EPR Properties (EPR) 2002 Q1 法說會逐字稿

Thank you for holding, and welcome to your conference call with your chairperson, Mr. David Brain. I would like to remind everyone that today's conference is being recorded. Thank you for using Sprint Conferencing Services. I will turn the call over to you now, sir.

Thank you very much, .

You're welcome.

Morning, all. This is David Brain, the CEO, and I want to thank you for joining us this morning. I have to, as usual, start with a preface statement that says this conference call may include forward-looking statements as defined in the Private Securities Litigation Reform 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 of results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that would cause the actual results to vary materially from those forward-looking statements is contained in the company's SEC filings, including the company's report of Form 10-K for the year ending December 31, 2001.

Again, thank you for joining us. Let me say, this is David Brain, President and chief Executive Officer. Joining us this morning as usual is our Chief Financial Officer, Fred Kennon.

Good morning.

And our special guest this morning is Spider-Man. Well, he won't exactly be on the call with us this morning, but I got to say, he is doing his part for our tenant industry.

The film exhibition industry is off to another record year. Box office receipts are up 16 percent year to date, and the company is off to a record start as well. During the first quarter, though - focusing on the first quarter - box office revenues were up about 13 percent during that period over last year, and box office receipts for the EPR portfolio were up over 14 percent during the same period on a same-store basis. This excellent revenue performance is what supports our portfolio average store level pre-rank cash flow of two times our rent requirements, with all of our portfolio properties rent coverage greater than one. So we're always happy to see that industry revenue picture like that.

EPR's reported financial results were also at record levels, as Fred will detail in a minute. But before we go to that, I want to do a - update you with regard to the - EPR's progress on the property acquisition initiatives and associated capital formation efforts we covered with you in our last quarterly conference call.

The Gulf States five-theater transaction has been completed, but not without about a one-month delay that caused us to carry the proceeds of our most recent equity offering a bit longer than anticipated and collect a bit less rent than expected, thus dampening our shareholder results from what they could have been, but still, in our result a - in our view, a good result. Suffering the delay, however, was the right thing to do in order to make the ultimate result of the transaction of optimal value. Our focus is on long-term reliable results for our shareholders and not necessarily the quarter.

The other approximately $120 million in transactions we've discussed previously have progressed also. We've signed agreements giving us the option to close on 44 million of them, and expect to do - complete due diligence - oh, I'm sorry. And expect to do the same in terms of signing final option agreements on another 53 million either today or within days and further complete due diligence and close those transactions within the next 60 days. The remaining one-theater deal that makes up the balance of the 120 million current acquisition plans is encountering some delay and may take a couple more months than originally expected.

Now, aside from the progress of pending transactions, I wanted to comment on a subject that is often taken for granted with EPR and possibly for good reason, and that subject is occupancy. Not even all single tenant, triple net REITs can report to their shareholders that their portfolio of property improvements has never been less than 99 percent occupied, but we can make that report with what vacancy we have had relating to the small shop space at our theater anchored entertainment development in Denver. And we expect to make that same report in the future as well.

I was just having a - I was just recently having a conversation with some company contacts in the capital markets who were somewhat surprised by that fact, but then, even despite of - they were leery of future results, particularly in light the specialized nature of the vast majority of our properties as theaters. I reminded them of a couple fairly obvious points, and one not only much less obvious, but counter-intuitive point to support the reliability of our property occupancy that I believe gave them some pretty good comfort.

The two obvious points were that our properties were, on average four years old, with an average remaining base lease life of 15 years. And our properties are all the latest store formatted in industry that has really only seen two previous store formats in the last 70 years. That is, our portfolio of theaters are all megaplex, all stadium seating theaters that are now the store format of choice in the theater exhibition industry. And they were preceded by the mall-based, sloped floor, four- to eight-screen multiplexes that lasted from the '60s through the mid- to late '90s, and before that, by the downtown palace theaters that reigned from the dawn of the industry in the '30s into the '60s, both 30-year cycles.

