Good day, and thank you for standing by. Welcome to the Fourth Quarter 2023 EPR Properties Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Brian Moriarty, Senior Vice President, Corporate Communications. Please go ahead.

Okay. Thank you, Victor. Thanks for joining us today for our fourth quarter 2023 and year-end earnings call and webcast. Participants on today's call are Greg Silvers, Chairman and CEO; Greg Zimmerman, Executive Vice President and CIO; and Mark Peterson, Executive Vice President and CFO. We'll start the call by informing you that this may include forward-looking statements as defined by the Private Securities Litigation Act of 1995, identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate or other such comparable terms. The company's actual financial condition and the results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of those factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q. Additionally, this call will contain references to certain non-GAAP measures, which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most materially comparable GAAP measures are included in today's earnings release and supplemental information furnished to the SEC under Form 8-K. If you wish to follow along, today's earnings release supplemental and earnings call presentation are all available on the Investor Center page of the company's website, www.eprkc.com. Now I'll turn the call over to Greg Silvers.

Thank you, Brian. Good morning, everyone, and thank you for joining us on today's fourth quarter and year-end 2023 earnings call and webcast. 2023 was a year of meaningful progress as we delivered strong earnings growth, executed our investment spending, delivered sector-leading total shareholder return, and positioned the company to achieve sustainable growth in the coming years. During the year, we saw a sustained level of strong performance in our non-theatre portfolio as evidenced by a consistent 2.6 times coverage level. Additionally, we were pleased to see over 20% growth in 2023 North American box office revenues versus the previous year. This growth translates to an increased coverage level of 1.7 times in our theatre portfolio, which is squarely in line with pre-COVID coverage levels. It's important to highlight that we achieved this coverage level even as 2023 box office revenues were down approximately 20% from 2019. This coverage data reflects the strength of our theatre portfolio along with the sustained trend of increased food and beverage per cap spending and along with operating efficiencies implemented by our tenants. This coverage data is also consistent with our anticipation that we would achieve pre-COVID theatre coverage levels prior to reaching pre-COVID box office levels. While last year's strikes will interrupt the linear annual growth in box office revenues due to title delays, the quality of our portfolio continues to endure and positions us well for a very favorable-looking 2025 film slate. Our investments during the year provided increased diversification and highlight our ability to source what are non-marketed opportunities. We ended the year with positive momentum in our investment spending. And as we move into 2024, we will continue to leverage this strength while remaining disciplined in our capital deployment and delivering reliable earnings growth. Our investment pipeline includes investments across our target property types with both new and existing relationship-based customers. We are also announcing a 3.6% increase in our monthly dividend to common shareholders. Considering our 2024 earnings guidance, along with our dividend yield, we are positioned to deliver strong returns. While our equity remains at historically discounted price levels, the fundamentals of our business continue to strengthen, and our thesis on experiential real estate remains intact. Consumers have demonstrated consistent demand for the experiences our customers have to offer. And we look forward to again delivering for our customers and shareholders in 2024. Now I'll turn the call over to Greg Zimmerman to go over the business in greater detail.

At year-end, our total investments were approximately $6.8 billion, with 359 properties that are 99% leased, excluding properties we intend to sell. During the quarter, our investment spending was $133.9 million, bringing the total investment spending for 2023 to $269.4 million. 100% of the spending was in our Experiential portfolio. Our Experiential portfolio comprises 289 properties with 50 operators and accounts for 93% of our total investments or approximately $6.3 billion and at the end of the quarter, was 99% leased. Our Education portfolio comprises 70 properties with 8 operators, and, at the end of the quarter, was 100% leased. Turning to coverage. The most recent data provided is based on a September trailing 12-month period. Overall portfolio coverage for the trailing 12 months continues to be strong at 2.2 times. Trailing 12-month coverage for theatre is 1.7 times, with box office at $8.8 billion for the same period. Our theatre coverage reporting assumes that the Regal deal was in place for the entire trailing 12-month period. For comparison, our Q3 theatre coverage was 1.4 times on a trailing 12-month box office of $8.1 billion. Trailing 12-month coverage for the non-theatre portion of our portfolio is 2.6 times. Now I'll update you on the operating status of our tenants. Our theatre coverage is at 2019 levels, even though North American box office remains well below 2019 levels. We continue to see sustained increases in food and beverage spending and spending on premium large-format screens. Our portfolio is well positioned to capitalize on these trends. As we have previously discussed, we are actively refining our overall portfolio by continuing to diversify our holdings and increasing our non-theatre investments. We are also focused on reducing our number of theatres and improving the quality and coverage of our theatre portfolio. In Q4, we…

