Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2020 EPR Properties' Earnings Call. [Operator instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Moriarty. Thank you. Please go ahead.

All right. Thanks everybody and thanks for joining us today on our third quarter 2020 earnings call. 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 1995 identified by such words as will be, instead, continue, may, believe, expect, hope, anticipate, or other comparable terms. The company's actual financial condition and results of the operations may vary materially from those contemplated by such forward looking statements. Discussion of these factors that could cause results to differ materially from those 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 directly 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 with 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 company President and CEO, Greg Silvers.

Thank you, Brian. Good morning, everyone, and thank you for joining us on today's third quarter call. I'd like to start by continuing to offer our best wishes for the health and safety of everyone as we face the challenges of the ongoing pandemic. Joining me on the call today are company CIO, Greg Zimmerman; and company CFO, Mark Peterson. I will start the call with an opening statement and then turn the call over to Greg and Mark, who will provide more detail. In this uniquely difficult environment we are focused on the areas where we have control and allow us to successfully navigate the impacts of the pandemic. With this backdrop, I'd like to start today's call by highlighting our near term priorities. Number one, people and process. During this period there can be no greater priority than the health and well-being of our workforce. In response to the pandemic, we, like many, initiated a remote work environment to help mitigate employee risk. Additionally, we have put in place sound processes and technology to ensure employee engagement as our people work remotely. I'm extremely proud of the adaptability and dedication demonstrated by our organization. Number two, ensuring strong liquidity. Our top business objective since the onset of the pandemic has been ensuring the necessary liquidity to get to the other side. We may have near-term tenant disruption, however, the businesses that our property support are not going away. The institutional quality of our properties gives us confidence and their resilience. The key to weathering the storm is financial stability and our liquidity gives us that stability. Number three, stabilization and ramping up of our tenant businesses. Non-theatre tenants continue to navigate the pandemic with solid performance as consumers get more comfortable with safety protocols, yet our theatre tenants…

Thanks, Greg. At the end of the first quarter, our total investments were approximately $6.7 billion with 369 properties in service and 96.7% occupied. During the quarter our investment spending was $8.7 million and was entirely in our experiential portfolio comprising built-to-suit development and redevelopment projects that were committed prior to the COVID-19 pandemic. Our experiential portfolio comprises 284 properties with 44 operators is 96.4% occupied, and accounts for nearly $6 billion of our $6.7 billion in total investments. We have three properties under development. Our education portfolio comprises 85 properties with 15 operators and at the end of the quarter was 100% occupied. I now want to update you on the operating status of our tenants, our deferral agreements and rent payment timelines. 63% of our theatres were open as of November 3. Openings continue with restrictions implemented by state and local governments. As of today, only New Mexico prohibits all theatres from opening. However many states, most significantly New York and California have county by county restrictions which precludes some theatre openings. In early October, Cineworld announced that it would close all of its US, UK and Ireland theatres because of the lack of tent-pole films from Hollywood. After that announcement, Regal opened several theatres in New York, and opted to leave some theatres in California open. As of today, two of our 57 Regal theatres are open. The exhibition business faces significant headwinds because of a lack of product. This lack of products and resulting lack of demand and customers makes it impossible to prove they can safely operate and can draw sufficient customers back to support the release of major motion pictures. Because of this dearth of product, we expect the remainder of 2020 will be slow. The current 2020 major film slate, which is subject…

Thank you, Greg. Today, I will discuss our financial performance for the quarter, which was significantly impacted by the continuing disruption caused by COVID-19, provide an update on our balance sheet and strong liquidity position, and close with some estimated forward information. FFO as adjusted for the quarter was a loss of $0.16 per share versus $1.46 in the prior year, and AFFO for the quarter was $0.04 per share compared to $1.44 in the prior year. As Greg mentioned, at the end of the third quarter, we determined it was appropriate to move Regal and one attraction tenant to cash basis accounting due to the collection of their receivables not being deemed probable, which is a high threshold on the new lease standard as 75% probable or collecting 90%. As a result, we wrote off receivable totaling $49.8 million at September 30 related to these tenants, including $33.4 million from prior period. FFO as adjusted for the third quarter of 2020 includes the full impact of these write-offs, while AFFO includes all but the straight line portion totaling $23.9 million. Note that the receivables written off are still owed by these tenants and will be booked as revenue in the future if and when received. However, there will be no receivable risk on the balance sheet for these tenants going forward as a result of moving them to cash basis accounting. Also, please note that the operating results from the third quarter of 2019 included the Public Charter School portfolio which was sold in the fourth quarter of last year and is included in discontinued operations. The prior period results also included $11.3 million termination fee. Total revenue from continuing operations for the quarter was down $55.3 million versus $169.4 million in prior year. This decrease was due to…