In fact, I pointed out that of the unprecedented 3,700 screens that closed in 2000 and 2001, the average screen count at a location was approximately 5.6 screens, and the average term of operations was approximately 20 years, based on their box office receipts reporting history, both facts supporting the store format renewal perspective and the long life span of a theater. This less obvious and - the less obvious and somewhat counter-intuitive fact, I pointed out, was that as our properties of a - are of a specialized nature, it's one that actually works in our favor, especially when you consider that our portfolio grosses on a per screen basis are over one-and-a-half times the industry average.

New generation, stadium seated megaplex theaters, I reminded them, are not only different from other retail properties in terms of ceiling heights and interior design, but also require about three times the parking field that other retail properties do, and further, are generally permitted only under special entitlement or zoning classes. Therefore, if you have a successful theater like ours that garner gross revenues at one-and-a-half times the industry average, a potential competitor cannot use a failed Kmart or Service Merchandise or other big-box retailer shell somewhere in the area. In fact, due to those parking and entitlement issues I mentioned, they cannot even use the land after demolishing the old building.

Site assembly, to be our competitor, is a huge challenge. Entitlement for a second theater in an areas is another formidable challenge. And these are just the tip of the problem iceberg when you understand that studios do not regularly license film to multiple theaters in close proximity, presenting the potential competitor the overwhelming challenge of determining how they'll make an adequate return on their investment with less than full access to films to show.

Another corollary of this competitive or replacement property issue is comforting as well, as our recent experience has shown. If we have a well-performing property leased to a tenant that experiences financial difficulties otherwise in their corporate system and defaults on their obligations, it is not difficult to immediately arrange for a substitute operator while retaining substantial negotiating leverage. Because of the considerable challenges and generally two-year timeline associated with developing a competitive property, the only way for someone to access the revenues associated with this industry in the area of one of our properties is through us and our property. The result of this is that our real credit dependency for occupancy becomes the industry, and, as was pointed out at the top of the call, the industry is quite healthy indeed.

I was, I believe, able to effectively illustrate this point further with a bit more dramatic, but nevertheless comparable situation. Since they were from New York, I asked them if they knew who the contract operator of Yankee Stadium was in terms of ticketing, admissions, and concessions. Was it Aeromark, Volume Services, or so forth. No one in our group was exactly sure, but nevertheless, I was able to make my point by asking them how reasonable it would be to assume that the Yankees would stop playing, at least at home for a period of time during their season, of the property operator defaulted on their operating agreement. It would not be reasonable at all. Operations would continue virtually without interruption, if interrupted at all.

Just as in the cinema exhibition industry, there is not really an appropriate substitute property, because of its specialty nature. And if there's demand for the product, and one particular property operator is unable to conduct operations, then someone else will step in. The operator is separate from the content provider, and it is the content that is the credit since the content can not go elsewhere.

The real credit, the determiner of occupancy is the industry. And our tenant industry, the cinema exhibition industry, has grown box office revenues at a compound annual rate of approximately six percent for the last 35 years. And has not even seen a multi year decline in the last 15 years of even five percent. The best properties in a sound and growing industry with competitive barriers is our recipe for quality cash flows, and shareholder returns.

Now we'll go through the quarterly financials with Fred and I'll join you all to address questions.

Thank you, David. Our first quarter FFO was 9.7 million, an increase of 1.2 million compared to Q1 last year. On a per share basis, that's 60 cents diluted compared to 58 cents last year.

Total rental revenue of 15.8 million was up 2.4 million compared to last year. Included this quarter is 400,000 of percentage rent for one of our theater properties. This same property produced 200,000 of percentage rent in the comparable period of the prior year.

Also in comparing to the prior year, our joint venture in Westminster, Colorado, which includes a very productive 24 screen theater, and a retail and entertainment complex, was a non consolidated investment last year in which only our share of net income was recognized. In the current quarter, you see those results consolidated. As you'll recall, we purchased our partners' interest in that venture at year end 2001, and we now consolidate the revenues and expenses related to that investment.

Property operating expense line, which is new for us this quarter, reflects the net operating expenses related to the Westminster investment. Although the theater component at Westminster is our typical net lease structure, the retail center component does have traditional property management characteristics to it.

