EPR Properties
Q2 2020 Earnings Call Transcript

Published: 6 Aug 2020

[Operator:]

Good day ladies and gentlemen and welcome to the Second Quarter 2020 EPR Properties Earnings Conference Call. [Operator Instructions]. As a reminder this conference call is being recorded. I would now like to hand the conference over to your host Mr. Brian Moriarty, Vice President of Corporate Communications.

[Brian Moriarty:]

Thank you. Hi everybody and welcome. Thanks for joining us today for our second quarter 2020 earnings call. I'll start the call today by informing you this call may include forward-looking statements as identified 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 earning release, supplemental and earnings call presentation are all available on the Investor Center page of the company's Web site, www.eprkc.com. Now I'll turn the call over to the company's President and CEO, Greg Silvers.

[Greg Silvers:]

Thank you, Brian. Good morning everyone and thank you for joining us on today's second quarter call. I'd like to start by extending our best wishes for the health and safety of everyone and by voicing my appreciation to the entire EPR team that has been diligently working to advance the goals of EPR while working remotely and facing the challenges of the ongoing pandemic. Joining me on the call today are Company CIO Greg Zimmerman; and Company CFO Mark Peterson. I will start the call with an opening statement then turn the call over to Greg and Mark who will provide more detail. As we discussed on our last call, during this unprecedented time, we've taken the necessary steps in terms of our balance sheet and tenant agreements to help ensure EPR's long-term success. To this end we have maintained an essential focus on fortifying our balance sheet with sufficient liquidity to sustain us. We have more than $1 billion of cash on hand which puts us in a very strong position to navigate the current challenges. Furthermore, with increasing progress in our rent collections as we move through the quarter and for July, we are cautiously optimistic that we will continue to see sustained improvement during the coming quarters. We are also pleased to see that our tenants have made significant progress in safely reopening our properties within the confines of jurisdictional mandates and our theater tenants are currently targeting the late summer to reopen. Separately, we've reached resolution with the vast majority of our customers where deferrals were warranted. Our team has worked extremely hard over the past few months to execute agreements which are reasonable for both EPR and our tenants as we ramp back up throughout the year. Greg will have more detail on this. Additionally, we executed important new lease restructuring agreements with AMC theaters. The leases contain several features which we believe will significantly enhance our long-term position with respect to AMC which we received in return for providing a reduction in annual fixed minimum rents. Specifically, we believe the new Master Lease structure will reduce our risk should AMC seek the protections of a reorganization process. As Greg will elaborate, we also meaningfully extended our lease term and gained the optionality to reduce AMC concentration through the bundling of transitional properties. Lastly, with regard to the recent studio announcements regarding the release of titles. I think it's important to remember that all of us are trying to navigate a pandemic that has disrupted our normal activities. We understand that some will want to mark this time as a permanent change. However, we believe such leaps are not supported by the underlying economics. All of the studios understand that to maximize the economics for a film they need a robust theater exhibition platform. Notwithstanding, the excitement generated by Trolls World Tour, the reality is that Universal did not make near the revenues or profit of the original title that was released theatrically. And in reality after taking into account significant margin expenditures, they may have lost money. The uncertainty of the times has led studios to pursue various avenues including premium video-on-demand, streaming-on-demand and delaying titles. It's important to note that the delaying of releases has been by far the most frequent choice for the studios even those that are experimenting with PVOD and SVOD. Both Universal and Disney reaffirmed their commitment to theater exhibition. Disney indicated that the release of Mulan was driven by the pandemic and not a change in their operating model. Universal moved Fast & Furious 9 to a 2021 theatrical release. We understand that these experiments may result in changes to the model, but these changes will be driven by economics and theatrical release continues to be an important part of that equation. As with any experiment many questions remain including what's the economic model? Does film rent reduction or exhibitor participation in PVOD revenues offset revenue losses from shortening the window? And how much revenue will be lost if in fact studios like Universal only intend to move films that were not going to generate significant box office anyway? What price point will consumers support for at-home viewing? And is this data skewed to reflect current pandemic conditions? To date most non-theatrical releases have been family product with a younger target demographic. Separately over the last five years PVOD has shown significant decline while monthly subscription streaming platforms have seen significant growth. How will this be implemented internationally? Remember worldwide box office was approximately $42 billion and this hybrid approach is a difficult proposition for most of the remaining markets given the fear of privacy. Any long-term systematic change requires a viable economic model and the underlying economics at this point simply do not support radical shifts to the strategy. Could we see revisions through the theatrical window? Definitely, especially for low-budget films or films with low-to-moderate box office expectations. Likewise we could also see new content providers like Netflix move into theatrical release as a means to increase revenues. The long-term effects of the pandemic on our everyday lives have yet to be defined, but we are confident that theatrical exhibition will remain an important part of film distribution simply because of these economics. Now I'll turn the call over to Greg Zimmerman.

