EPR Properties (EPR) Q2 2021 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen, and welcome to the Q2 2021 EPR Properties 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 conference call is being recorded. I would now like to turn the conference over to your host, Brian Moriarty, VP of Corporate Communications. Please go ahead.

Thank you, Alisha. Hi, everybody, and welcome. Thanks for joining us for today for our second quarter 2021 earnings call and webcast. Participants on today's call are Greg Silvers, President and CEO; Greg Zimmerman, Executive Vice President, CIO and Mark Peterson, Executive Vice President and CFO. 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, intend, continue, believe, may, expect, hope, anticipate or other comparable terms. The company's actual financial condition and the results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of 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 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, 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 the company's President and CEO, Greg Silvers.

Thank you, Brian. Good morning, everyone, and thank you for joining us on today's second quarter 2021 earnings call and webcast. During the quarter we continue to make significant strides as we announced that cash collection levels exceeded the high end of our guidance and that nearly all of our properties are open. Fueled by these strong fundamentals, we achieved a critical milestone and subsequent to quarter end we announce the early termination of our covenant relief period. Importantly, this milestone is a turning point to allow us to return value to shareholders and pursue external growth. I'm also pleased to have announced the resumption of our monthly dividend to common shareholders, which we anticipate continuing to increase alongside earnings growth over time. I'm very thankful to our employees, partners and shareholders who have supported our efforts in achieving this milestone and navigating these unprecedented times. Throughout the U.S. we're seeing consumers driving the experiential recovery. Having been cloistered in their homes for months consumers have an even greater appreciation for the experiences that our Properties offer. As we've stated consistently, consumer demand has not been an issue. This is most recently been highlighted by the response of the movie going public as delayed releases have finally begun to come to theaters. Even with certain same-day in-home streaming alternatives, we continue to see new post pandemic box office records. We've also seen strong performance across our non-theater portfolio with several tenants outpacing 2019 levels. While we recognize that we are still in a fluid environment, we believe the experience economy has proven to be increasingly important to consumers and we remain highly confident in our single thesis of investing in properties which support this economy. Additionally, we believe that high-performing properties will remain strong as lower performing locations potentially close and customers are displaced. Upon achieving our goals of exiting the covenant relief and resuming our dividend, we are now focused on deploying our capital, increasing our earnings and growing our dividend. Lastly, we are restarting our annual earnings guidance which will provide greater clarity of our conviction for the year. Now, I'll turn the call over to Greg Zimmerman to discuss the business in greater detail.

