EPR Properties (EPR) 2002 Q3 法說會逐字稿

Thank you for holding, everyone. May I have your attention please. I'd like to welcome you to your call today with Mr. David Brain. This portion of the conference will be in a listen-only mode. Although we will open up lines later on in the conference for a formal Q&A session. Also, I would like to remind everybody, this call is being recorded. Thank you for using Sprint conference line.

Thanks, Chris, and good morning everybody. This is David Brain, as we get started, I want to remind you that 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 and results of operations may vary materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause results to differ materially from those forward statements is contained in the company's SEC filings, including the company's report on Form 10-K for the year ending December 31, 2001. With that said, I'll say again this is David Brain, CEO of the company. Fred Kennon, the Company's CFO joins us as usual.

Good morning, everyone.

Also, my comments before we go with Fred into the detail of the quarterly results are going to be largely restating for emphasis elements of our press release, along with a couple of additional industry and portfolio data points. I believe you will see and agree with me, after going through this data, that our tenant focused industry, the film exhibition industry, and what we view as our tenant credit, is in a very strong position, as is our company.

Now, contrary to the news of a lot of retail sectors, I am very pleased to report to you that box office and total theater level revenues continue on a very strong pace. Year-to-date industry box office revenues are up 13 percent over the prior year, and our portfolio box office performance is 18 percent ahead of last year on a same-store basis. As our last call, as I pointed out, the strong revenue growth performance of the industry and of our portfolio, and how this contributed to our property and rent stability, I indicated that we'd make an effort to update you on our next call on any improvement in our portfolio rent coverage. Improvement from our often-stated two times average. Well, I am pleased to report to you that our tenant reporting is now reflecting on a sustained basis -- and we wanted to ensure that that was the case -- a 10 percent improvement in coverage, on average, to reflect an average rate of 2.2 times.

The improved coverage -- this improved performance -- comes despite the fact that the majority of our portfolio has annual rent escalators. So higher rents to cover. But pre-rent cash flows have been helped not only by the growth in revenues, but also by a modest increase in margins. The operating margin improvement of our tenants is, in part, due to a reduction in film rent as a percent of admission revenue. And I point this out because I've often been asked or sometimes even told, but I've been asked about whether the megaplex format poses a risk for increased film rent and lower margins as greater seating and screen capacity at a single location might lead to compressing revenues into the opening high film rent weeks of a release. Well, we've been convinced and said that we think this risk is, at most, marginal, and now the data bears this out.

Now, against this backdrop of strong performance, we have been making substantial progress at entertainment properties in building the company's position. As reflected in our principles press release, our revenues for the quarter are up 37 percent over last year, and our funds from operations are up over last year by 22 percent. These are significant increases, I believe, by anyone's measure. Now, these increases in scale have not yet translated into per-share FFO results, however, because we have largely financed this growth with equity. Over three-quarters of the capital used to expand the company this year has been equity. This has resulted in a de-leveraging of the company from a mid-50s percent position to the mid-40s. As a result, we have improved the financial strength of the company and put it in a position to view additional growth opportunities with greater flexibility and hopefully a lower cost of capital. We have not foregone per-share result improvements; we have only modestly postponed them to increase their measure.

Now, this leads me to a brief comment on our earnings guidance before I turn it over to Fred. So far this year, we have used more equity than originally planned, and had some delays in closing some properties that dampened results from what we thought they might be a year ago. This has led us to a range of 2003, next year FFO earnings estimates, that we have reflected in our press release. We are optimistic about double-digit FFO growth next year, given the balance sheet position of the company and the pipeline of deals available to us, but are also cautious, knowing that there are issues regarding insurance, interest rates, and those timing devils that sometimes arising in closing real estate transactions. Overall, things look very good, though. With that, I'll turn it over to Fred for the quarter and then join you in just a moment.

