number on the overall dispo guidance that would be less obvious?

Well, again, just because we’re referencing things under contract. There is always risk that those would not close. So I would prefer to come back to you here in the next 90 – 60, 90 days and talk about that.

Okay, that’s fine.

We tried to give you – what we tried to, Jordan, what we tried to do with Mark’s bridge was try to reference to kind of help you with that and give you a bridge to the impact of that without kind of calling out specific deals. But that was what that attempt was.

Okay, no that’s appreciated. And we’ll just figure it out with hindsight, which is no problem. As far as the acquisition goes, congratulations. We certainly appreciate the asset management that’s going on here in terms of reducing some exposures. But I’m kind of curious in terms of the timing, in terms of where we are economically. I know a lot of this is experience economy-oriented. But you are certainly, as Tony made reference a little bit here, tweaking up toward what would seem to be more economically sensitive assets, it may be tweaking down, i.e., Imagine, the education exposure at a point in cycle where it seems – let’s just say that we’re near 7 of the recovery or so. Any thoughts around that?

It’s a good point, Jordan. It’s interesting for us and this goes to how we talked about our underwriting. If you look at those assets, most of these assets have been up and performing for 20, 30, 40 years. So we actually can go back and map in different economic times how they perform and what we’ve seen. Again, these are less, with these daily accessible properties, with these kind of attractions assets, they more service the markets that they are in. They are not fly-to resort-type destinations. So they’ve actually outperformed during recessionary times. So that doesn’t mean that there’s not specific impact like we spent a lot of time – one of the waterparks it’s in Houston. And we spent a lot of time going back looking at impact of the oil patch and kind of what’s going on in those. But I want to assure you that we have looked at that kind of economic cyclicality and what the impact of these were to those assets and how to underwrite those to remove that volatility.

And just to add to that too, when you think about the real estate cycle, the worry is you’re overpaying. Well, if you look at the yields that we’re getting and the coverage’s that we underwrote, we think we are not overpaying and that’s why kind of stuck to our guns over the last couple of years as we’ve looked at this portfolio.

Okay, fair enough. The other question just sort of be a little bit of a follow-up there, which would be, you’re obviously – is it concerted reduction in education exposure here, which may be tenant-oriented. But as you look forward to the sort of ex-CNL spend for next year, so 600 to 650, will that be bucketed, did I hear that right to a greater extent toward education?

It will be – Jordan, first of all, let me clarify your comment about lowering our exposure in education. I want everyone to be perfectly clear. Our enthusiasm for education has not waned at all. We have said is and we’ve said this for several quarters that we wanted to lower our Imagine exposure from a risk perspective. That is more tenant-directed than sector. If you look at next year, it is fairly balanced as far as the three segments as we move for that. But that in no way is, I want to be interpreted as a sense of slowing or diminishing our excitement for our education segment. We see this as strong portfolio management identifying both a tenant that has – that we spend – represents as insignificant portion of our overall portfolio, but we spend a lot of time talking about it. And therefore, we made the decision that we wanted to lower that exposure. This goes to our ability to execute and deliver on that commitment and but does not in any way diminish our excitement about the overall segment.

Okay. Well, thank you for clarifying. One last one. Just – did you give the, excuse me, escalators on the 4.56?

We didn’t. I mean, generally speaking, in the attractions they’re kind of 10% every five years. All of these pretty much have some percentage rents in there that we will see how those play out and kind of consistent with what we’ve done before. The actual mortgage is just a flat 8.5.

Okay. Thank you.

Thank you.

And our next question comes from Joshua Zimmerman from Bank of America. Your line is open.

Hey, good morning, guys. A question on Och-Ziff Mortgage. Did they just choose to do financing through EPR, or did they look at other financing sources?

I think, Josh, it’s a fair question. What we did, remember, we – yes, from our perspective, we controlled this deal, and we actually kind of wanted to keep the deal structured as far as how we wanted to maintain control and be able to execute it. So we actually shopped to potential other people that would come to the deal. So I don’t know. I mean, as I said, they have certain refinancing rights. We have protections in there, both in terms of, as I said, we’ve got a four-year make whole, meaning, they have to pay all the interest payments for that. If they refinance early, we also have it structured with kind of condo-style repayment protections to where that if they refinance, they’re overpaying us that the allocated amount, so that we can’t have any sort of adverse selection. So I would say, you would – you could talk to them, but we can’t control that process, because we kind of control this transaction.

Okay, all right. Any particular reason why you guys chose to keep the Northstar of California. You – do you like that asset more, or just how did that come about?

I think what, again, from our standpoint, if you – it is West Coast exposure, which we have a predominant East Coast exposure from geographic. Vail is a fantastic operator, top-of-class. Again, it filled that with our criteria with being, it’s still a drive-to kind of metropolitan destination. So we felt it checked a lot of boxes both in terms of operator quality, their level of investment in the property, the durability, the theme of the complete four seasons asset. So it was a much – what it kind of straight down the middle deal for us.

Okay. Thanks.

Thank you.

And our next question comes from Robert Kirkpatrick with Cardinal Capital. Your line is open.

Good morning and thanks for taking the call. With the entry into kind of the amusement park combination side of the attractions portfolio, do you see that growing in the coming half-decade or so?

I don’t – I’d Rob, I wouldn’t see that that would be an area that we would spend a significant amount, there were certain assets. And if you look at those, there are certain – even those amusements were kind of iconic to this. if you – Pacific Park is really the park on the Santa Monica Pier, which it is much different than you would think of as an amusement park. So there’s just a couple of those in there. I don’t think that we’re going to focus on the amusement park area. I think we had some assets that we thought made sense that we could underwrite. There were some core – our waterpark assets that we thought were very strong. And we – those were the things that we think came together as a package, but I wouldn’t see us making a big move into that.

Great. Thank you so much.

Thank you, Rob.

And our last question comes from Anthony Paolone from JPMorgan. Your line is open.

All right, thanks. I just had a follow-up on the, I guess, the idea of maybe an overhang with the stock being issued to the CNL folks. I haven’t looked it up, but did CNL shareholders currently get dividends and, if so like sort of the magnitude and how it might compare with where EPR’s dividend is currently?

They are paid dividends. I think in connection with this deal, there may be some change to that, but they have been paid dividends. Again, I think it’s probably appropriate not for us to comment on their shareholder base. But it is – they are used to getting dividends, so we think it’s consistent and now we’ll go to a monthly dividend with us. We think with – at this point, we have a very, very attractive yield where we sit. And, Tony, we’re hopeful that some of those will stay with us.

Okay. Thank you.

Thank you.

At this time, I’d like to turn the call back over to Greg Silvers for closing remarks.

Again, I want to express my thanks for everyone’s patience. I know today’s call was extended. We think we had a very exciting transaction to announce and exciting results not only for 2016, but that – how this moves us into 2017. So again, thank you, everyone. And if you have any questions, please feel free to give us a call and we’ll talk to you soon. Thank you.

Ladies and gentlemen, this does conclude today’s conference and you may all disconnect. Everyone have a great day.