Thanks, Greg. At the end of the second quarter our total investments were approximately $6.5 billion with 357 properties in service and 95% occupied. During the quarter, our investment spending was $16.5 million, bringing the total investment for the first half of the year to $68.6 million in each case entirely in our experiential portfolio. The spending included build-to-suit development and redevelopment projects. Our experiential portfolio comprises 283 properties with 42 operators and accounts for 91% of our total investments or approximately $5.9 billion of the $6.5 billion. We have four properties under development. Our education portfolio comprises 74 properties with eight operators and at the end of the quarter was 100% occupied. Now, I'll update you on the operating status of our tenants, our deferral agreements and rent payment timelines. 99% of EPR theaters were open as of July 26th. Based on relaxation of provincial restrictions our four theaters in Canada reopened at reduced capacity in mid-July. We continue to operate two theaters through a third party manager in Columbus, Ohio and Champaign, Illinois. In Q1, I noted we had five unleased theaters which were vacant. But which we planned to release, none of which were operated by major exhibitors. I'm pleased to report that we have executed leases for all five theaters and we anticipate they will reopen this year. All of our theaters which will continue as cinemas are leased. As previously reported, we have recaptured six theaters which we are marketing for sale, including two with executed contracts. Starting in March, as the country began returning to normal, studios released more and better film product and month-over-month box office began to improve. March's $114 million box office gross was the first time box office exceeded $100 million in a month since March 2020. Box office jumped to $190 million during April and increased again to $209 million from May. Driven by a Quiet Place Part II and F9, June box office vaulted to $399 million. We anticipate July's box office will finish the month over $500 million, a 25% increase over June. Just as important, the growth is driven by tent-poles together with the solid performance of smaller films. As of the past weekend, year-to-date box office growth exceeds $1.5 billion versus $2.1 billion for all of 2020. We are excited by the positive trend of month-over-month box office growth. We expect this momentum to continue. The film slate for the remainder of the year is very strong since Hollywood delayed the release of many tent-pole titles to capture greater theatrical box office gross as the country recovered. Disney's Jungle Cruise this weekend is an example of a highly anticipated title which had its release date delayed until theatrical exhibition began its recovery from the pandemic. Jungle Cruise will be released simultaneously on Disney Plus premier access, premium video on-demand and is as of now the last film Disney has announced that will be simultaneously released to PBOD. The slate for the remainder of the year includes the Suicide Squad, Free Guy, Shang-Chi and the Legend of the Ten Rings, Venom: Let There Be Carnage, Dune, No Time To Die, Eternals, Ghostbusters: Afterlife. Top Gun: Maverick, Spiderman: No Way Home, The King's Man and Matrix Four. Disney's Marvel studios' Black Widow was released on July 9 simultaneously in theaters and on Disney Plus Premiere Access PBOD. In its opening weekend it grossed $80 million, which approached pre-pandemic attendance levels and exceeded F9's opening weekend by $10 million. Disney reported that Black Widow grossed an additional $60 million worldwide on opening weekend through Disney Plus Premier Access PBOD. Through this past weekend after 17 days in theaters, Black Widow has grossed $155 million, which is a robust number. For the remainder of the year, Disney is employing varying release strategies. As noted, Jungle Cruise will be simultaneously released in theaters and on Disney Plus Premier Access PBOD. The other two Marvel Studios' releases, Shang-Chi and the Legend of the Ten Rings and Eternals are currently scheduled for theatrical release only before the availability on Disney Plus. Likewise, the King's Man is also currently scheduled for theatrical release only before availability on Disney Plus. Black Widow's results and Disney's evaluation of multiple strategies underscore a couple of points. First, why theatrical release continues to be an essential element for studios to drive revenue? And second, studios will continue to experiment with windows, PBOD and streaming as they seek to optimize their revenues. But in all cases theatrical exhibition remains an important element. As box office recovers theaters with amenities, recliners, premium large format screens including IMAX and enhanced food and beverage including alcohol offerings are demonstrably outperforming theaters with limited amenities. This trend is true for our portfolio. We own 3% of the theaters, but produce 8% of the box office and 96% of EPR theaters are in the top 50% of theaters. It has become clearer and clearer that the investments we've made over the past several years to add amenities to our theaters are driving results. Nearly 60% of our theaters have one or more houses with recliner seating. Nearly 60% of our theaters have at least one premium large format screen. And nearly 80% of our theaters have either enhanced food and beverage and/or alcohol. Our cinema portfolio is well-positioned to outperform. Turning now to an update on our other major customer groups. A 100% of our non-theater operators and 100% of our education portfolio are now open. Our seasonable businesses are closed in the normal course. We are seeing continued positive performance across all segments of our drive-to-value-oriented destinations. Ski attendance was 2% ahead of three-year averages and revenues were down only slightly, reflecting restrictions on food and beverage in many locations. Perhaps more important, we saw an increase in new skiers, which bodes well for an expanding customer base. We're seeing excellent performance across Eat & Play with attendance at or above 2019 levels. We are very pleased with the performance of the new Topgolf San Jose, which we acquired in May. Our fifth Andretti Karting location in Buford Georgia opened in May and is also performing well. We expect demand to remain robust throughout the summer. We are seeing strong pent-up demand across our attractions and cultural holdings and expect the trend to continue throughout the summer. Several of our attractions are significantly ahead of 2019 attendance levels. We are also seeing high demand in our experiential lodging portfolio and again expect the trend will continue throughout the summer. The Cartwright Resort and Indoor Waterpark reopened on July 1st. The renovation of the Bellwether Beach Hotel in St. Petersburg was substantially completed in the quarter joining the renovated Beachcomber Beach Resort. Our award-winning Margaritaville Nashville Hotel will benefit from the inaugural big machine Music City Grand Prix Indycar Race in Downtown Nashville in early August. Finally, our beautiful brand new camp Margaritaville RV Resort and Lodge in Pigeon Forge opened in June. Our education portfolio continues to perform well. Our primary capital recycling activity continues to be in theaters. In Q2, we sold one theater property for net proceeds of $14.9 million and recognized to gain on sale of $0.5 million. We're pleased with our progress in disposing vacant theaters. Since Q2, 2020 we have sold four theaters and have executed contracts for two more. As I noted above, we are marketing the remaining four. After a challenging 16 months, we're excited about the prospect of returning to growth. Our investment professionals are back on the road and looking at new opportunities in all of our experiential categories other than theaters. Finally, I want to update you on the status of our cash collections and deferral agreements. Cash collections continue their upward trajectory. Tenants and borrowers paid 85% of contractual cash revenue for the second quarter, including approximately $1 million in deferred rent from cash basis tenants and from tenants for which the deferred payments were not previously recognized as revenue. In addition, year to-date through July 26, collections of deferred rent and interest from accrual basis tenants totaled $48.9 million. Customers representing substantially all of our contractual cash revenue, which includes each of our top 20 customers are either paying their contract rent or interest or have a deferral agreement in place. In those deferral agreements, we have granted approximately 5% of permanent rent and interest payment reductions. Mark will provide additional color on revenue recognition and cash collections for the second quarter and the remainder of the year. We are excited by the prospect of each metric approaching a 100% by the fourth quarter. I'll now turn it over to him for a discussion of the financials.