Thank you, Mark. As we discussed today, progress is being made on multiple fronts. Cash collections are rising on a quarter over quarter basis and tenant performance outside of theatres continues to improve. While challenges remain, we are confident that the activities that our property support will endure and we have the balance sheet and quality assets to weather this pandemic. With that, why don't I open it up for questions?

[Operator Instructions]. And your first question comes from the line of Nick Joseph with Citi. Your line is open.

Performance continues to improve and you gave a lot of good details. I'm wondering if you could provide kind of some numbers behind what you're seeing for open tenant and how performance has been kind of sense of maybe either versus pre-COVID, or from a rent coverage perspective, just to give an indication of how much has been recovered from kind of on the ground performance?

Sure. I think that those trends are very positive. But why don't -- Greg Zimmerman, why don't you add some color to this on kind of what we're seeing?

Sure. Hey, Nick, good morning. Obviously, we're not -- we can't give tenant by tenant numbers but I would tell you that a lot of our tenants are approaching 80% to 90% of pre-COVID numbers, and some are actually outperforming. The other thing that I think has been a benefit is operating metrics are getting a little better. They've had to seriously look at costs, as they've gone through this process. And that's generally across attractions, eat and play, and watching.

Great, thanks. That's helpful. And then just on the theatrical releases, obviously, we've seen some delays and as you said, kind of a chicken in the egg issue where if the theatres aren't open, they're not going to release the movies. So kind of what breaks first, what ends this stalemate between releasing the movies, but also the theatres, choosing to not be open until those movies are released?

I think, as Greg pointed out, and I'll ask for his comments, after I think getting New York City and LA, open, it will be important, but I also don't think we can downplay the importance of a vaccine as far as what people are thinking. If you look at this in terms of major windows of when product is available, our next major window will be the holiday season, and do those movies hold. If not, then we're probably looking for tent poles is the spring. I think that's kind of the time for him. But Greg, maybe you can add something to that.

No, I agree. The other thing I would say, Nick is its dependent on a lot of things happening in Europe as well. As of last week, the UK, France, Italy, and Germany, put restrictions on theatres. They're presently probably only going to last 30 days, but who knows if they'll roll. And I think it's important to remember that between New York and LA, it's well over 16% of box office. So the -- it be -- the studios are going to obviously look at that carefully. And then lastly, probably because of the deal that Universal has with AMC, we expect Croods will release over Thanksgiving.

Your next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Your line is open.

Mark, thanks for the comments on your expectations around collections in the fourth quarter. Any updates or do you have a sense on translates into whether you'd expect to be in a cash flow positive position in the fourth quarter, whether you might expect a shortfall?

Yeah, we should at that midpoint of 45% cash collections relative to pre-COVID contractual cash revenue, we should pretty close to breakeven. Think our breakeven is about 46%, and so we're right around there is what we expect for fourth quarter. So should be sure should be pretty close to break even as far as from a cash burn perspective.

And then are you able to share how much of minimum rents was variable rent based on percentage of sales in the quarter?

Well, we -- of course, we had percentage rents that we're calling percentage rent, so that was $3.1 million. And then there were other percentage rents that we're treating as minimum rents because they're really payments towards their minimum rent. And I don't think we share that level of detail. It wasn't tremendous because a lot of that's based on box office, and box office wasn't that great obviously in Q3.

Okay. And then just on Regal, has there has there been any formal agreement reached between you and Cineworld, either a lease restructuring or a lease modification at this time? I understand the reclassification and transition that was made this quarter to cash basis, but are negotiations taking place or have they, sort of, just closed the, I guess, 55 of the 57 theatres in the portfolio at this time and elected not to pay rent?

