Good day, and thank you for standing by. Welcome to the Third Quarter 2023 EPR Properties Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [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, Vice President of Corporate Communications. Please go ahead.

Okay, thank you Victor. Thanks for joining us today for our third quarter 2023 earnings call and webcast. Participants on today's call are Greg Silvers, Chairman and CEO; Greg Zimmerman, Executive Vice President and CIO; and Mark Peterson, Executive Vice President and CFO. We'll start the call by informing you that this 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 those 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, today's earnings release, supplemental and earnings call presentation are all available on the Investor Center page of the company’s website www.eprkc.com. Now, I'll turn the call over to Greg Silvers.

Thank you, Brian. Good morning, everyone, and thank you for joining us on today's third quarter 2023 earnings call and webcast. I’m happy to report another strong quarter highlighted by top line revenue growth of approximately 70% and FFO as adjusted per share growth of approximately 27% versus the same quarter of prior year. These results were driven by continued strong results in our experiential properties along with significant deferral collection. With these results as a backdrop, we are pleased to announce that we are increasing our 2023 earnings guidance. A few matters on tenant health. As we previously announced, during the quarter, we significantly enhanced our theater portfolio as we entered into a comprehensive restructuring agreement with Regal, anchored by a new master lease. Additionally, Southern Theaters, our fourth largest theater tenant, was acquired by Santikos Entertainment, who paid the full remaining deferred rent owed by Southern Theaters. While the actor strike is still ongoing, resolution of the writer strike was an important milestone as theatrical exhibition continues its strong recovery. As of last weekend, year-to-date box office has already surpassed 2022 total box office revenues. As we emphasized previously, compelling content translates into theater attendance. Most recently, the Barbenheimer event highlighted the power of theatrical exhibition as it brought in cohorts from diverse age and gender demographics. Additionally, it brought back many who hadn't been to the theater in years. With the Taylor Swift ERAS Tour movie, we're seeing the true power of theatrical experience combined with highly engaging content. This is an excellent example of alternative content brought to life in a theatrical environment. Many in the industry are seeing the success of this movie as an indicator of opportunities for other genres and performers to bring their content to this entertainment platform. Our non-theater portfolio continues…

Thanks, Greg. At the end of the quarter, our total investments were approximately $6.7 billion with 359 properties in service and 99% leased. Beginning this quarter, we will exclude properties we intend to sell from our leasing occupancy statistics. During the quarter, our investment spending was $36.8 million bringing our total investment spending for the nine months ending on September 30th to $135.5 million. 100% of the spending was in our experiential portfolio and included continued funding for experiential build-to-suit development projects and redevelopment projects commenced in 2022 and 2023. Our experiential portfolio comprises 288 properties with 51 operators and accounts for 92% of our total investments or approximately $6.2 billion. And at the end of the quarter was 99% occupied. Our education portfolio comprises 71 properties with eight operators and at the end of the quarter was 100% occupied. Turning to coverage, the most recent data provided is based on a June trailing 12-month period. Overall portfolio coverage for the trailing 12 months continues to be strong at two times. Coverage for the non-theater portion of our portfolio is 2.6 times. Coverage for the theaters is 1.4 times with box office for the 12 months ending June 30th at $8.1 billion. By way of comparison, if the restructured Regal deal which I'll describe in more detail in a moment had been in place for the trailing 12 months ending June 30th, theater coverage would be 1.5 times and overall coverage would be 2.1 times. Beginning next quarter, to provide a more accurate view of coverage, we will report theater coverage as if the restructured Regal deal was in place for the full trailing 12-months. Finally, with trailing 12-month box office gross through September 30th at $8.8 billion, we anticipate theater coverage is returning to our pre-pandemic range. Now I…