Thank you, Greg. Today I will discuss our financial performance for the quarter, provide an update on our balance sheet and strong liquidity position and close by introducing 2021 guidance. FFO's adjusted for the quarter was $0.68 per share versus $0.41 in the prior year and AFFO for the quarter was $0.71 per share compared to $0.44 in the prior year. Total revenue for the quarter was $125.4 million versus $106.4 million in the prior year. This increase was due primarily to improve collections and revenue from certain tenants which continue to be recognized on a cash basis. I'll have more on collections later in my comments. Additionally, scheduled rent increases as well as acquisitions and developments completed over the past year contributed to the increase. This increase was partially offset by property dispositions and to a lesser degree an increase in vacancies. Percentage rents for the quarter totaled $2 million versus $1.5 million in the prior year. This increase related to higher percentage rents from an early education tenant due to a restructured agreement and was partially offset by the disposition of certain private schools in December of 2020. I would like to point out as I did last quarter that we are defining percentage rents here as amounts do above base rents and not payments in lieu of base rent based on a percentage of revenue. During the quarter, we reduced our allowance for credit loss on our mortgage notes and notes receivable, which resulted in a credit loss benefit of $2.5 million versus a loss of $3.5 million in the prior year. This reduction was due to a partial repayment by a borrower on a fully reserve note due to stronger than expected performance, as well as positive changes in the macro environment which reduced the allowance calculated using our third party model. Note that this benefit is excluded from FFO's adjusted. Lastly, income tax expense was $398 000 for the quarter versus a benefit of $1.3 million in the prior year. This variance related to the full valuation allowance recognized in all deferred tax assets during the third quarter of 2020, which effectively eliminated the impact of deferred income taxes after that time. Now let's turn to our balance sheet and capital markets activities. Our debt-to-gross assets was 39% on a book basis at June 30th. At quarter end, we had total outstanding debt of $3.21 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 4.6%. Additionally, our weighted average debt maturity is approximately five years and we have no scheduled debt maturities until 2022 when only our revolving credit facility matures which currently has a zero balance. As previously announced due to the favorable performance this quarter and the expectation of continued improvement going forward we were able to elect an early termination of the covenant relief period that had been in place under certain of our credit facilities until the end of the year. As a result effective July 13, 2021, the interest rates on our revolver and $400 million term loan were reduced by approximately 100 basis points, and the interest rates on our $316.2 million of private placement notes were reduced by 125 basis points in each case based on our current unsecured debt ratings. Note that of the approximately $2.3 million in immediate quarterly cash run rate savings we will realize going forward as a result of this change. Only about $1.6 million will be reflected as a reduction of quarterly GAAP interest expense as the premium paid during the covenant relief period on the private placement bonds continues to be amortized over their remaining terms. Of course, all of the $2.3 million quarterly cash run rate savings will be reflected in AFFO going forward. Upon termination of the covenant relief period, we were also released from certain restrictions including restrictions on investments, capital expenditures, incurrences of debt, stock repurchases and payment of dividends. Coming out of the covenant relief period, we were also pleased to resume a monthly cash dividend to our shareholders of $0.25 per common share with the first payment beginning in August. This represents an annualized dividend of $3 and a yield on our current stock price of about 5.7%. We had $509.8 million of cash on hand at quarter end and we paid down our revolver to zero in April. We are pleased to note that from a liquidity perspective we went into the pandemic with about $500 million of cash on hand and nothing drawn on our revolver, and we are now coming out of the pandemic at the same levels. We are also encouraged by the positive signs we are seeing in our customers businesses and the resulting positive trajectory we are experiencing in cash collections. As I mentioned earlier, cash collections from customers continued to improve and were approximately 85% of contractual cash revenue or $115.7 million for the second quarter. This amount is in excess of the high end of the guidance range we had previously provided and was driven by additional collections from certain Eat and Play and Attractions Tenants. In addition, during the quarter we collected $16.3 million of deferred rent and interest from accrual basis tenants and borrowers and the deferred rent and interest receivable on our books at June 30th was $51.9 million, which we expect to collect primarily over the next 30 months. Subsequent to the end of the quarter, we collected an additional $3.1 million of such deferrals bringing the year-to-date total through July 26 to $48.9 million. In addition, we have about $116 million of deferred rent and interest owed to us not on the books related to cash basis customers and from tenants which deferred payments were not previously recognized as revenue. While some of this amount is scheduled to be collected beginning in the second half of 2021, most of this amount is scheduled to be collected over 60 months beginning in July 2022. Collection of $116 million certainly has more risk associated with it than the receivables on the books. And as a result until these customers return to accrual accounting, income will only be reported as the cash has received. It is important to note once again that collections from both of these groups of deferrals are in addition to the quarterly collection rates that we have been reporting on and provide us with additional growth capital. We are pleased to be introducing guidance for 2021 FFO's adjusted per share of 276 to 286. We believe it is important for investors to understand the run rate of our existing portfolio and therefore we've elected not to provide investment spending guidance for 2021 as we ramp up our investment pipeline. The guidance for 2021 FFO's adjusted per share includes only previously committed additional investment spending of approximately $20 million for the last six months of this year. As we have done in previous quarters, we would also like to update you on the expected ranges of contractual cash revenue that we expect to recognize in our financial statements for the third and fourth quarters of 2021, as well as our expected collections that relate to those same periods. The expected range we expect to recognize in Q3 of 2021 and Q4 of 2021 of such contractual cash revenue is $117 million to $122 million or 84% to 88% and $132 million to $138 million or 95% to 99% respectively. Additionally, the expected range we expect to collect of such contractual cash revenue in Q3 of 2021 and Q4 of 2021 is $114 million to $120 million or 82% to 86% and $130 million to $135 million or 93% to 97% respectively. Differences from the full amount of contractual cash revenue relate to deferrals granted in the associated accounting as well as abatements. Please note that the definition of contractual cash revenue continues to exclude percentage rent, straight line and other non-cash revenue and revenue-related to managed properties. Details regarding all of our 2021 guidance can be found on page 22 of our supplemental. Now with that, I'll turn it back over to Greg.