[Greg Zimmerman:]

Thanks, Greg. At the end of the first quarter, our total investments were approximately $6.7 billion with 369 properties in service and 97.3% occupied. During the quarter, our investment spending was $11.7 million and was entirely in our experiential portfolio, comprising build-to-suit development and redevelopment projects that were committed prior to the COVID-19 pandemic. Our experiential portfolio comprises 284 properties with 44 operators is 97% occupied and accounts for nearly $6 billion of our $6.7 billion in total investments. We have three properties under development. Our education portfolio comprises 85 properties with 15 operators and at the end of the quarter was 100% occupied. I now want to turn to our customers' reopening schedules and to update you on our deferral agreements and rent payment time lines. We have ongoing discussions with our major exhibitor partners about their reopening plans. There have been several stops and starts owing to the pandemic. But as of today, the major exhibitors have announced their intent to reopen in mid to late August to prepare for the release of Tenet on September 3rd for the Labor Day weekend. Openings will be state by state, city by city. Given the varying impact of COVID-19 throughout the country, we do not anticipate that AMC, Regal or Cinemark will be able to open 100% of their theaters in their first reopening phase. As the past several months have demonstrated, reopening plans are entirely dependent on the studio's release schedule, which has been pushed back based on governmental restrictions. As we mentioned on our Q1 call, while ongoing social distancing requirements will limit capacity in most theaters given typical seat utilization metrics theaters should have sufficient capacity to meet demand. Our exhibitor partners have developed comprehensive COVID-19 safety plans, the safety and comfort of their employees and guests is top of mind as they come back to the movies. As life begins to return to normal, seeing movies on the big screen in a theater will as it has always been an exciting cost-effective out-of-house entertainment option. We expect the remainder of 2020 will be a slow ramp-up as customers grow more comfortable coming back to the movies with social distancing protocols and studios better understand the exhibitor's ability to deliver box office results. The current 2020 film slate, which is subject to change, includes Tenet, Death on the Nile with Kenneth Branagh, The Empty Man, Honest Thief with Liam Neeson, Wonder Woman 1984, Black Widow, No Time to Die, Coming to America and Dune. The 2021 film slate was strong before the pandemic because a number of films have pushed to 2021 were bullish. The 2021 film slate includes strong offerings A Quiet Place Part 2, Top Gun

[Mark Peterson:]