Thank you, Greg. Today I will discuss our financial performance for the third quarter, provide an update on our balance sheet, and close with providing updated 2023 guidance. We had another strong quarter of results with FFOs adjusted $1.47 per share versus $1.16 in the prior year, up 27%, and AFFO of $1.47 per share compared to $1.22 in the prior year, up 20%. Now moving to the key variances by line item, total revenue for the quarter was $189.4 million versus $161.4 million in the prior year, an increase of 17%. In addition to the effect of acquisitions, development, and scheduled rent increases, a number of other items contributed to this increase. As we discussed last quarter, Regal emerged from bankruptcy on July 31st and the new master lease became effective on August 1st. In connection with re-establishing accrual basis accounting for Regal, we recognized approximately $700,000 in straight line rental revenue during the quarter as anticipated related to the new master lease with Regal. In addition, we recognized straight line rental revenue that was not anticipated, totaling $2.1 million, primarily related to recording a straight line receivable on the master lease on the effective date, related to four ground leases that are subleased to Regal. During the quarter, we collected a total of $19.3 million of deferral payments from cash basis customers that was recognized as additional revenue. This included, among other collections, the $11.6 million of remaining deferred rent received from Southern related to its sale to Santikos and Regal's stub rent and pre-petition rent for September of 2022, totaling $3.8 million, as I outlined on our last call. We also received an additional $1.2 million of prior period property operating expense reimbursements from Regal that were not previously anticipated. Going forward, we could receive an amount…

Thank you, Mark. In conclusion, I want to leave you with a few salient points regarding our performance. One, as Greg pointed out, 2023 box office is expected to be at or above $9 billion, a 24% increase over last year. Two, our theater coverage normalized for the Regal transaction currently stands at 1.5 times, and this is computed on a trailing 12-month box office of $8.1 billion. With an anticipated $9 billion box office for 2023, we expect that we will be back to our longstanding pre-pandemic theater coverage range of 1.6 to 1.8. Three, even with the ongoing actor strike, currently most industry participants predict 2024 box office to be at least $9 billion. Four, our non-theater portfolio continues to significantly outperform pre-pandemic metrics. As these points demonstrate, our belief in the resilience of the experiential economy is grounded in performance. Not only have we collected over $150 million of deferred rents, but our properties are now performing at or above their pre-pandemic levels. With that, why don't I open it up for questions? Victor?

Thank you. [Operator Instructions] Our first question will come from Joshua Dennerlein from Bank of America. Your line is open.

Hey, guys. Appreciate the color and the opening remarks. Just kind of thinking about your guide for the full year and then what it implies for 4Q, can you kind of help us bridge like where you are in 3Q to 4Q's like implied range?

Yes, there's a lot to that reconciliation, Josh, but I can go over kind of the major components here in a second. So first of all, obviously you've got about $0.25 of deferrals in Q3, and we expect that to be nominal in Q4, so that's a big one as you head from Q3 to Q4. We also had straight line rent kind of one time of the $2.1 million, so that's another $0.03. And then if you think about it, once you get deferrals out of the way, the Regal base rent is higher for one month in Q3 than it is in Q4, and that's in about another $0.02. So you work that down, you get to about $1.17. Then as you head to Q4, there's a couple things that are pretty big to keep in mind. The managed properties in JVs really drop in Q4, that's their off-season, so there's quite a bit of drop in FFO from Q3 to Q4 for those properties. But on the other side, about 50% of our percentage rent of that $12 million is recognized in Q4, so that's an up of about $0.05, whereas the timing of managed in JVs is kind of down about $0.08. Then there's other minor items. So that's a long way of saying that's a way of getting from $1.47 this quarter to $1.14, but those are the major pieces as you head into Q4.

Okay, all right, that's super helpful. Appreciate that. And then, Mark, you did mention just kind of where you think the company can kind of stabilize on a go-forward basis for growth, I think without equity in your opening remarks. Could you kind of go over those assumptions again and just kind of how you're thinking about it, maybe what could drive maybe upside to that growth rate?