Thank you, Mark. As you've heard today, we've made significant progress on all fronts and are pleased with that progress. However, we are not done. With more than $500 million in cash and an undrawn revolver we are focused on deploying capital to drive earnings growth and increase tenant diversity. I want to say again how proud I am of the entire team in realizing these goals early. And we look forward to more accomplishments as we move throughout the balance of the year. With that, why don't I open it up for questions. Whitney?

[Operator Instructions] Your first question is from the line of Katy McConnell with Citi.

Great. Thank you. Good morning everyone.

Good morning, Katy.

Could you plant some more color on the sale process for the one theater asset sold this quarter just as far as pricing and buyer demand? And then the same for an update on the fix that you have in process now?

Greg, do you want to answer?

Sure. We sold four theaters over the past year as I mentioned since Q3. One's been for industrial, a couple from multi-family and one was for a retail use. This theater will be for multi-family. The contracts we have include one for industrial. The four were marketing or for various opportunities, not industrial. Office, retail, potential multi-family. As we've said before, Katy, we'll provide an update on the cap rate and other information related to the sales once we get through selling most of these assets later in the year or early next year.

Okay. Thanks. And then now that you have the ability to pursue external investment more in the near term, can you update us on the types of opportunities you're seeing? And whether you're targeting more one-off assets or portfolio deals at this point?