Thank you, Greg. Today I will discuss our financial performance for the quarter, which was significantly impacted by the temporary disruption caused by COVID-19; discuss payment deferrals; provide an update on our balance sheet and strong liquidity position; and close with some estimated forward information. Before I get into the results for the quarter, I think it is helpful to first go over the charts included in the press release, which detail how we classify tenants and borrowers for accounting purposes as well as certain deferral information. As you can see on the left side of the slide, we have classified our tenants and borrowers into five categories based on how we accounted for them in the context of our annualized pre-COVID contractual revenue level of $624 million, which consists of cash rent including tenant reimbursements and interest payments. Note that this annualized cash revenue excludes properties -- operated under a TRS structure. Customers with no payment deferral represent 18% of such revenue. Customers that had some or all payments deferred with such deferrals recognized as revenue in our financial statements represent 50%. Note that for this category of customers, we had $64 million of accounts receivable related to payment deferrals at June 30 that we believe is fully collectible and anticipate recognizing another $67 million of such deferrals in future periods for a total of $131 million. Customers with payments deferred, but such deferrals were not recognized as revenue in our financial statements as amounts were not deemed probable of collection represent 4%. And customers that are under a cash basis of accounting and/or that have been or are expected to be restructured, which includes AMC, represent 27% of such revenue. Note that certain payments were deferred in the second quarter for customers in these two categories totaling $41 million and this deferred revenue was not recognized in our financial statements. Finally, new vacancies as a result of the pandemic represent about 1% of such revenue. The last column of the chart shows our projected total payment deferrals of $142 million. This amount does not include any deferrals for customers that are cash basis and/or they have or are expected to be restructured. AMC is the largest tenant in this category and is a good example of why their deferrals are not reflected here as the rent has been restructured under a new agreement as Greg described. The next chart shows the statistics for the $142 million of projected total deferrals as well as the status of all agreements based on annualized pre-COVID contractual revenue. Note that the average deferral period is 11 months. The average months deferred is five months and the average collection period which begins after the deferral period is 32 months. The bottom of the chart shows that customers representing 85% of annualized pre-COVID contractual revenue have either executed a deferral agreement or do not require a deferral agreement. Now with that context, let's go over the financial results for the quarter. FFO as adjusted for the quarter was $0.41 per share versus $1.36 in the prior year. And AFFO for the quarter was $0.44 per share compared to $1.37 in the prior year. Please note that the operating results for the second quarter of 2019 included the public charter school portfolio, which was sold last year and is included in discontinued operations. The prior period results also included a $6.5 million termination fee. Total revenue from continuing operations for the quarter was down $55.3 million from prior year, mostly due to the impact of COVID-19 including

[Greg Silvers:]

Thank you, Mark. As we discussed today we are cautiously optimistic about the re-openings to date and the planned reopening for theaters. While optimistic there remains several hurdles that we must cross until we can resume normal operations including the payment of a dividend. I can assure you that the resumption of a dividend is a priority for our Board, but only after we have clarity on some of the challenges we face. As we discussed today, we're hopeful that that process is well underway. With that why don't I open it up for questions.

[Operator:]

[Operator Instructions]. You have your first question from Ki Bin Kim from Truist. Your line is now open.

[Ki Bin Kim:]

Thanks. Good morning, guys. So you guys made a pretty bold forecast that you expect permanent rent reductions of 5% to 7%. Just to clarify for everyone you're talking about your entire pre-COVID revenue base right? Not just the 85% of tenants that you reached an agreement with?

[Greg Silvers:]

That's correct. It's off the entire.

[Ki Bin Kim:]

Okay. And can you just help me understand, how much of that is contractually known? And how much of that is unknown because obviously you only have agreements for 85% of your tenant base.

[Greg Silvers:]

I'll let Greg chime in. But I think even -- what we counted were the 85% those are kind of signed agreements. The remainder of that portion is substantially complete. So -- but so I think we feel very confident about kind of where we're at with those numbers.

[Greg Zimmerman:]

Yes, Ki Bin, it's Greg. Yes, we feel very confident. And as you would expect we focused on the majority of our large tenants and big revenue first and then we're knocking out the remainder. But we're fairly confident on the rest of the agreements.

[Ki Bin Kim:]

Okay. And obviously, it's going to be hard to forecast earnings or cash collection for your company. But how are you thinking about the cadence from here on out? And I'm not sure what the right metric is, but if you could provide any kind of color to The Street on what we should expect going forward in terms of like collections or revenue recognition.

[Greg Silvers:]

Again, I think, you can imply kind of what it will be for the balance of the year based upon the numbers that Mark just supplied because we gave kind of what revenue recognition would be our estimates if you go to the midpoint of that. I'll let Mark jump in. But, I think, if you look at the midpoints of those that would give the best indication of what our balance of the year cash collections would be.

[Mark Peterson:]

Yes. Just a little bit about timing. I think collections will continue to get better as we come off of these deferral agreements in Q3 and Q4 certainly. And with respect to revenue recognition, we'll see a marginally better revenue recognition in Q3. And then as we move into Q4, I think, you'll see even greater revenue recognition as some of tenants that are in that category three that we weren't recognizing during the deferral period start to get recognized. And furthermore we get a little more percentage rents and other income recognized on properties that are either cash basis or they're in restructuring. So I think cash ramps up nicely and rev rec does as well but it's more fourth quarter oriented.