Sure. So those comments are about over the next couple of years. So we're talking about 2024 and 2025. We think we can grow approximately 4% in both of those years, driven by the fact that free cash flow that we're investing of over $100 million at 8 and a quarter cap. Also, if you think about next year versus this year, we have the Regal percentage rents and operating theaters coming online that we didn't get the benefit of this year. So this year there's kind of a drop, the 20% drop in base rent, but next year we'll get the benefit of the performance of those theaters as lease year, during the lease year and the operating theaters for the whole year. So there's quite a bit of improvement there. And then I just think the investments, some of the investments we did in 2022, frankly, that was kind of outsized. Remember we did 600 million worth of deals and those are starting to come online this year and next year. So you put that all together and you have some things going the other way as well. You put it all together though, we think that translates to about a 4% growth in both years. So fortunately, we have cash on hand and nothing drawn on our line. So, and we only have the 136 million of maturities in 2024 and then 300 million in 2025. We don't think that if you do the math on our line, that we'll need to access the capital markets to achieve that 4% growth through 2025. So we're encouraged by that.

Okay, awesome, thank you.

Thanks Josh.

One moment for our next question. And our next question will come from Eric Wolfe from Citi. Your line is open.

Hey, thanks. I think you've previously given a sort of run rate FFO guidance for like 471, which excluded sort of the impact of the default, but also included the impact of the reward structure and other things. Is that still a good base on which to think about the growth that you just outlined?

When you look at run rate for us, it's a bit difficult because if you pick say, fourth quarter quote run rate, we've got built-to-suit going in service throughout the period. We have of course, the Regal percentage rent and operating profit that really doesn't kick in until next year. So run rate picking a quarter or even a kind of run rate for the year. I think 471 sort of base run rates probably a little bit high, but we have that embedded growth that I talked about in terms of Regal, in terms of built-to-suit coming online and so forth. But what I think you should focus on if you remove the deferrals, which is important to Josh's previous comment, if you remove the deferrals, we think we can grow that base amount, that 467 that we showed in that slide by about 4% next year. And then another, roughly 4%. We'll crystallize that number when we give guidance in February for the year, but that's how we look at it.

Got it, makes sense. And then your cash balance grew by I think, $73 million quarter-over-quarter. Just trying to understand sort of what drove that because it seemed like, you actually had some net investment activity in the quarter. And as you mentioned, your pre cash flow is about a little over $100 million a year. So let's call it $25 million per quarter. So just wondering why it grew so much during the quarter.

Yes, we did collect the 19.3 million of deferrals that were shown on that schedule. So that's a huge number. Also, the timing of bond payments matters and they're heavier in Q2 and Q4. So there's some reversal of that coming in Q4, just the timing of the way our bond payments work. But yes, it was a heavy high cash flow quarter given the low bond payments, the extra deferrals, and then just the growth in our operating business.

Got it, that's helpful. Thank you.

One moment for our next question. And our next question will come from Rob Stevenson from Janney Montgomery Scott. Your line is open.

Good morning, guys. Greg, obviously you have expansion commitments made to partners that you're still working on. But beyond that, are any new investments really penciling today given where the bid-ask spread is and your cost of capital in this interest rate world?

I would say, Rob, the answer is yes. I think things are taking time because of that bid-ask spread and getting people comfortable with that. But again, as Mark pointed out, given that we're spending cash as opposed to issuing new equity, we think on a risk-reward standpoint, things are, and as he implied in our future growth, we'll continue to do that. It has taken more and longer to achieve that kind of price awareness that the market has moved substantially for everyone. But I think Greg, and I'll ask Greg to comment, we're still seeing things that, again, we like the assets, we like the performance of these assets, but making them pencil to where we think is where value is has taken a little longer, but we're seeing some movement in that area.

Yes, Greg, I think that's absolutely right. And the other thing, Rob, I would add is that we're seeing these opportunities in most of our verticals. We're seeing the meat and play attractions, experiential lodging. So we still have what we feel is a pretty good pipeline. But I echo what Greg's comments are, it's just taking a little longer given the current environment.