Again, Katy, what we've said is, we've been pretty clear about the fact that we want to grow our tenant diversity. So we've said, we're not looking to grow our theater portfolio, but our other areas of experiential as far as whether that's one-off or portfolios, given our cash balance were open to all of those, all the above. I think we have to recognize that it's -- we're actively building that pipeline that it's already half of the year. So if any larger transactions are probably going to take time and be toward the end of next year or end of this year or toward the beginning of next year. But I know Greg and his team are actively out there pursuing kind of large and small transactions. And it just feels really good not only for ourselves, but our team to get back in that involvement. And I know our tenants greatly appreciate it as they look to expand their business and respond that they've got a capital partner ready willing and able to go forward with them.

Okay, great. Thank you.

Your next question is from the line of Anthony Paolone with JP Morgan.

Okay. Thanks. Good morning. My first question is with the 5% vacancy in the portfolio, does that -- like how's that tie with some of the leasing, it sounds like you did on the vacant theaters?

Again, I think our overall 5% vacancy is really. Go ahead, Mark.

Yes. I think, we've got some properties we're marketing for sale. And I think that's included in vacancy, because they're being marketed for sale. All the ones that as Greg said, all the ones that we expect to lease have been leased. But we still have some theaters as Greg mentioned that we're marketing for sale that are vacant on the experiential side.

And then just a relatively small number, but we do have some entertainment retail centers that may have an occasional small shop vacancy, but…

Which we've always said is open.

Yes. Consistent with us.

Exactly.

Okay. So the five that you leased that's included already in those sort of vacancy numbers? Or basically not in there because they're leased?

They're in there and then we've got -- the vacancies really stemming from the -- like I said, the vacant theaters that we plan to sell and a little bit of the retail that Greg mentioned at our entertainment retail centers. So we've already got that -- another way to say it, that 95% does include all the ones that we expect to lease are in that number. Then we just -- that number will go up as we sell these properties. And then, they'll always be some vacancy due to the entertainment retail centers likely.

Got it. And you all -- it seems like the run rate, the revenue run rate's been in that $554 million range as you've laid out sort of your expectation for collections and so forth. What do these theater leases add to that when they're up and running or commence?

Well, I think right now for the rest of the year, the theater leases are more on a percentage rent deal. So they'll really kick in more next year.

Yes. And they probably won't open until later in the year. Some of them have to have a little bit of renovation done. They were closed for a year and a half. We're hoping to get them all open at least by Q4.

I think more than anything, Tony, I think and I'll ask Greg to comment that that these -- we've released these at or about the range of where they were released at before pre-pandemic, which I think bodes well for the quality of the theaters that we have given our ability to change operators and achieve lease levels that are very similar to what we had before in this environment.

And just in terms of dollars I think those are probably worth a little over $3 million.

Yes.

$3 million in incremental.

Yes. More next year.

Okay. Got it. That's helpful. And then just the only question I had was as you look to make investments again, can you maybe put some numbers around where cap rates are for the various segments in which you'd like to deploy capital?

Rather than break down every one of them, I think what we've said is that -- and I'll ask Greg to comment somewhere around the mid seventh is kind of where we think opportunity and deployment is available. So -- and as I said, it's going to be in areas that we would say all of our experiential other than kind of the theater segment.

Okay. And do you think that's -- I think you were on the casino deal, you all were close to -- previously, it sounded like that was maybe a mid-high sevens kind of number, but there's been a lot of liquidity in that space. Do you think that number would still hold if you went back to a transaction in that nature? Do you think that's compressed to all?

We're going to have to see. Again, there's no doubt that there has been transactions that have occurred. But even to-date those have been more kind of Vegas focused. But Greg maybe you have?

Yes. I mean, the one major non-Vegas focus was the Springfield transaction with MGM and MGP and that was a 7.5 cap.

Okay. Great. Thanks for the color.

Thanks Tony.

Thanks Tony.

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

Hi. Thanks. Good morning. Just first question, I just wanted to follow up there on investments and the comment about revisiting the gaming asset that you were pursuing before the pandemic. Can you talk about that specifically and perhaps provide an update on that on that process? And just curious whether there's potential for something to happen in 2021 or whether that might be something more for 2022 as you've exited the covenant relief period and look to pursue growth?

Todd, we've talked about and expressed our continuing interest in gaming and think it fits. It's a logical fit to our portfolio. I don't know that it makes sense for us to comment on a potential deal. So I'd rather leave it there. We've been pretty straightforward about the fact that it's an area that we think we're going to pursue. And I think it makes sense to add to our portfolio. But Greg maybe you have anything more to add.