No, I mean, we've reached a deferral agreement with, with Regal and so, again, I think, our approach to this, Todd, was really out of being conservative and an abundance of caution. But we have -- we do have an in-place agreement with Regal for their deferral. So if there would -- if there had been an announcement regarding a restructuring, we would have made that, but this is currently a deferral agreement. And, Greg, I don't know if you have anything more to add on to that?

No, I don't think so, be able to.

Okay. Just lastly, I know it hasn't been that long since they reopened, but you mentioned that the two Cineworld or Regal theatres that opened in New York and California. I was just curious if you had any read or update on sales and traffic, and also what content are they viewing there? Wondering if you could just speak about that, and whether you'd expect any additional openings to take place that they might be contemplating?

I don't think we think there'll be any additional openings, and they're playing, I mean, there is some sporadic product that's coming out. I think they're still -- what's very interesting, and Greg can comment on this, is when a several weeks ago when Orange County opened up a few locations in California shot to the number one, kind of, theatres in the country. So that there when we see these openings, we see the consumer respond, but without true flow of content, it's very hard and I think Cineworld's decision was based upon the fact. And if you follow them, they said they could open within two weeks once there's a demonstrable kind of content flow. And so I think right now, we're just not seeing that, but when they do open, they're performing very solidly. But Greg, maybe you have something more?

No, I think, that's right. And I think, Todd, you're probably looking at 15%, and I'm not speaking specifically of Cineworld. I'm talking about all exhibitors, traffic is probably 15% of last year, particularly when you take into account that Tenet is the only tent-pole film that was released. As Greg mentioned, there are still releases. I mean, Liam Neeson movie released a couple of weeks ago. They're just not major releases.

All right. Greg. Thank you.

Hey, Todd. One other thing. I flipped my numbers on the percentage rents for this quarter was $1.3 million. It was prior quarter $3.1 million, and again, by percentage rents there, I mean over base rent. So $1.3 million this quarter, $3.1 million prior year quarter, just to clarify.

And your next question comes from the line of Anthony Paolone with JP Morgan. Your line is open.

My first question is, I'm just trying to understand I think in the press release, you talked about working on additional deferrals with some of the theatre tenants, but if you're running percentage rents, I guess, what is there really to do from here?

But, Tony, it really was when do they resume, kind of, beginning to pay cash rents again, and I think the early expectation was, when we cut some of these deals back in May, that we would be on more sure footing. When you looked at what the release calendar was, we anticipated early on that we would begin to see a more of a ramp up in the fall. And so we're dealing with those sorts of issues of when do we kick back into full paying rent and when do we start repaying some of the some of the deferrals.

Okay. And then is -- can you give us what the collections are in the portfolio excluding the theatres?

Mark, I don't know if we have those numbers excluding theatres?

I mean I have a number, I don't have them handy. I'd say, the lion's share is non-theatres, but we are collecting, still collecting theatre rents both as a percentage sales, in some case a percent of fixed rent.

I just kind of want to understand like outside of theatres, like where is the next -- what's the soft spot beyond theatres that you're seeing?

Again, I think it's pretty strong. I mean if you start to look at, as we said, theatres are soft and then you begin to say 55% of our portfolio is non-theatres and we're at kind of mid 40-ish percent, the real strength candidly right now, Tony, is our non-theatre portfolio.

Okay. And then in something like early childhood education where there's probably reduced capacity, I'm guessing, due to -- are the economics working for the operators? Like can they run the business and sustain as for some period of time? How does that work?

Yeah. I think it is. I think as Greg noted. And I'll have him comment after this. I think most people are adjusting their expense structure to accommodate it kind of these and these restrictions are not uniform. I mean so we have some jurisdictions where they're operating at -- almost that capacity. So I think it's really going to depend, but it appears that they are able to scale their expense structure to their revenue side and it appears to be working. And candidly they've been ramping throughout this quarter and continue to do that. But Greg, maybe you have something. You can add on top of that.