Thank you, Greg. Today, I will discuss our financial performance for the fourth quarter and the year, provide an update on our balance sheet, and close with introducing 2024 guidance. We had another strong quarter of results with FFO as adjusted $1.18 per share versus $1.25 in the prior year, and AFFO of $1.16 per share compared to $1.27 in the prior year. Note that out-of-period deferral collections from cash basis customers included in income were $0.6 million versus $6.2 million in the prior year, resulting in a decrease versus prior year of $0.07 per share. I'm pleased to report that as of year-end, we have collected all accrued deferred amounts related to the pandemic. The remaining off-balance sheet amount of $12 million relates to only two tenants, one with the balance of approximately $26 million that has been paying based upon an agreed-upon schedule which concludes in 2024, and the other with a balance of approximately $11.4 million with payment depending on exceeding an EBITDA threshold. We believe the fact we have been paid back over $150 million of deferred rents since the pandemic, in addition to current rents, speaks to the strength of our tenants' businesses and validates our approach in managing through that challenging time. We work closely with each of our tenants to develop plans that work with their businesses and help position them for longer-term success. Now moving to the key variances by line item. Total revenue for the quarter was $172 million versus $178.7 million in the prior year. Within total revenue, rental revenue decreased by $3.9 million versus the prior year. The positive impact of net investment spending in the current and prior years and the $2.5 million lease termination fee recognized during the fourth quarter of 2023 that Greg discussed were more…

Thank you, Mark. Today's report reflects the continued strengthening of our portfolio, with theatre coverage returning to pre-pandemic levels. The quality of our portfolio has allowed us to collect over $150 million deferred rents, including all accrued amounts related to the pandemic. Additionally, our guidance demonstrates our ability to continue to grow even in a capital-constrained environment. Finally, I want to take a minute to acknowledge the retirement of Craig Evans, our General Counsel and Secretary. Craig and I have worked together for many years, and he has served as a trusted adviser and respected member of the EPR executive team. His accomplishments are too numerous to mention, but his efforts are much appreciated, and we wish him all the best in his retirement. Now let's open it up for questions. Victor, are you there?

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

Yes, hey guys thanks for the time. Could you remind us what's in your JV bucket and operating assets? I'm assuming all the operating assets are in the JV? And just like how you guys are thinking about those assets on a longer-term basis, whether or not like the guide for 2024 is like where they kind of stabilize out?

Yes. So you got operating properties in a couple of buckets. You've got consolidated operating properties that are in other income and other expense, and that's the Cartwright Hotel and Water Park and you got the seven operating theatres. So that's other income and other expense. On the JV side, we've got four properties or four sets of properties, three of which are JVs – three of which are RV parks, and one -- the other one is the investment in the two hotels in St. Petersburg. As far as the guidance for on the JVs, because I think that's more what you're asking about, they -- it's up about $400,000 versus actual results for the prior year. And we also have an increase of about $1.2 million in interest expense embedded in that. So from an operating perspective, it's really up more like $1.5 million. Part of that interest expense increase is things coming off of capitalization. But in the St. Petersburg properties, we also have an interest rate cap that's expiring in June that was kind of capped, so for at like 3.5%. So that's going to go up. But beyond that, we do expect -- we've put recent investments in the JVs. I think we spent somewhere upwards of $16 million in 2023. And unlike a lease, it takes a bit of time for that to ultimately result in improved performance. So we were a little bit conservative or cautious thinking that it would have an immediate impact in 2024 in our guidance. But longer term, we're confident that investments are going to bear fruit. And I think if you move into 2025, you'll see an even larger increase. So to answer your question, we don't think they're at their kind of final endpoint in our 2024 guidance given the recency of the investment and it takes a little time for those to bear fruit.