No.

Okay. And then, thinking about sort of shifting the offense and deploying capital, Mark, can you talk about leverage today sort of coming out of the pandemic and reminds us of the company's long-term leverage target -- long-term leverage targets and whether that's changed at all or perhaps discuss where you expect to be at year end or heading into 2022?

Sure. Yes. The good news is by the end of the year we should be back in sort of that mid-five range that we target. And that's where we've kind of always operated around the mid-fives debt-to-EBITDA. So, as we go into next year kind of x transactions that number actually will probably drop slightly, because we've got additional cash flow and so forth coming in next year. So, the good news is here in the near term we're back to kind of that investment grade metric of mid-fives that we've always operated at.

Okay. And just one question on guidance. Can you provide an update on Cartwright? I think you said, it opened July 1st. Can you just walk through the financial model impact there and the contribution from that asset that's embedded in the guidance? And any early reads since the reopen there?

We're not giving specific guidance on Cartwright. I will say, just opening it's going to take some ramp time. So we're not expecting a large contribution over the remainder of the year. As it's ramping back up, there's sales and marketing expenses to get going again et cetera. So, we're not anticipating in our guidance significant contribution. It'll be some contribution. But that really should come more into play next year when we get a full season and another -- it's been open this year and then you have a full season next year.

And I would say from an operations perspective, it's only been open for three weeks. So we're ramping up after it have been closed for a year and a half. But the early results we're pleased with and it's in line with what we expected.

Okay. All right. Thank you.

Thanks.

Your next question is from the line of Rob Stevenson with Janney.

Good morning, guys. Can you talk about what you're seeing in the marketplace on good performing theater valuations today versus the pre-pandemic? I assume cap rates are still tricky given NOI. But on a per screen or seat valuation or are these things not trading. And the only things that are trading here are the scrapes and adaptive reuses?

I would say and then I'll let Greg to comment. I mean, I don't think we can be much clearer. I don't think we're in the market for looking at theater, so we haven't been looking at transactions involving operating theaters. As far as what we're seeing it's -- you really hit it. It's adaptive reuse. So I think it's -- we're just in a little bit different place right now, Rob. So we're not really as I said, looking at theaters to grow that portfolio. But Greg?

No. I think that's exactly right and I think you summarized it, Rob.

Okay. Because I was just -- not so much the ads, but if you wanted to market one of your say top 20 AMC locations for sale today versus July 2019. Just trying to triangulate here what type of pricing differential we're looking at? Because it seems like a lot of people are sitting on -- other than you guys are sitting -- are also sitting on theaters and maybe they don't want to sell now, because they think valuations are depressed. But it looks like either 2022 or early 2023 there might be a wave of these things as people want to get out of them and just wanted to sort of understand what was going on pricing wise here?

It's a great question. I just don't think there's a lot of realization of that right now. I don't think there's a lot of transactions. So it's difficult to give you an answer, Rob.

Okay. And then, Greg, can you talk about how the board settled on the $3 annual dividend? What the discussions were about possibly setting it lower and then increasing it on a quarterly basis, concerns that delta or other variants might shut things down or limit capacity in some manner, again, and cause some disruption there? I mean, when you look at it your back end guidance on an FFO basis is somewhere around 160, 170, which is call it a high 80s low 90s FFO payout. Just how you guys thought about that?

Sure. Great question. And Rob, it really was to deal with taxable income for this year. And so, that was the discussion. There really wasn't a risk discussion or a delta variant or anything. It really was to do based upon taxable income. But there was a view that if our projections continue to hold up that it would allow for meaningful increase next year.

Yes. Because we have additional normalization that fully happens in 2022 at next year or so that would allow for growth.

While still maintaining a relatively low 70s payout.

Right.

Okay. So, Mark, I guess the question then winds up being is if you're looking at your sort of fourth quarter sort of revenue collection and the implicit guidance that, that factors. I mean, does that basically assume by your statement there that as we head into 2022 all else being equal and there's no disruptions and the revenue keeps coming back et cetera, that this is going to also force you to raise your dividend in 2022 as well from a taxable standpoint?

Yes. All things equal just because we have --yes, we're not at quite at a 100% and then we'll -- hopefully next year's going to 2022 we'll be at 100% revenue recognition which will you know drive greater taxable income. So yes, it would imply a dividend increase to cover that tax liability.