I think those are the important points. And -- especially in the early childhood education utilization is steadily improving. And the private school, it's just been a relatively stable environment. We'll have -- as I said in my script, we'll have a little more color on that at the end of the quarter as we see what happens going into next year with restrictions.

Okay --

Hey, Tony, I'd like -- just looked up your -- answer to your question. In third quarter we collected in the low 60s as far as cash, right, that 41% of pre-COVID revenue and the theatre number was roughly about $15 million.

Okay. So -- and is there a way to take the remainder and just divide that by what was due?

I'm sorry. What was that?

60:

Right.

With 15 of it being the theatres. So –

Right.

-- in the high 40s I guess thereabouts from everything else. Okay. I guess we can kind of back into then what that collection rate was 40?

Yeah, kind of high 40s everything else, right, if it's low 60. So high 40 over 40 plus million of everything else.

Okay. And then just last question. In 2021 you're supposed to deliver about $65 million of build-to-suits, what's the expectation that those will be able to pay rent? Like, what's in that mix?

Greg, maybe you have some color on that. I think we're evaluating all of these, Tony. And again, it's, I think, where we can delay things we are. So we'll see if those come online. But I think most of those are non-theatre kind of development, so our expectation is that they will perform as our non-theatre portfolio is performing now. So Greg, maybe you have some more color?

Yeah. I completely agree. And I would say specifically a couple of them are developments in areas of business that we've seen strong rebounds, so not worried about rent payments from there, Tony.

Your next question comes from the line of Brian Hawthorne with RBC Capital Markets. Your line is open.

My first question is, so you mentioned the AMC Universal deal helped them with The Croods release. Do you expect the cruise then to be released with the other operators that are not AMC?

Well, I don't know -- we don't know if Regal will be open, but I think most of the exhibitors are approaching the Universal deal as a pandemic type environment and may play it, but they're not. I don't think they are embracing the underlying kind of thesis of shortening the window. They're treating it as a aberration, but it would not surprise me that they're going to play it during that just given the dearth of product that's out there. But Greg, maybe you have some thoughts.

I agree that's completely, Greg. I doubt Regal will be open given what's going on in here.

Okay. And then on the theatre deferral agreement, so can we assume that the length was -- the timing for the length of clip from percent rent to cash rent, was that somewhat aligned with the studio or the box office release schedule?

It -- yeah, it was somewhat aligned, but I would say we took a more conservative approach and kind of backed it up. So, I think, we thought that we would be back to maybe not full rent, but paying more of a percent of contractual rent into the fourth quarter and you see that reflected in our forecast for cash collections being down, Brian. So, I think, when we cut these deals back in May and June, I think, we felt like there would be a better path than we're on right now candidly.

Sure.

Brian, the other thing I would say is that the two material things that happened in October, one was the James Bond movie was pushed to next year, we had been hoping that that wouldn't drop, and then obviously, Regal deciding to close all their theatres. So that led us to embrace a more conservative approach.

Okay. And then has Callaway Golf acquisition change your opportunity with TopGolf at all?

Again, I think it -- the opportunity still as strong. I mean I think we feel like and we've had discussions with everybody, all the participants in that and feel like, again, it makes -- it creates a stronger tenant, but they've assured us that TopGolf is their growth vehicle that they're looking at and that they still want us to be an active participant with that.

Okay. And then last one for me. The maintenance CapEx was up this quarter. Can you talk about what drove that? And should they expect that going forward?

Mostly the -- some of the transition related to moving our some early ed facilities to Crème de la Crème. Frankly, that was elevated this quarter; we don't expect that same level to persist.

Your next question comes from the line of RJ Milligan with Raymond James. Your line is open.

Thanks. Good morning, guys. In your comments you commented that additional permanent rent reductions may be required. And I'm just curious, does that just pertain to the movie theatre category or other categories included in that possibility? And what are the factors that will impact sort of reducing rents permanently versus just extending deferrals going forward?