Thank you, David. Looking at the significant factors contributing to our third-quarter results, our rental revenue for the third quarter was up 37 percent over last year to a record $18.8 million. This increase is largely reflective of the 146 million in acquisitions completed so far this year. G&A expense increased over last year by just over a hundred thousand dollars which really reflects the increased costs of running a larger business -- about 33 percent larger -- when compared to a year ago. On a sequential quarter basis, G&A expense was flat compared to the second quarter, and given the level of new business analysis that we continue to conduct, that run rate will be appropriate going forward.

Interest expense increased about $1.2 million compared to Q3 last year. This is largely reflective of the $56 million in additional debt compared to last year, and additionally, we have been aggressive in our amortization of fees related to certain debt facilities, with the expectation that we will refinance them early to take advantage of cheaper debt alternatives. Also, during the third quarter, we terminated the remaining $21 million of availability under our I-star credit facility. It represented redundant capacity, and additionally, we continued to see a number of lower-priced debt alternatives become available to us. Fees associated with the termination are included in our interest expense, with a net negative impact of about a penny per share for the quarter.

Depreciation and amortization increased by 42 percent over last year. The increase includes the impact of additional property acquisitions, as noted earlier, as well as an increase in stock grant amortization for non-vested shares issued to management for both annual and long-term incentives taken in stock. In the current quarter, we recorded a gain on sale of property of 202,000. This represents the sale of excess land adjacent to our Westminster, Colorado entertainment center, and this is really the first disposal of property that we have had in five years, and as you can see, we do not include the $200,000 gain in our FFO computation.

Joint venture income is lower by about 200,000 compared to the prior year. However, most of the year-over-year change is due to the impact of the Westminster joint venture, wholly-owned and consolidated in the current quarter, and non-consolidated, partially owned, in the prior year. Additionally, our German partners, Atlantic, continued to purchase increments of our equity interest in the Cantera theater JV which nominaly lowered our income allocation for the quarter. Year-to-date, our German partners have purchased approximately 2.6 million of our JV equity, and based on the current conditions, we expect a continuation of that trend. Our original expectation for this joint venture was to ultimately be a 20 percent owner. We currently have a 69 percent ownership in that joint venture.

FFO on a diluted basis increased 22 percent over the prior year, to 10.7 million for the quarter. On a per-diluted-share basis, FFO was flat versus the prior-year quarter. On a year-to-date look, FFO was 30.8 million, for an increase of 21 percent, while the per-share results increased 2 cents to $1.75. We have been able to achieve an increase in our per-share results so far this year, even while we significantly lowered our debt leverage from 54 percent at the beginning of the year to 47 percent at the end of the third quarter.

Of the 146 million in new property acquisitions through September, only a small portion, 15 percent, or about 22 million, was financed by debt. Now, as we indicated in our earnings guidance, our expectations for the next several quarters call for us to use existing balance sheet capacity to enhance our shareholder returns significantly without depending on the equity capital market as a source of funds. Our equity-raising activities early in the year were one of the deliberate steps taken to improve the balance sheet for predictable controlled growth. Our expectation for 2003 is in the range of $2.60 to $2.70 per share. Now, factors affecting achievement of the high or low end of that range include the variables of the timing of new investment next year, which we assume will be approximately 50 million, the achievement of any percentage rents payments in certain of our properties, and the overall costs of running the business. And with that, let me turn it back over to David for his closing comments and then we will answer your questions. David?

Thanks, Fred. Before we go to your questions, I want to deal with one small item that has arisen. I want you all to know that despite recent events, there are no plans to change the name of the company to My Big Fat Greek REIT. Although we've thought about it, given the long-term and surprising performance nature of that recent film of a somewhat similar name. Now, also on a bit more serious but still lighthearted note, I wanted to point out that this call coincides essentially with our fifth anniversary. It was five years ago, in late October 1997, that we started our road show that has led us to this point today. I want to take this opportunity to thank all those shareholders and friends that have been with us from the beginning or some portion of the way. I, we, have greatly enjoyed the opportunity you have given us, the confidence you have placed in us, and we will continue to work hard to earn that confidence, run the business so to make it more valuable for our shareholders and keep our story one of promises kept. Now, I will open it up to questions and comments, and please let us hear from you. I guess Chris are you there?