Okay, great. Thanks guys. Appreciate the time.

Thanks, Rob.

Your next question is from the line of Michael Carroll with RBC Capital Markets.

Thanks. So I wanted to talk a little bit about the gaming transactions that are available. And I guess, what other opportunities are out there outside the one that you had under contract pre-COVID? I guess, Greg, correct me if I'm wrong, but the thought was that EPR could compete with $600 million to $800 million of these types of deals a year. Obviously, you gave that number, I guess, pre-COVID. Is that still a good, albeit long-term target with these types of properties?

Yes. I mean, I think we're going to be able to compete. I think it's -- again, we'll have to see how the valuation is. I mean, we never saw ourselves, Michael, as somebody who was going to compete on $4 billion deals, some of the large Vegas properties. But we do think there will be opportunities that will allow us to play in the space and add meaningfully to our diversity. But Greg?

No, I think that's right. And we still have a strong belief in the value of regional casino assets.

Okay. And then, can you talk a little bit about, I guess, where these transaction valuations are going in? And I did -- did I hear you correctly that you thought gaming cap rates have compressed more meaningfully on Vegas deals versus regional deals? And there's those opportunities for these regional deals still in those mid 7% type ranges?

Well, I think what we said, Michael, is that if you look at the data, the data indicates that there clearly is still a premium that is associated with premier Vegas assets and the transactions that we've seen in the market whether that be Vici's Venetian transaction or the recently announced a Blackstone deal. The only data point during the pandemic that we have for a regional asset was MGP's acquisition of Springfield, which was done at a 7.5. I think as with any and all of the experiential assets, I think as normalization comes back we'll see where cap rates go and we will see about our opportunity to play in that. But right now, the data would indicate that there's still a very attractive option for EPR.

Okay, great. And then last one for me. I think last quarter you highlighted that the studios and exhibitors for theatrical releases were still targeting about a 45-day window. I mean, has that changed over the past few months given the releases that have occurred in the results that these studios and exhibitors solve on the May and June type releases?

I don't think that's kind of any -- if anything again and I'll make my comment and I'll ask Greg. I think there is still a greater recognition of the value of theatrical exhibition windows to the total value of a movie title. I would direct if you haven't to the comments of IMAX's CEO on their earnings call who directly took on the issue of Disney. And their opinion is that they realize that the best way to maximize revenue dollars is to have an exclusive theatrical exhibition window. We may see some more experiments as we work through the year on what the actual right number of days on that is. But I think there is agreement on not only the need for a theatrical window, but standardizing that to where it maximizes revenues across the entire spectrum.

I think that's right. And as I mentioned, Disney only has one more that is dropping simultaneously for the rest of the year, Jungle Cruise this week.

Okay, great. Thank you.

Your next question is from the line of John Massocca with Ladenburg Thalmann.

Good morning.

John, good morning.

So, a quick question on guidance. I just noticed the lower bound of kind of the Q3 cash rent collection guidance was 82% and just kind of stood out given you collected 85% in 2Q. Is that just conservatism? Or is there something kind of tangible maybe driving that reduction at the low end versus what was actually achieved in 2Q?

Yes. So midpoint 84%, we collected 85%. It's really because in the second quarter we had a couple of tenants pay us unexpectedly actually because of our performance, and so they paid us more. That may continue. We're just being a little bit more conservative to if they're going to pay outside of their deferral agreement, if that's going to happen again in Q3. It could happen. We're just being a little bit more conservative there. We also had one tenant who pays according to -- there's a base and then they pay relative to their normal rent also a percentage rent based on performance, so we're being a little more conservative there. But it could happen very similarly. I think what's going to happen going forward is, while we have non-theaters kind of going down a little bit in Q3 for conservatism, theaters will start to go up in Q3 and then really go up in Q4 is really what's driving the kind of the forward. Q3 is pretty similar to Q2 when you kind of cut through it all. And then Q4 is where the big increases.

Okay. And then it looks like Regal was kind of paying partial rent in 2Q, 2021 if my math is right. Is that in line with a deferral agreement with them? And if so, can you provide any color as to when that would potentially end?

Well, we don't speak to any particular agreement. What we can tell you, John, is that everyone is paying in accordance with their deferral agreement or their contractual lease. So -- and that short of and Mark, I'll have to comment on this. But short of maybe one attraction tenant, I think everyone is pretty much back to their full contractual rep by the beginning of 2022.