I think it could. But I think primarily we're talking in the theatre space. I think that's where -- given the kind of tenor that we've had today, RJ, about how non-theatres is bouncing back very strongly. I think our couching there is -- again, there's no doubt that kind of restructuring risk has risen to a higher level as we move through this pandemic. And so I think that's kind of the triggering mechanism. We cut these deals. If you look at our overall portfolio and our largest exposures with AMC, Cinemark, and Cineworld, clearly we've cut a deal with AMC. So we think we've positioned ourselves well there. We don't believe that Cinemark is a restructuring risk. And so our risk, I would say, is primarily in the Cineworld area. And, again, it's that those are not -- our deals don't reflect that they will restructure right now, but I think we're trying to be candid with the investing public that if we, if once you -- when you go into a restructuring that you position yourself the best you can, but we've made the decision given our portfolio we're not going to do the preemptive act that we did with AMC. So I think that's where we're trying to be kind of thoughtful in our language. But, Greg, maybe you have something to add to that.

No, I think you covered it, Greg.

And my second question is what percentage of ABR of the theatres pre-COVID is now on a cash basis and sort of what are the factors that might push more of that exposure onto a cash basis?

Well, really the primary to that on a cash basis are AMC and Regal and I think pre-COVID, AMC was roughly 17 to 18%. And I think Regal was 12 to 13%. So those are the primary two, there's some others that are on kind of a modified cash basis where we're not recognizing anything during the deferral period. So that percent overall is a little higher than the sum of those two, which is about, you know, 30% or so. So probably be around, I would say, 35%, something like that.

Okay. And what would need to happen in terms of converting the rest to a cash basis?

Well, really it's about their credit quality and our ability to see that they, you know, can they pay, is their credit strong. So as this thing moves on, we are constantly looking at their credit and their ability to satisfy the receivables. Because anytime we decide to accrue a receivable, we've got to be 75%, or confident that we are going to collect, you know, 75% confident that we're going to collect 90% under the lease rule. So it's a pretty stringent rule. So we are looking at those. And in this quarter, as we've talked about Regal deteriorated enough credit-wise that we thought it didn't meet that threshold and that we were, you know, should put them on cash basis.

Your next question comes from John Massocca with the Ladenburg Thalmann. Your line in open, sir.

As we think of some of the stronger non-theatre operators in the context of cash flow, when would you expect some or the bulk of repayment of those deferred amounts? Maybe it happened earlier in the year to come to EPR and was any of that flowing through in 3Q 2020?

Yeah, I don't think we had -- and I'll let Mark answer this. I think this is mainly starts -- starts flowing through and in 2021, just because of -- that we took a kind of conservative approach and how long that ramp would take. But I think it would begin to flow some in 2021. But Mark, maybe you have more on that.

No, that's correct. I agree with that. They generally start in '21, and generally go beyond 2021. In some cases over the remaining lease term, some of our theatre tenants. But I think what Greg said is accurate.

But when you say non-theatre, would those come sooner rather than -- you know, obviously theatres is a little bit in flux, but, you know, people who seem to be a little more in recovery, could that potentially be a positive tailwind for cash flow? And maybe that -- the 2020 event would --

It wouldn't be because I don't think it's going be 2020 because everybody is a little still skittish about second wave and how that's going to impact. I do think, though, it could accelerate some of our payback in 2021, just because the impact has not been as severe as was anticipated when these deals were cut.

And then if we think about some of the commentary on moving subsidiaries to guarantee some of the current lease obligations and is that largely is the procedural or clerical act or is there some factors that keeps that from happening?

I think that I'll let Mark add on this, but I think it's largely a procedural which the subsidiary guarantees and things like that are pretty common for non-investment grade. And when we drop below these credit ratings, the -- it is more procedural than it is kind of something unique to EPR. But Mark, maybe you have something to add beyond that.

Yeah, I would agree. We had two of the three ratings go below investment grade. We're required to provide those really to all unsecured debt. So everyone will get that subsidiary guarantee, but it's frankly just procedural. There's not much to it.

Okay. Understood. And then the increase in liquidity requirement on the modification that occurred was announced yesterday, as you negotiated with the private placement holders, I mean, is there a potential for more liquidity requirements there or is that probably the kind of high watermark for liquidity requirements going forward?