Yes, I'm here sir.

Here you go.

Okay. If you have a question just touch star 1 on your touch-tone phone and all go into queue. If someone else has already asked your question, you may remove yourself by pressing the pound sign. Okay. We have a question from David Ronko (ph). You have the floor.

Ronko (ph): High-, guys, I think you touched on this but obviously with the number of exhibitor bankruptcies that the industry went through in the last couple of years, there were a number of attractive acquisition opportunities. You guys clearly took advantage of that, running your year-to-date total to 146 million, 10 megaplex theater properties. That's very impressive. Wondered if we could, you know, possibly see you keep up the pace in '03 or if you feel that most of the opportunities have been exploited there.

Ron -- or David, I'm sorry, very good question, and it's one we have thought a lot about in our estimates. Probably we don't expect 150 at this time, to replicate what we had. On the other hand, we do think there are some good opportunities out there. There are both some good opportunities still in as-built, you know, already-built, and seasoned properties, as well as now the industry thinks a little bit about -- I don't think the building fashion we saw in '98/'99, but still building some new locations, there are some good opportunities. That's why really we've pencilled in more on the order of $50 million with regard to our acquisitions next year. There -- we have awareness of transactions that are quite a bit in excess of that. Statement, it's getting them done at the same time, it's getting them down on our terms and the best of properties as we finish our underwriting on those opportunities. So there's good opportunities. There's not a real scarcity of opportunities, I guess I'll say that. At the same time, it's probably a little lower than it was.

Ronko (ph): Great. Excellent job, and good luck going forward.

Thank you.

Okay. The next question is from Tony Paolone. You have the floor.

Thanks. Good morning, everybody.

Hi, Tony. Good morning.

Dave, you talked about the film rent costs coming down as a percentage of revenue for the operators, and it also helping your coverage ratios. Is that -- I mean, what is that attributed to? Is that -- you know, are the rental costs, the studios just being nice and cutting those costs or is there some other dynamic going on that will continue?

Well, Tony, I don't think it's so much the studios being nice. I think this year, it's a real -- it's reflective of you've got a good diversity of films performing. And when you have -- probably film rent is going to be a little higher as you have concentration of box office in just a few titles and this year there's been good diversity. The release calendar has been full and they've been -- and the wealth has been spread a little bit more. At the same time, you do have a factor of, you know, there's clear perception now in the industry, where it was clouded for a while but there's clear perception, really, about who the performers are, the good theaters, and there's also a number of theaters coming off-line, and as the retail channel, you know, and these good performers gain a little bit of capability to negotiate, you'll see them negotiate a little bit better terms. And settlements on those films.

So it's a combination of really the characteristics of the film release and the -- and the patronage, as well as a little bit -- a little bit of, you know, increased improvement of the negotiating position of some of the good retailers.

Okay. In terms of the 2.2 times, is that a 3Q number or is there some lag there as to when you get the data?

That is really through Q3. When we had our last call, we had some delays in getting some data in. We didn't have even Q2 done at the time of the call but we do have Q3 done so that's really through Q3 this year and it's really kind of both a Q3 and an LTM that we're at 2.2 coverage.

Okay. In terms of percentage rents, can you go over what that was during the quarter and how it's shaping up maybe for future quarters?

Well, we don't have any -- Fred?

Well, there was no percentage rent in the third quarter, Tony.

Okay.

And in the past, because the one property that we have had has a lease year that cycles in the first quarter, all of our percentage rent has been typically recognized in that quarter. And probably going forward, that will be somewhat true, but we -- we have pretty high hopes that some of the recent property acquisitions we've done will be in percentage rent and those will have a different timing point because of their lease year so -- so again, we recognize those when they're triggered by the terms of the lease, and we would expect similar results for Q1 of '03.

Yeah --

Similar to what it was in Q1 '02.

It was about 400,000.

Okay.