I think everyone is -- it's just that one of them is a cash basis, so it'll be more seasonal in terms of how we get that. But everyone's back to 100%. I mean, John, to answer your question, everyone's preferring -- performing according to the deferral agreement plus, because we were 10 million over the midpoint, 10.2 million over the midpoint. So I'd say, yes, it was plan. What happened during the second quarter was planned and then we got some unplanned due to out performance. So I think things are actually happening better than we had anticipated.

Okay. And I guess, yes, these you're going to collect at the high end kind of 99% of revenue recognition in Q4. I guess maybe they think about the range in that kind of Q4 collection given what you're saying, is that based on kind of conservatism? And you may be some six months out kind of maybe just taking a little bit of leeway for any kind of credit events or anything like that?

Are you talking about Q4 cash collection guidance?

Correct. Yes, the 95% to 90%, oh, that's revenue. 95% to 99% revenue recognition or the 93% even to 97% cash collection?

Yes. So, it jumps up a lot primarily driven by theaters on both sides of that equation. And then there's just -- there's a couple of tenants that have deferrals through and it's not many. Through that go into the Q4 and they'll fully normalize in next year. So in 2022, we'll be at 100%. There's a small amount of tenants that aren't quite at the 100% revenue recognition at the end of Q4.

Let's may nail down my question though, like that 99% revenue recognition, that assumes everyone continues to pay per their deferral agreements, right? If they do they'll get 99% revenue recognition?

Well, our guidance is 95% to 97% for rev rec for the last quarter, right? So if everyone pays 97% and then if there's a possibility of going above that. If we get these cash basis guys to pay, in some cases they're paying early and that could continue. So it could be -- could start to approach 100% by the end of the year, but our guidance is 95% to 97%.

And then, just bigger picture. Let's say theoretically that kind of simultaneous streaming or PBOD becomes industry standard, how are you thinking about coverages for your theater properties? I guess, would you continue to kind of have robust enough coverage given the kind of leases that are in place if you are seeing some of that box office may be siphoned off into a Disney Plus Premier Access or a kind of equivalent streaming service from one of the other studios?

Yes. I mean, again, I think first of all we would based on what we said earlier, we'd challenge that assumption. I think you're seeing more and more evidence whether it's MGM from HBO Max or Disney now. This is their last one that there really isn't that market for premium video on demand. So I think first of all we challenged that proposition. But as we talked about, we have some of the best of the best theaters out there. And therefore, again, we think our theaters are going to perform even in if box office ends up normalizing to a lower level. There maybe some of that lower half of the country theaters that close and we'll have to see how that redirects the consumer. I mean, we could come out of this even on a lower box office with the exact same coverages, because those consumers are redirected into our surviving theaters. But what -- and the reason that we kind of gave you kind of the information we did today is to talk about the productivity of our theaters and how well they're -- how confident we are that they're going to sustain and be a part of any solution involving theatrical exhibition as we go forward.

Hey, John. I just want to say one thing. I was saying 95% to 97% for revenue recognition, where it's 95% to 99%. My comments still hold what I said, but you're right, it is 95% to 99%. So we're approaching 100%. There's still some deferral into Q4. It fully normalizes next year. But the high end is 99% for rev rec, you're right.

Understood. And then this quick one on -- follow-up, the last question. Do you have any visibility into the theater portfolios coverages today kind of broader coverage today or ability to cover now that we kind of have a pretty much fully open portfolio?

Again, it's very difficult to look at today. I think again, if you just look at kind of a big picture item. If you look at -- and I'll let Greg to comment on this. If you think about 2019 being kind of a $11.5 billion, $12 billion, 11.9.

11.3.

11.3 sorry. 11.3 number and you think we were around the 20 [ph] and you've got is, he said, a $500 million month. If you project $500 million months on a standardized basis you get back close to those kind of numbers. So now, the reality is not all months are equal, but we are at or approaching a run rate to where the theaters are cash flow neutral to beginning to be cash flow positive on a per unit basis.

Okay. Very helpful. That's it for me. Thank you very much for taking my questions.

Thanks John.

I am showing no further questions at this time. I will turn the call back to the speakers for closing remarks.

Thank you, Whitney, and thank you all for joining us today. And we look forward to talking to you at our third quarter call. Thanks everyone. Thank you.

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