Okay. That's good color. And then maybe just on the operating assets that don't flow through the JV line. How are you thinking about those from, I guess, where they are in the 2024 guide versus like maybe where they can kind of stabilize out?

Yes, sure. If you kind of look at the guidance, for other income and other expense. Last year, that net amount was about $1.1 million, but some of that was income from FX and some miscellaneous income. So it's kind of about breakeven, you put it all together with the operating theatres, just transitioning from Regal and then sort of the Cartwright. For next year, if you look at the midpoint of our other income and other expense guidance is about $3 million. And about $2 million of that is from the theatres, from the seven theatres. And we expect that those will start to produce income. Obviously, we were in transition in 2023. As we move into 2024, those will start to produce income. That's a little bit lower than the chart we put out, frankly, for the theatres -- for the operating theatres that we're getting back for -- that we got back in the Regal transition. And frankly, we're just being a little bit conservative in that takes a little bit of time to transition those to Cinemark in Phoenix, the operator of those five theatres. So that's a little below what the chart implied that we put out back when we did Regal. I will say on the percentage rent side, we do have the full number kind of baked in from that chart on the theatres that didn't have to go through that transition that we took back from Regal where we did the percentage rent deals. So that kind of gives you a little color. I do expect those -- if you move to 2025 and you see the increase in box office as expected for 2025, those should, both in the percentage rents line and in the operating profits line, should increase quite a bit as box office is scheduled to go up anywhere from $8 billion to $8.4 billion, to something like $9.5 billion-ish for 2025. So growth in 2025 on those ought to be pretty good.

Thanks a lot.

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

Hi, thanks, good morning. First question, Mark, I just wanted to follow up on sort of the guidance and the theatre commentary. Just looking for a little clarity. You outlined the box office projections for the calendar year 2024, $8 billion to $8.4 billion, but also noted that the box office is running a little behind in the near term due to the strikes. What's the contribution to percentage rents from the Regal lease specifically in that $12 million to $16 million percentage rent assumption? And can you just talk a little bit, I guess, about how you think the box office shakes out for the Regal lease which runs through July 31?

Sure. And I'll jump in, Mark, before. This is Greg, Todd. I think what we would say is, we think for the lease year that the box office is going to be $8.3 billion, for the lease year. So again, as Mark indicated otherwise, we think if you follow -- if you go and look at our chart that we supplied when we do that, those numbers are consistent with what we think on the Regal contribution. Again, that's -- remember, that's an August 1 to July 31 lease year, so we kind of have broken it out, both giving you our view on kind of what the full year box office will be and then kind of the lease year. So again, those are clearly impacted by the strike, but still think that it will be a nice contribution, as Mark indicated in his comments, of what it will add.

Yes, the percentage rents from Regal, for the chart and what we have in our guidance, is about $3.8 million.

Okay. That's helpful. Got it. So $8 billion to $8.4 billion for 2024 and $8.3 billion is sort of the assumption for the Regal lease here. I just want to -- got it. And then you discussed the lease restructuring with Escape that took place during the quarter. Should we expect additional lease restructurings in the theatre portfolio in the near term? And is there a percentage rent that you're expecting from Escape in 2024 within that $12 million to $16 million guide?

I don't know -- and Todd, this is Greg. I don't know that we have any other planned restructuring, but -- Greg and his team take the opportunity. If we can -- if we think we can improve the overall portfolio and save or create capital by taking theatres back and selling them and still create and overall stronger, we'll definitely take a look at it. I don't think that there's a meaningful contribution for that theatre. I think the long-term plan is probably to sell that theatre as either for a different use or [indiscernible] theatre use.

Let me clarify. So there is a percentage rent component to one theatre and then we also enhanced the percentage rent on the two theatres that we're going to continue, Todd. And like Mark said about our investments in [indiscernible] RV Park, I mentioned that the operator is going to refurbish both of those theatres. So we would hope that, if there with percentage rent, that would come after those refurbishments.