Our G&A expense of 522,000 declined slightly compared with Q1 last year. You may recall that last year we incurred some unusual nonrecurring costs associated with the proxy contest that was underway. For the current quarter, the G&A ratio was 3.3 percent of revenues.

Interest expense increased by 735,000 versus last year, largely due to the $60 million increase in long-term debt.

Now turning to the balance sheet, as you know we improved our balance sheet quality in February, raising 43 million of common equity in a spot issue. We continue to add to balance sheet quality in March with the Gulf States Theatre property acquisition, as the sellers took a $15 million equity component as part of the sales price in that transaction.

At the end of the quarter, our debt as a percent of total assets was 49 percent. And with not a lot else to say about the quarter, let me turn that back over to David and we'll get his closing comments, and then we will answer your questions.

Thank you very much, Fred. I don't know that I've got more to go through. At this time I think we'll open it up to questions, probably - that'd probably be the most effective thing. or operator, are you there?

Yes, sir. Did you want to go on and begin the question-and-answer session now?

I think that would be great, thank you.

OK. You're welcome. Right now we will begin with the question-and-answer session by asking anyone who wishes to ask a question to press star one on your touch-tone phone. At that time you will be automatically placed into queue until your name is announced. If someone else has already asked your question, you may remove yourself from queue by pressing pound.

Thank you for using Sprint conferencing services. If you have a question, please press star one now. Mr. Brain, we do have the first question from . Mr. , you now have the floor.

Just a few items. David, if you wouldn't mind, can you just run through those overall box office trends you mentioned at the beginning of the call? I just want to make sure I caught those.

Sure, Tony. Year end to date, as we sit right now, through the past weekend, box office is up 16 percent. Through what is called the winter season that ends about - coincides as ending - it coincides about with the end of the first quarter, it was up 13 percent. And our portfolio was showing on same store basis up 14 percent, I think with the three elements I mentioned.

Up 14 for your portfolio versus 13, that's that same period?

That's correct.

And did you have it on a year-to-date basis, your portfolio versus the 16?

No, I don't have it on the year-to-date. Tony, usually we get some - well we get some months - I guess I could do box office, I don't have that handy. But I can follow up with you that on the year-to-date basis.

That's fine otherwise. But again, the 13 is through the winter season, which ...

That's correct.

OK.

So 13's for the industry through the winter season.

OK. And then can you just detail the $15 million, I guess, to some sort of a convert as part of the Gulf States transaction? Can you just go through those terms?

Sure. Yes, go ahead, Fred. Do you want to ...

OK, the 15 million of what amounts to OP units taken by the seller in the Gulf States transactions have a convert to EPR common stock. And ...

Until conversion. I was going to say until conversion they'll carry a - carry the 10 coupon. So it'll pay 1.5 million of income to them.

Yes, their yield on that is 1.5 million annually until converted. And the conversion is at their election. And that actually translates into a total conversion of about 850,000 common shares, Tony. That would be at 17.50 was their convert price.

OK.

Which we talked about is obviously below our current trading price, but as agreed in the transaction the time we made the deal was at a premium to our trading price showing both a, I guess the - how much we've moved, and b, the time taken for that thing to get finalized.

OK. While we're on the sort of capital structure. Fred, can you just run through the debt and average interest rates in the quarter? You know, what's out on the line, that sort of thing?

Well I can tell you if - on - for the quarter our - Tony, I don't have it right in front of me here as far as the average weighted coupon and what not. Through year-end I think on a pure coupon basis we were at about a seven three, so that would be - that would be pretty static through the quarter, it wouldn't have changed. So my expectation is if I do the math on that coupon, it's going to be about a seven two, seven three coupon.

Seven and a quarter.

OK. So like the seven three would basically go against the three 13 and a half million in debt at the end of the first quarter roughly? You think that's a fair rate to apply to that for ...

Right, that's fair.

... interest going forward.

Yes.

OK. And then in terms of the acquisitions - your acquisition pipeline, the 120 million bucks, can you talk about economics and you know, how these are being priced?