Okay. And then, Mark, how should we be thinking about how the NOI from the $200-and-some million of expansion commitments sort of comes in over the next couple of years, right? I mean, just round numbers, if I think about it as, call it, $300 million at a 7% cap. I mean how does that sort of proratably sort of hit in 2024, 2025, 2026, what's the sort of end sort of period is when all of that stuff is income producing at full sort of speed?

Yes. We show a scheduled property under development on Page 20 of the supplemental that shows spending on build-to-suit and then when it goes in service. And I think if you look from beginning of 2024 forward, we've got about $127 million worth of build-to-suit spending as it finishes out. So -- and then it shows on that schedule sort of how that build-to-suit comes into service. And then on the mortgage side, of course, as we put the money out, that kind of earns that money right away. So by the way, don't think 7% caps think 8% or more in terms of when it goes in service. But I think that schedule is helpful to understand that timing. Like I said, of that $200-plus million, about $127 million of it will be spent over -- most of which will be spent in 2024, but there is some into 2025 as well.

Okay. And there is no meaningful delay like the water park that's going to be finished next summer. Does that start producing at full speed immediately? Or is there a ramp-up and it really doesn't start hitting at full speed until 2025 that sort of thing.

Once it goes -- yes, once it goes in service, which is what we're showing on that schedule, it earns its full cap rate.

Okay, that’s helpful. Thanks guys. I appreciate the time.

Thanks Rob.

One moment for our next question. Our next question comes from the line of Jyoti Yadav from JMP Securities. Your line is open.

Hey guys. This is actually Mitch here. Just help me out with the 2024 debt because you had suggested that you're not looking to tap the capital markets. So is that a suggestion that you're going to redeem the maturity?

We would pay it off our line of credit. We have nothing drawn on our line of credit. So the plan currently is to pay it off our line. Of course, we'll look at the debt markets at that time and see if longer-term financing makes sense. But in the near term, we've got plenty of capacity through cash on hand and line of credit capacity to pay that off.

Great. And then so when you talk about that 4% for next year, you're implying a little bit of dilution associated with the refi of that debt? Is that kind of the way you should think about it?

Correct, correct because we're paying it off our line and it's cheaper. Yes, we are -- you're correct.

Okay, great. And then what's Santikos long-term plan? Is that just a onetime purchase? Or do you think that they're going to look to maybe do some further consolidation?

Again, I think, clearly, if you know the Santikos brand, I think their thoughts are to continue to operate theaters to be opportunistic if presented so I think they're still looking to grow their chain. So I -- but Greg, any.

No. And Mitch, we've had the opportunity to meet with them at length and understand what they're doing, and we're pleased to have them as partners.

Great. And then I think my last question is I think you -- Greg, you had mentioned $9 billion base case for 2024 box office, so kind of flattish year-over-year. Obviously, we continue to get some indication of some movies that are -- or big releases that are getting delayed. I mean do you think that there is any sort of downside risk to that number should the strike on the actor's side continue? Or are you pretty confident that, that kind of bakes in an elongated strike with regards to the actors?

Well, again, there's always risk that we can't anticipate. I think what we've said all along is the first half of next year is fairly big. I mean, again, a lot of things are complete. So we'll start to see. What's going to occur is when the strike gets resolved, which we know it will be resolved at some point there's going to be a mad rush of, okay, completing anything that needs to be completed 24 versus starting new projects. So how that breaks out. I mean, remember, again, even 2 months ago, Mitch, the estimate was probably closer to the high 9s. So that $9 billion kind of has some of that built in just kind of anticipating. I mean there's really not -- the only major release, Greg, that I'm aware of that's moved right now is MI-8 so we don't have a whole lot of things. And remember, Dune moved in to that period of time from this year. So again, right now, not a lot of significant movement. It's -- like I said, it's probably got a 10% factor in there from a high 9s to low 9s. But we'll still have to see.