Okay. Got it. That's helpful. And then, Mark, just in terms of the August 2024 maturity, $135 million, 4.35%, I think you mentioned that you plan to retire that on the line, which I think is consistent with what you said last quarter. But debt costs have come in somewhat. Just curious if that's still the plan or if your thought process has evolved a bit.

No, it's still the plan. If you kind of look at our cash flows for the year, we start with cash on hand. We have excess cash flow in excess of $100 million. We have dispositions. And then we can fund CapEx, maintenance CapEx, and pay off that private placement, still only end up with about $150 million drawn on our line given our current plan. So still a modest draw. But yes, the plan, as I said -- as you said, and as I said last quarter, is to pay it off the line and not have to access the capital markets. Now should the capital markets be there, we can look at longer-term financing. But our plan right now is to pay it off the line.

Okay, alright. Thank you.

One moment for our next question. Our next question will come from the line of Anthony Paolone from JPMorgan. Your line is open.

Hi, great, thanks. Can you talk just generally as you're looking out to 2024 where the coverage levels are lowest or what might be on the watch list outside of, say, the theatre stuff, just your non-theatre assets?

Again, I'll let Greg jump in. But really, it's -- our watch list is very diminished. Again, I don't know that we have anything that's jumping out. Greg is shaking his head, so you can't hear that. But I think, again, and it points to the idea of -- when we reflected last quarter, we talked about a theatre coverage in the 14, 15 range on -- that was on an $8.1 billion box office. So I think our thoughts are relatively, Tony, we've seen the low watermark of theatre coverage if we talk somewhere between $8 billion and $8.4 billion. So that is things are clearly improving in that sector. And as we've talked about earlier, even with and in the face of some increased expense pressure, our coverages have remained high in our non-theatre space. So I don't think we see really -- we don't have any credit worries that we're addressing right now.

And Tony, also, as I said in my script and we keep repeating, we're very thoughtful on the theatre side about pruning what I would call underperforming or small market theatres, which kind of, by definition, had poor coverage. So I think overall, our portfolio is healthier because of the steps we've taken.

Okay. So then, I mean if we think about just -- put aside sort of the operating assets and percentage rents, but if you think about just the contractual organic growth in the portfolio, I mean, what should that number look like? Because it seems like 2024 million might be down because you did the theatre, you got the term fee, and so you did the theatre restructuring, it sounds like you're getting a KinderCare back. I'm just trying to understand like how to think about organic growth going forward.

Sure. I mean, I think, generally, we've said somewhere in that 1.5% to 2% is kind of -- next year, in 2025, we'll be impacted by that because of our AMC lease restructure, we have a lease bump for AMC next year in 2025, which because of the fact that we're -- they're cash basis, we're not straight lining. So that will be a more meaningful bump as we get into 2025. But on a run rate basis, that kind of 1.5% to 2% is generally...

Yes. As Greg said, it can vary depending on whether it's every five years it actually hits. And then, like you said, in the case of AMC, it's our first bump and be pretty meaningful in 2025. So we should see more kind of higher internal growth in 2025 than 2024.

Okay, great. Thank you.

One moment for our next question. Our next question comes from the line of Smedes Rose from Citi. Your line is open.

Hi, thank you. I just wanted to ask you a little bit about the Mirbeau Spa relationship. It sounds like a mortgage going in, you mentioned you can convert it into a more sort of traditional sale leaseback. Is that your option? And would you expect to do that? And could you just talk about the kind of yields that you're getting on that investment?

Sure, Smedes. Yes, it is at our option. There are a couple of triggers that would take -- we get to make a decision over time as the performance goes out. And then some of it also relates to the forward commitment that we have with them to fund future operations. We don't get into the cap rates on individual deals. But as I said early on in the script, most of our deals last year were 8% or above 8% cap rate.

Okay. And then the leverage looks like it moved up sequentially. I was just wondering where you expect that to be maybe by year-end in your guidance. Could you just repeat what the goal is on the leverage side?

Sure. Leverage is 5% to 5.6%. And with our plan, we'll be squarely within that, perhaps even at the lower end of that in our plan going into 2024. So we've always kind of maintained that 5% to 5.6%. And I kind of laid out the cash flows for next year. A lot of our funding is being financed by free cash flow and even, to some extent, disposition. So that's why leverage can remain low and we could still invest in new acquisitions and so forth.