Well, Tony, I think we talked about that before. I guess I'll go back and reference our comments in the earlier call. But some of these transactions we have limited things we can say about it, but we - the economics are comparable to our - the front-end cap rates are comparable to our property - our portfolio yield at this time. And that's what we said, which is essentially our portfolio yield is at or about 11 percent. That these transactions generally have - we have some of them that are - we're buying from developers and they're relatively flat yields.

Those will tend to be the higher cap rates, and then there are some that are - have escalators and good percentage rent clauses, and those will be the lower cap rates. All in all, it'll actually be kind of as a group, they're - but they're in excess of our current portfolio yield rate, and I mean those are the economics. They will - they're varied because they're from four different sellers.

OK. But they haven't changed, then, since last quarter when you started talking about them?

No.

OK.

No. The timing in closing these things has really been a matter of due diligence and documents, timing considerations that we indulged on the part of the sellers that they wanted or that they've indulged us, just to stage them.

OK. And you broke it up basically into three tranches the 44 million, the 53, and the final, which I suppose is about 23 million bucks?

That's correct.

Do you expect them to kind of close in that order, or do you maybe work out in some other manner?

Well, I think if they can the what happened is, as I said, we're the 53 million piece we're kind of going right through the definitive, and it may close first actually, before the 44, but it's between those two groups those two packages. And the other the 20 22, 23 million is the one that will take longer. We're encountering some difficulties on with regard to the due diligence and with regard to the seller and the final negotiation of the purchase documents.

OK. But then in terms of just getting these done then, it sounds like earliest would be maybe late here in the second quarter, but mostly most likely trickling in to 3Q. Is that fair?

I guess. I mean, our objective is to get them done in Q2, but very much so. I'd like to say they'll all get done in Q2. But at the same time, I can't tell you particularly the 23 million that that will be for sure. In fact, there's a there's a good chance that might move over into Q3.

OK. One final just minutiae question. How much dilution like added shares are going into a share count because of options that given where your current stock's at, roughly?

I think that count is about 130,000 shares, Tony, for the option piece.

I'll tell you, the options that were awarded, even to management at the time of the IPO are now kind of, for the first time, being, you know, counted in the dilution because they're in the money. So we've had all of the cumulatively for the all the options that associated with our long-term incentive plan that have been awarded that are beginning to be counted that haven't been counted a lot to date.

OK. Thank you.

OK.

The next question is from Mr. . Mr. , you now have the floor.

Good morning, David.

Hi, .

A couple questions. Number one, can you talk a little bit about your participation rents? How many of your properties have it? When do they begin kicking in, and how significant can that be, especially in lieu of, you know, the box office trends we've seen most recently. And then I got a couple follow-up questions.

Sure. Globally, participation rents on everything we do, ...

OK.

... to answer that question. We have I think one of our property acquisitions in this round of eight seven or eight more properties is without a percentage rent clause that we're buying from a developer. So that will be the kind of the exception that proves the rule. But generally, we always have participation clauses in our rents. Our rents as I've gone over this, we've we generally are at, oh, 17 to 18 percent of revenues. Our rents represent 17 to 18 percent of revenues, and our breakpoints for participation rents beginning initially started when our rents fall below six percent of revenues. So you can see, that's a long ways off.

Right.

Revenue would have to, you know, triple, you know, or increase more than twice in order for us to get there.

Right.

But we have we have a number of in our portfolio that cross thresholds when our rents fall below, oh, 15, 12, and 10 percent of revenues as well. A lot of our properties are, you know, as revenues increase rapidly, when you start compounding things at seven well, now we're into, you know, in double-digits a year ...

Right.

... you know, you'll get there real fast.

Yes. Yes.

So we have we have we have really one theater property in percentage rents now. We expect by the end of the year we're going to have three to four maybe ...

OK.

... for the for the '02 year, and we expect to be, you know, more clicking in. Now, these things can they are about 200,000 last year, as Fred was saying.

Yup.

It'll be improved to we expect that'll be improved for this year. It could be easily two to three times that. And then in the in increasing years, we expect it to become, you know, a material part of the landscape and ...

Right.

... start being I could see it easily within several years being several million dollars.