Yeah, I mean, it was an easy guess. I mean, we held their interest rates, schedules and everything else, the way we had it before. So if you think about it, we get to count cash on hand plus undrawn amounts on our line of credit. So we have $1 billion, over $1.2 billion of liquidity. So the idea of, you have to maintain it was $250 million going to $500 million was a pretty easy guess and that I've got $700 million of -- $700 million plus of cushion there. So that takes us all the way through the end of next year as far as that liquidity requirement. So number one, we don't anticipate another modification, knock on wood; number two, the $500 million is pretty easily achievable when you're sitting at $1.2 billion currently.

Your next question comes from the line of Joshua Dennerlein with Bank of America. Your line is open.

In the past, I think, you flagged 5% to 7% of maybe the pre-COVID rent to be permanently adjusted or maybe you call it restructuring. Is that still how you're thinking about the portfolio or do you think that's been increased or falling?

Well, again, Josh, and that's what we talked about earlier. In Greg's comments, he said, what, it's reflective of our agreements right now with some cushion built into that. What we -- what in Greg's comments, what he said is, that doesn't anticipate any sort of major restructuring, i.e., bankruptcy of those. I think when you look at our tenants right now, that risk is really in, kind of, the theatre portfolio or but the majority of that risk is in the theatre portfolio. So I think what we've tried to do is quantify the risk that we know now, we have some cushion in that risk, but it at least acknowledge that it doesn't accommodate for full bankruptcy risk. Now, we've tried to address that with AMC, and the fact that we've already, kind of, felt like we've restructured or restructured our portfolio to address that. And as I said earlier, we don't think that Cinemark is a restructuring risk. So it really comes down to us from the theatre side of Cineworld and some of our smaller operators. But when you go beyond our, kind of, our fourth largest theatre tenant, we really -- it's three or four theatres or two theatres or one theatre. So the real risk is in the bigger -- with the bigger groups. But, Greg, maybe you have something to add beyond that?

No, I think, that's absolutely right, Greg. I mean, it's plus or minus 150 theatres that we own are in our top four tenants. So the other 30 are sprinkled among a number of other operators and, as Greg said, from anywhere from four to one theatre.

Okay. Appreciate that, Greg. And then, I guess, movies just keep getting pushed out and out for the releases. Do you know what the studios are doing as far as like new movies? I was wondering if the way to think about is, if they keep pushing things back, maybe they're not making new ones at this point, and maybe you get out two years and there's, kind of, a hole in the movie theatre window? Any kind of insight there would be great.

I think what we saw Josh was, kind of, what has occurred, yeah, we've seen some pushing out. But we also had pushing out of production during that -- during the COVID period, California, just resumed production probably in the last, kind of, six to eight weeks. So I think that it created a hole and I -- but I think that that is starting to ramp up, but I think you will see what it will lead to is strong -- a good strong portfolio of titles in 2021 and probably 2022, just because of that backdrop. And by then, given when this -- when we get some return to normalcy, I think, it'll be -- as we get out to 2023, it'll be fine. But I do think that, all of production was impacted probably from April to August. So things that that were in pre-production or in post production probably have gotten pushed, and so we may see some titles and you've already seen it with some of the major studios started moving titles even late 2021 titles into 2022.

And your next question comes from the line of RJ Milligan with Raymond James.

Just one quick follow up on the -- during the quarter, there was a big income tax expense. I'm just curious if you could talk about that and if we can expect if that's just a one-time thing, or there's potential for that to be elevated going forward?

Really, that was a deferred tax write off non-cash, that was really a one-time thing. We just won't record deferred tax assets going forward. Our provision will be more or less our cash provision. So that related to -- as a result of the COVID-19, us not being feeling comfortable within the entity that fit -- that caused that deferred tax asset which is related to Kartrite and in some of our Canadian entities, in terms of with the COVID disruption did we feel confident that we were going to realize that asset. So we reserved, put an allowance of that $18 million on that deferred tax asset, but that's not something that will repeat it so.

Excuse me, speakers. I'm not showing any further questions at this time. You may continue.

Well, thank you, everyone, for joining us today. We appreciate your time and attention. We look forward to talking to you-all soon and probably most of you at NAREIT. So have a great day and we'll talk soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.