Alright, thank you.

Thank you Smedes.

One moment for our next question. Our next question comes from the line of Michael Carroll from RBC. Your line is open.

Yes, thanks. I just wanted to touch on the Escape theatres and the Alamo Drafthouse transitions. I guess, generally, why were those theatres underperforming? I mean, I think, Greg, you kind of highlighted in your prepared remarks that generally you've been getting rid of the theatres in smaller towns. Is that the reason that drove those underperformance of those assets? Or is there something else there?

I think it's a couple of things. The Alamo Drafthouse, in particular, were in smaller markets in Texas. They were actually in Laredo and Corpus Christi. And again, I would say, Michael, we don't necessarily think that every small market is bad, but smaller market theatres sometimes have more pressure on them. And then the same with Escape, one -- the one that we terminated was actually attached to a dying mall in Cincinnati. So they're just -- we didn't see a lot of opportunity for growth there. And the one that we have a percentage rent deal on is in a highly competitive zone and, frankly, other theatres [indiscernible]. So I hope that answers the question. It's a combination of everything. We look at the performance and we also look at what we think the performance cadence can be over the next couple of years when we make those decisions.

I think a couple of things I'll add to that, and Greg can chime in. First of all, you look at the underlying credit. As Greg mentioned, the two Alamo Drafthouses were franchisees. So the other two that we kept are corporate credits. So again, the fundamental -- next to that is what we saw at Escape. We have a firm belief of operators need to continue to commit capital to improving these theatres and whether that's expanded offerings in the terms of recliners or premium screens, IMAX, that sort of thing. And some of these smaller operators don't have access to capital. When we did the Escape, we got a commitment for $1 million per theatre that kept for them to improve those theatres. And so when you look at all of those things, it's not just are they doing well now, but how are they going to do and perform over the life of the lease? And are they going to be able to put the money in them to keep them as competitive as we think they need to be, Michael.

Okay. And then that $1 million commitment, I mean, how significant is that per theatre? I mean can they do those significant upgrades that you kind of were just mentioning?

Yes. I mean, yes, they definitely can. I mean if you think about upgrade, a full kind of renovation for seats and things, is about $250,000. So you can get significant improvements with this capital.

Okay. And then within your remaining theatre portfolio, I mean, how many kind of fit that market where there are smaller town type theatres where you're concerned that you might have to potentially transition or do something with?

I think Greg and his team are doing a great job of kind of, as he talks, pruning those out.

And again, Michael, I said a minute ago and I'll reiterate, there's nothing wrong with small markets. If the theatre has a good footprint and it's been upgraded, small markets performed very well. So we tend to look at everything. And I would say we feel pretty good about where we are now. We've taken a lot of steps since COVID. We've disposed of 16 theatres in the past 3.5 years.

Okay. Great. And then just last one for me. I guess, Mark, related to your guidance on the other revenue and other expense lines. Obviously, there's big ranges between both those. And then can we assume that your other income guidance is $3 million? Or does it -- or can other revenues trend differently within that range and the same with other expenses and we can get something lower or higher than that $3 million target?

So you're talking about the net $3 million target, right?

Correct.

Yes. So yes, I mean, these are operating properties. So there certainly is a range that they could operate in. For example, part of that is these operating theatres. And we think we've been fairly conservative projecting that for 2024 given the fact that they were shut down for a bit in -- sort of in 2023 and the operators are now getting a full year under their belt. So yes, that can vary. And of course, Cartwright which is another part of other income and expense can vary. We think the $3 million is fair achievable, but we're hopeful that there is upside to that, and that's why there's a range.

I think the other thing that -- and I'll ask Mark to comment, is the seasonality of that number. I would not expect that to divide by 4 and lay that in there. Because whether it's theatres or Cartwright, theatres generally out -- their busy seasons are kind of the second and fourth quarter. And similarly -- so it's just -- it will be -- Mark's tried to give you kind of an annual look on this, but there will be some movement. So generally speaking, the first quarter in the theatre business is not nearly as strong as the second quarter. So seeing those numbers flow through for the whole year, it will be what's important, but there will be seasonality to that on a quarter-to-quarter basis.