OK. All right. Secondly, with the box office rents receipts being so strong, do you think that would potentially postpone any closings within the industry? You know, the industry dynamics seem to be improving with Regal coming public, you know, AMC getting some money. Do you think that that will, you know, with the economics being so good at this time that some of these theaters that were destined to be closed may remain open a little bit longer?

, I think that is true. We know in the bankruptcy negotiations, a number of the guys in bankruptcy negotiated 30- and 90-day notice kick-out clauses, and kept what were marginal stores open. But they kept them available to be closed really on very, very short notice. And I think a lot of the our understanding is a lot of those stores are operating because right now, as the industry is strong, then some of those marginal stores make sense. We'll be above a break-even point, or, if they were at or a little bit below the break-even point, there'll still be the source of hope for some operator that they'll ...

Right.

... make their way back as thing continue to improve.

So that, you know, for that reason, you know, all the strength in the box office is kind of a bad sign because people take as an index for the health of the industry getting the screen count back down closer to 30,000 ...

Right.

... from 35,000. For our purposes, I recognize that, but at the same time, a lot of those marginal screens that are hangers on aren't really competitively effective against us.

Right.

Aren't really taking the business of us. They're not that meaningful on the landscape, so I don't worry about it a lot. I wish it would clear itself up because I think other people would take more from it than it's really worth, but it would mean something for their perception of the industry and potentially our stock.

But, they yeah. I think the answer the question go back to the main question yeah, I think they some of these are still staying open because of the strong box office ...

How about alternatively, would this encourage any additional expansion that might not have occurred?

Oh, sure. I think that the run of box office in '01 and year to date '02 is what's encouraged somewhat the success of like a Regal offering, and as capital flows back to the sector, probably it will encourage some store development. That's the that's kind of the good and the bad news.

Right.

You know, I think the I really have a lot of contact in the industry and can relate to you a strong sense of the fact that I think the industry will be developing new stores in a very rational basis and not in an irrational basis as I described, where people are going in and building in each other's kind of face, if you will, splitting film, making for a bad situation for both. People will be there's still a substantial amount on the market to reap, renew, replace older, smaller format screens with the new large box, megaplex store format. So that's what'll be happening.

Thanks, David.

Making great opportunities for us, which we're excited about.

Right. Thank you.

All right.

The next question is from Mr. . Mr. , now you do have the line.

Morning, guys.

Hi, .

David, can you guys can you guys speak to the competitive environment out there right now for the asset class that you're looking at and your potential acquisitions? Are you seeing any changes and more people looking at movie theaters possibly as a as an investment?

Well, I don't think so, . We really haven't seen anybody, you know, targeting. What we have seen in a couple instances is some neighborhood centers that where sellers had a theater in them or they had a theater as a part of a power center or a neighborhood or a or a shopping mall that they had talked about splitting that off and selling that to us because buyers otherwise who were otherwise interested in the property were not interested in the theater and were potentially not buyers because there was a theater in there.

That's tended to reduce a bit. The people who would buy a power center will take it if there's a theater in there rather than trying to spit the theater out. So I don't think anybody's we haven't seen anybody coming back and targeting this area in any substantial way in our niche. But we have seen some deals go to people who otherwise were buying, you know, as I say a whole retail development who will take a theater with it.

Right. OK. Well, good. As far as you're JVs, you made a few acquisitions in the fourth quarter of the JV interest. Can you give a do you have a breakout of how that impacted top line rental revenue and maybe your expense items?

Well, the top line rental it would be just over a million dollars for the quarter, .

OK.

And it's related just to that Westminster theater. And I'm sorry. Not the Westminster theater but the whole development theater, including the retail component. And then the expense side of it we break out on that line, property operating expenses is specifically Westminster.

OK. Great, thanks a lot.

OK.

At this time, if anyone else has any further questions, please press star one now on your touch-tone phone.

Mr. Brain, it looks like at this time there are no further questions.

Well that's great. I want to close then by inviting everybody to contact the company if you'd like to otherwise ask a question or a comment. We're always open to your input, and look forward to talking to you again next quarter, if not before. Thank you all for joining us.