And our expectations, although we might -- we might exceed that -- we'll be a little conservative -- we expect about the same level for that one property. And again, we have actual high hopes that we will see other properties fall into the percentage rent category sooner rather than later, based on the trend of box office and overall revenues.

Okay.

Tony, going forward, I would say as we look on the landscape, we've got more theaters, I indicated this on our last call, moving forwards -- as the revenues grow very briskly as I've mentioned in the industry, we move quicker to those percentage rents. It looks like most of the guys that are closing in on the percentage rent breaks are mostly lease years in Q4 and Q1, so those will be the two quarters you'll hear us more talk about them. We'll try and give you clarity on what is in percentage rent in those quarters. And really, that has to do with -- Q3 probably will always be the quarter that will have the lowest percentage rent, just because we do less of our acquisitions, there are less theater openings in Q3 than there tend to be in the other quarters. But we'll try and keep you informed on that.

And one other note, Tony, and when we talk about guidance for '03, we're assuming a static level of percentage rent, so --

Right.

-- there is not any expectation for '03 beyond what we've recognized in '02.

Okay. In terms of just the fourth quarter here and visibility, is the 62 cents, does -- what needs to happen to get there? Is there any acquisitions that have not closed that you have in those assumptions?

No. We -- as you recall, we closed the Hoffman purchase on the first week of October.

No. We have part 2 of our Little Rock purchase that goes in those numbers. We have -- we have the -- we have land acquired and have yet the completion of construction of a theater.

But that will be a nominal impact late in the quarter.

That is true.

And so the 62 cents is really based on what we have in the bag today.

Okay. And how about future deals? In the past, you kind of had visibility on certain transactions because you knew they were under construction and you kind of viewed yourselves as a takeout, I suppose. How does that look going forward? What do you have in the hopper?

Well, we've probably decided at this point it serves us better to comment less rather than more on these, specifically with some of the issues we've had with a deal or two falling out on due diligence, and so we don't really have anything that we're -- other than the acquisition of the improvements that we have scheduled in December that's really kind of hard commitment in that respect, Tony, so otherwise we have, you know, between, you know, probably what I'd call, you know, 50 to a hundred million of stuff we're in the works on now. But I don't really think we have any, you know, clear visibility with regard to timing of those other than to say, as Fred indicated, we'll try and get them done earlier rather than later next year.

Okay. Two final questions. The Hoffman transaction that you did, I think in the first week of October -- right?

That,.

Yes.

How was that financed?

That was financed with debt.

The whole thing or --

Yes. And that's not -- that's not entirely accurate. We had cash on our balance sheet which financed a portion of that, and it was really done with about a net 15 million of debt.

Okay. So about 7 million cash, 15 of debt sort of thing?

Yep.

Okay. And then finally, you'd mentioned some other sources out there for debt capital as one of the reasons why you retired the balance of the line. Can you just talk about where you see your capital coming from on the debt side next, say, 12 months?

Well.

Well, the CMBS market, which was really not open to us at all in 2001, largely because of the bankruptcies in the tenant industry, and -- appears to have come back now to the point of accepting theaters, and we've got a number of options and quotes in that regard, so we expect to have some things to announce, but the -- the CMBS market with an effective spread over treasury is very attractive to us right now and there's really just a couple of factors that will cause timing issues, I think, in getting some of that done.

Okay.

David, gout any other thing to add to that.

Well, I'd just say that as Fred indicated, in 2001, the CMBS market was closed but for the transaction we did get done in 2001 really on our own and I think one of the good news for the company is the CMBS market is back, a little more for our quality of theaters than it is for theaters in general. We've really demonstrated, as we've shown performance and improved performance, really, throughout our portfolio in all the deals we've done, with all the -- you know, agents and intermediaries we've done that business with, so they're pretty enthused about doing business with us again. So I don't know if it's open for theaters in general but it is open for us and as Fred says, it's probably -- it's more aggressively priced than is the bank market so we'll be going off there. We have a good amount of unpledged properties at this point we've been acquiring, so we've got an ability to go off and raise money in that market pretty readily.

Okay. Thank you, and congratulations on your five years.