Yes. And just to add to that, we don't give quarterly guidance, but I said in my prepared comments that the first quarter will be below the kind of the annual number guidance midpoint divided by 4 by about $0.09. And it's in part to what Greg just said with the theatres, but also the off-season for our operating properties, particularly RV parks and so forth, as well as percentage rents is much lower in Q1 than it is for the remainder of the year. So it's important to understand that seasonality, if you will, in terms of projecting quarterly results.

Okay, great. Thank you.

Thank you, Michael.

Thank you. One moment for our next question. Our next question comes from line of Ki Bin Kim from Truist. Your line is open.

Thanks, good morning. Just going back to your theatre projections, you made a comment that you think 2025 will be a much bigger year. Can you just provide like a range of outcomes that you're thinking about, and what you're seeing that makes you believe that?

Again, Ki Bin, it's really about titles. And again, when we come to our estimates, we're using a variety of industry pundits, including for -- some of the major theatre analysts that some of the banks who are on the line here. And I think, again, when we say 8 to 8.4, I think, there's probably no analyst out there that doesn't have at least 9 to 10 in the 2025 number. And it's fully -- as Greg said, it's really about the number of titles. So as the production ramps back up from the writers and actor strike, we're seeing, again -- and an acknowledgment, when you combine that with an acknowledgment by all the studios that they need the theatre exhibition business. I mean, almost, I think, other than Netflix, almost all the streamers are losing money on their businesses, and they need the cash flow that's generated from the theatre exhibition movie, and they've all kind of re- kind of committed to that. And so we're getting really good visibility into titles right now, beginning right now into 2025, and it looks very strong. And again, that's not just our numbers. That's kind of pretty much industry-wide. You see some above 10, but generally, I think everyone is in the range of 9 to 10. So at a midpoint at 9.5, that's a pretty strong year compared to what we're seeing this year.

Yes, coverage was 1.7 times at 8.8 trailing 12 months. So we'll be in good shape.

To put some numbers, if you look at the chart that we put out, which we probably would have been at $9.4 billion or so forth this year but for the strike. So if you kind of think about that as just a year delayed. The chart suggests that the percentage rent could be another $5 million higher than what we're guiding to this year at $8.7 million. And of course, the operating profits will go up as well, given if the performance of those theatres follows the box office, which we think it will.

Yes, you read my mind on the next question. Is that chart still -- is that still the base case? There are some rent restructurings from other theatres. So I wasn't sure if there's some movement in this...

That's just Regal in the operating theatre. So we still think it's the base case that we're operating under. As Mark said earlier, our operating theatres are a little off that, but we really think that's a ramping-up period of time that we will we will be there. And our percentage rent number is holding true to that case this coming year.

Okay. On the AMC ramp bump that's coming in 2025, can you just remind us what that is?

It's a 7.5% bump. So again, I don't have their actual rent number. Mark, do you have that? It's a 7.5%. Roughly, let's -- we'll refine this, but I think it's roughly on $90 million?

Every -- every 5 year?

Yes, 7.5% on $90 million. So -- and that occurs August, July -- July or August.

Okay. And just one more. The executed LOIs or purchase sale agreements for the three of the remaining eight Regals and the one AMC that you have under PSA, just high level, does this mean you're just assigning a lease and you're going to get rent in? And if you can just provide some color on what that NOI increase would be...

Yes. So for the vacant Regals and vacant AMCs, we are selling them. We're not going to enter into a lease. They're vacant. So there's no lease to assign. And we have a cadence of selling about six a year, and I think that's probably what it will be this year. A lot of it depends on whether people need to get entitlements, how long that process takes. Of the 16 we've sold over the past 3.5 years, roughly 50% are being used -- reused as theatres, and the other 50% are not. And as I said many times, we're agnostic. We just market and take the highest price and move on.

Okay, 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 Silvers for any closing remarks.

Well, we really appreciate everyone's time and attention. Look forward to talk to you in the coming year. And thanks, everyone, and appreciate it. Have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.