Appreciate that. Thank you.

One moment for our next question. Our next question will come from the line of Todd Thomas from KeyBanc Capital Markets. Your line is open.

Hi, thanks, good morning. I appreciate the update on the additional dispositions and the details around the theater portfolio. Can you just comment on the pace of dispositions relative to your initial estimate that was provided with the legal resolution and your ability to mitigate the dilution from carrying those assets or generate the recovery rent that you previously outlined?

Yes, Todd, I think we said last quarter, the history we've had since COVID is selling 5 or 6 per year. And we feel pretty comfortable about that pace continuing. As I mentioned, we have signed PSAs or LOIs for 6 of the remaining 10 so we -- and we're seeing good traction on all of them. So -- and that's from a standing start in July because we weren't able to market any of these before we announced the Regal deal.

The other thing I would add, Todd, is what we're achieving is consistent with the forecast that we gave at the time of the Regal. So I don't think we're changing from that expectation. Hopefully, it appears that, again, as Greg and his team has gotten into this, that they've achieved probably -- it's -- how long does it take to close them, but the interest has probably been faster than we had initially anticipated, which helps us, as you point out, not only with getting capital in, but eliminating some of those carrying costs and allowing us to deploy that capital and making it productive faster.

Okay. That's helpful. And then your comments about investing free cash flow and continuing to put capital out the door. As you look ahead, I'm assuming the committed pipeline pricing has been established on those investments, you're locked in, in that sort of 8% to 8.5% range. But are you seeing investment yields improve at all more recently such that you'd expect to be north of that 8% to 8.5% range going forward? Just curious if you're seeing any adjustment in pricing as you continue to have conversations about new investments here?

I think it's a -- again, I wouldn't say necessarily -- there's always been kind of price awareness, but there's also issues of risk reward, meaning maybe we're we would have been 75% of a deal, and we're now 60% of a deal, but we're still at 8.5%. So again, it's -- all of those things come into play. I think what we'd say is we're comfortably in the 8s that we're very comfortable with the property types that we're seeing with the quality of those types with the quality of our operators and building a resilient portfolio. But Greg do...?

And the breadth, as I mentioned before, I mean, we're seeing a lot of opportunities in many of our verticals, which is really reassuring.

Okay. And just lastly, I think you mentioned in your prepared remarks that in the attractions category, you're seeing some softness from lower spend, maybe lower traffic. Can you just provide a little bit more detail around what you're seeing there and how operator performance has trended? And then can you also just comment on whether you're seeing any softness at any other property types? I didn't hear anything, but just curious about experiential lodging.

Yes. I actually said, Todd, that we were seeing pressure on EBITDARM from insurance and wage costs, we're actually seeing attendance gains and attractions. So I would say, generally, the takeaway is there is some pressure mostly on wages and insurance in many of the verticals but really hits attractions because it just got a larger insurance bill. And then I also mentioned in the experiential lodging, we're seeing some normalization on RevPAR and ADR, but I would consider that coming back to normal from pre-pandemic levels rather than a decrease. Greg, I'm done here.

Yes, I was going to add, I think what we would say is across the -- pretty much across the board, we're not seeing backing up from the consumer side. Whether it's revenues or attendance. I mean, almost across the board, we saw continued positive growth in that. As Greg pointed out, insurance cost for a lot of our operators have gone up substantially. So we have seen some margin pressure. But as the coverage indicates going -- on a quarter-over basis, we went from a 2.7% last quarter to a 2.6% this quarter. That’s really about some of that expense pressure, but we've not seen any kind of pullback from the consumer at all, especially on experiential assets.

Okay, appreciate that clarification. Thank you.

One moment for our next question. Our next question will come from the line of Aditi Balachandran from RBC. Your line is open.