[Ki Bin Kim:]

Okay. And just last question. The 21% rent reduction for AMC. Was that for all 53 or 46? And what does that do for AMC? How much breathing room does it give them? And maybe -- I'm not sure which how you want to answer that maybe you can touch on what the coverage ratio was for AMC pre-COVID, what a 20% reduction in rent would do to that coverage ratio on a pre-COVID term.

[Greg Silvers:]

Well, the first question is it involved all 53 assets. So it wasn't just on the 46. It was all 53. And again, I think, it will provide them some degree of relief. However, AMC has close to 700 theaters. So there's a lot of things they need to work through with a lot of people. And what we tried to do Ki Bin was position ourselves in the event that they can't work through that and they do -- we're not saying they will, but if they do pursue some, sort of, restructuring avenue that we have dealt with our we believe our issues. And we're positioned ourselves to move forward. I think we generally do not give coverages on individual tenants but it's needless to say it's meaningfully improved that over the balance of those assets.

[Ki Bin Kim:]

Okay. Thank you, guys.

[Operator:]

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

[Brian Hawthorne:]

Hi. Good morning. My first question in a bankruptcy scenario, how comfortable are you that the AMC Master Lease will stand up in court?

[Greg Silvers:]

You know, I don't think anybody can give you great assurances. But I can tell you that when we structured it, we used bankruptcy council, the latest court decisions that were out there to structure a transaction that we believe is the most formidable available.

[Brian Hawthorne:]

Okay. And then on the 15% of gross receipts for the AMC, monthly payments for the rest of this year. I guess how much – how should we think about that in terms of – I mean assuming theater is open as planned out. I guess kind of how much potential rent could AMC pay this year?

[Greg Silvers:]

Again, I don't think we're giving that number. I can assure you that it's probably conservative in how we've approached this just because of there were a lot of unknowns as to how various jurisdictions would allow reopening, what product would be available. I don't think we're prepared to give a specific number but I'm comfortable that it's a conservative approach that we took.

[Brian Hawthorne:]

Is that percentage rent that's not included in the cash collections number you guys gave right? Not in that range.

[Mark Peterson:]

Correct the percentage rent is not.

[Brian Hawthorne:]

All right. Thank you.

[Operator:]

Thank you. Your next question comes from the line of Nick Joseph from Citi.

[Nick Joseph:]

Thanks. Just following up on the AMC restructuring. And Greg, you obviously gave a lot of kind of comments on the theater industry more broadly and kind of the uncertainty of what kind of the shortening of the exclusive window could be. So when you think about kind of medium and longer term, how you set rent, how did that factor in? And I recognized you walked through a lot of the push and pulls. But just in general how did you think about creating a buffer for any kind of structural changes to that business?

[Greg Silvers:]

Again it's primarily you're kind of looking at overall coverage. So you have to have some degree of forecast as to – and we spend a lot of time on it looking on where we think impacts of various things will be. And then it rolls through to where – what you think your coverage buffer needs to be. And you're also looking at again against where other theater companies are operating. And if you got into a situation where could you re-lease those theaters at given very similar economics. So all of those I can assure you that all of those things went into consideration.

[Nick Joseph:]

And then for the 88% of the properties that are now reopened. How is performance kind of four-wall performance for those properties relative to pre-COVID levels I don't know on an EBITDA basis. And I recognize it's still very early but can you give us a sense of how social distancing...

[Greg Silvers:]

I would say – and this yes. And this is a general and I'll let Greg kind of weigh in. I would say the tenancy that we've seen is probably 65% to 70% of pre-COVID revenues. Now again, we have some properties that are operating at 100% of 2019 revenues and sum that up. But generally that kind of 65% to 70% in this – the reason that that's kind of really solid is those are generally breakeven numbers for operators. So again, they're – at those levels they're not burning cash. They are at least breaking even and generally tending to grow. Now as Greg mentioned, if you have hotspots or flare-ups or things like that it can tamp back down but those numbers have been kind of at that level and building.

[Greg Zimmerman:]

Nick the only other thing I would add is that almost across the board everybody is doing better than they projected they would do which is comforting to us.

[Nick Joseph:]

Thank you.