Hi, thank you. Just a quick question. Can you talk a little bit about the biomarker or like, I guess, the depth of the buyer market, especially as you still have these 4 Regal theaters to sell in the pipeline?

Yes. I think the buyer market is pretty good. I'd say again, this is rough, but about 50% of the theaters we're selling will likely go to an existing smaller theater chain and the rest to various uses. And again, it's all dependent on the location of the real estate. So it could be multifamily. It could be industrial, it could be retail. We always market broadly. So we don't just target any particular user. We hire a broker and target widely. So we feel like we have a pretty good handle on what the demand is for any particular.

I would say Aditi, that the 1 indication is the speed at which Greg and his team have secured purchase and sale agreements or LOIs. When you look at that with 1 sold already in 6, that's 7 of 11. So that's a pretty high hit rate for what has really been about a 60-day period. So I think there's been a lot of interest. And I'll ask Greg to comment it, but multiple parties involved in most of these assets.

That factor. Yes.

And as you saw this quarter, and we expect the future slightly above -- in terms of price, slightly above what we're carrying that. So we're seeing some gains upon sale as well.

Thank you.

Thank you. One moment for our next question. Our next question from the line of Ray Zhong from JPMorgan. Your line is open.

Hi, good morning. I appreciate the color earlier. I have a question on other income line. I know you guys mentioned the operating assets are all in there. So assume Cartwright is there and operating there. I know you guys mentioned the theaters were actually at a little bit of loss this quarter. Just kind of help us out in terms of modeling maybe moving forward? I know you guys talked about the -- if the box office is $9 billion, what the other income should be for next year on the theaters, what about Cartwright, can you guys help us out a little bit on the seasonality and the magnitude how far is it from stabilized amount from here? Just anything help there would be appreciated. Thank you.

Yes. So other income versus other expense, we were down about $900,000 this quarter. And really, there's a couple of things going on there. We had additional -- the loss we said from taking on those five theaters, which was about $400,000 to $500,000, and we expect that to reverse in the fourth quarter and still more or less breakeven in terms of that. In terms of Cartwright, Greg mentioned the expense pressure on some of the -- some of our experiential lodging and actually the margin decrease there. And so that was the other contributor to that $900,000, if you will, degradation versus last year, both the operating theaters operating loss for the quarter and then the Cartwright having a slight increase in expenses that reduced their margin. If you go to the fourth quarter, this year, other income over -- this quarter, other income over expense was $1.3 million. We expect that number to be a slight loss in Q4 just due to the seasonality of the managed properties. If you think about Cartwright, that's its off-season theaters will do better, that will slightly offset the Cartwright. In fourth quarter, but really Cartwright off season is what's going to drive that number down in -- kind of net profit down in Q4.

Got it. And then just kind of is that a fair run rate on the Cartwright piece moving forward to think about a little over $1 million quarter on the 2Q and 3Q? Or is that -- there's still some run rate to stabilization there?

Well, Cartwright has been interesting. It was this kind of the first year it's been open for a full year, and there was some balcony construction going on there. So we do expect that to improve hard to say with the expense pressure, how much that will improve. Remember, too, when you talk about run rates, you're going to have first and fourth quarter be lower than second and third quarter with respect to Cartwright because you have in-season second and third quarter and you have off-season sort of first and fourth quarter. So just make sure you get the timing of that right. But I do think we're hopeful that Cartwright improves over this year given the kind of the next year after the first year out of COVID having a full year and sort of having this balcony issue, which shut down some rooms for a while that will be fully open next year. So we're hoping for improved performance. But again, there is some expense pressure we're seeing in that regard -- in that property.

Got it. Appreciate it. Thank you.

Thank you. And I'm not showing any further questions in the queue. I'd like to turn the call back over to Greg Silver, CEO, for closing remarks.

Well, thank you, Victor, and thank you, everyone, for joining us today. We look forward to talking to you on our next call, and have a wonderful day. Thank you.

And with that, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.