[Operator:]

[Operator Instructions]. Your next question comes from the line of John Massocca from Ladenburg Thalmann. Your line is open.

[John Massocca:]

Good morning, everyone.

[Greg Silvers:]

Good morning, John.

[John Massocca:]

Going back to kind of the ski segment again, I know we're a little bit early days but you guys mentioned you're confident they're going to reopen as planned. I guess, are there any particular conversations you're having that give you that confidence? Is that just simply the outdoor nature of that activity and how outdoor activity has been treated in kind of other segments going forward? Just any color there would be helpful.

[Greg Silvers:]

Yes, John. No, we're talking to all of our tenants. So, I think as Greg mentioned, if you remember most of our -- and we built that portfolio as a drive-to destination portfolio. And I think if you talk to the ski operators, there's a lot of confidence that when you're within two to four hours around major MSAs, that will kind of the positive spots. I think if there's any area where ski is worried, it's if airlift is involved and the impact that will have given the depressed kind of flight schedules and challenges in that space.

[John Massocca:]

Okay. And then as we think maybe about kind of the hospitality segment, the lodging segment outside of Kartrite. I mean, how has that kind of trended? It seems like they're all open, but are you -- is kind of thinking about revenue projections there? I mean, I would imagine they're significantly down versus kind of pre-COVID? I mean, are those kind of a significant portion of the tenants that maybe are in these kind of longer-term deferrals?

[Greg Silvers:]

So it's case -- Kartrite's one of that. But I think on the large part and I'll ask Greg to -- I would include them in the guys that are doing surprisingly well. I mean, they -- these are the drive-to locations. We can argue if they should be doing well given the conditions, but they are surprisingly doing quite well.

[Greg Zimmerman:]

Probably some impact to food and beverage.

[Greg Silvers:]

Yes.

[John Massocca:]

Okay. And then maybe just tied a little bit to the kind of first question I had. I mean you're seeing a significant divergence in performance amongst kind of maybe "outdoor" tenants versus indoor tenants? Has it kind of come a little further along here in the pandemic? And I guess maybe broadly speaking, how would you kind of slice the portfolio between "outdoor" tenants and indoor? I know, it's imperfect, because everything has got a little bit of an outdoor in an indoor element, but…

[Greg Silvers:]

Yes. I think you're correct, John. I think outdoor at least initially outdoor was -- has a perceived safety factor. So a top golf or something, which has an outdoor was -- had a very kind of positive reception. What I think we've seen more recently is that the indoor people who have demonstrated strong safety programs and that word-of-mouth gets out. We've seen that reversion back toward the mean for all of our product types to where the indoor is not significantly lagging the outdoor at this point.

[Greg Zimmerman:]

I think the other thing John to remember on the indoor stuff is, I'm going to go out on a limb and say everyone is still subject to restrictions on the number of people that can be there. And that's providing some comfort to customers, because if you're operating at 50% capacity it just doesn't look very full.

[John Massocca:]

Okay. And then broadly speaking as you kind of think about the portfolio, is there kind of a rough metric you can give on the division between outdoor and indoor?

[Greg Silvers:]

Again, it's -- the reason that that's hard is ski is significant outdoor, but they're not even operating for the most part this time. So it's hard. I would say that 65% to 70% is pretty consistent across outdoor and indoor as far as performance.

[Greg Zimmerman:]

Yes. And I did note John, a number of the attractions are not open specifically like water parks, because right now they're shut down by governmental action. So, for example, state of Arizona, I don't think you can even be open right now.

[Greg Silvers:]

Yes. Even properties that open strong.

[Greg Zimmerman:]

Correct.

[Greg Silvers:]

So we had several water parks that did very strong business to start subsequently were shut down in those states.

[John Massocca:]

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

[Greg Silvers:]

Thank you, John.

[Greg Zimmerman:]

Thanks.

[Operator:]

I am showing no further questions at this time. I would now like to turn the conference back to Mr. Greg Silvers.

[Greg Silvers:]

Well, thank you all for joining us today. We look forward to talking to you next quarter. Be safe. And we're -- as I said, we're optimistic. Things are improving out there. So thanks a lot guys and talk to you soon.

[Brian Moriarty:]

Thanks.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.