Thanks. Thank you very much.

Thanks, Tony.

Okay. The next question is from John Roberts. You have the floor.

Broch (ph): Good morning, David.

Hi, John.

Broch (ph): A couple questions. Going back to the CMSB market, can you give us a sense as to how much -- how much lower your borrowing costs could be and what kind of improvement we could see in that area?

Well, Fred, I don't know. Do you want to try and quantify that, I guess?

Well, I guess compared -- compared to our average today --

Broch (ph): Uh-huh.

-- it could be as much as 125 basis points lower.

And I guess the good news is, John, you know, that can be fixed for long term -- Broch (ph): You mean that's not the good news.

Well, I mean that's good news but also we can fix that long-term, instead of --

Broch (ph): Good. Great. And when you look out towards next year, David, you're talking about double-digit FFO growth, and new investments of $50 million. I assume that that 50 million is -- is the basis for that double-digit growth. I guess my question is: How soon do you -- would it be necessary to complete those acquisition -- those property acquisitions to get to that double-digit growth? When during the year are you -- would you assume completing those acquisitions?

John, right now we have made the assumption that we'll have it all done by second quarter.

Broch (ph): By second quarter. Okay. Okay. So assuming you do another 50 million, there's some up side to that, I take it.

That would be true.

That would be true.

Broch (ph): All right. David. Thank you very much.

Okay.

No more questions at this time, sir.

Okay.

It looks like -- I'm sorry. John Roberts, he's just come aboard. You have the floor.

All right.

Good morning, guys.

Hi, John.

Good morning.

One of the things, I know you don't talk much about cap rates but I'm just wondering what you've seen with the cap rates on your acquisitions? Has -- given the decline in interest rates, have you seen them come down a bit?

There's -- I think there's downward pressure on cap rates, John. At the same time there's not been a great -- a great amount of weakness in the cap rates. The market still is characterized by, you know, probably more sellers than buyers. So it's been a -- it's still a good position for keeping the cap rate. They've probably come down over what was their high, you know, 50 basis points or so, but it's still a very good -- you know, when they were in the -- the mid-11s, they're probably, you know, more like 11 I think is what we've indicated and we're still able to execute our transactions in and around there.

Okay. And could you just give a little more color on the acquisition picture going forward? You're saying $50 million done in the first half of the year. Does that mean that, you know, after the first half of the year, basically you're -- you consider yourself completed for the year, or do you see potentially some more beyond that?

Well, actually, the way -- the way we characterized it, in the 50 million what we've done is outlined that in our guidance as being what we can do without having to rely on outside capital markets. Essentially that's balance sheet capacity. As David indicated, there is quite a bit of business out there to be done, and certainly as we review that, if we can do a higher level of business accretively, we will do it and we'll pursue it. I don't think we'll just close the doors after we complete 50. But what we're trying to do is be rather predictable about what we can do that's within our control, and certain -- and 50 million certainly is within our control.

Right. So what you're looking at basically is going to say 55 percent debt to total cap and then looking out to maybe redo the balance sheet beyond that for more acquisitions?

Right. John, I mean we could kind of stair-step this thing. As Fred says, we tried to give guidance for what we can see and control at the same time we have had really good results accessing the equity markets, we expect that probably still will be true as we continue to, you know, keep things moving along and on track, and on a -- on a good step, but at this time -- and I think we'll revise guidance as those plans become clearer.

Okay.

But that's really for what we have. We don't really -- we in no way want to indicate we're going to take a vacation for half the year. That's not at all the case. We're just trying to be, you know, conservative and reasonable and really leave ourselves to change guidance as things unfold.

Okay. And what was your debt cost this quarter? Or maybe I should say rate, debt rate, excluding that termination fee?

Well, our rate has been running about -- about 7.3 on the portfolio.

Uh-huh.

And I think including all the fees that we have, it's about 7.6 on an all-in basis for the quarter.

Okay. Very good. That's it. Thanks.

Okay.

Okay. No more questions, sir.

All right. Well, I want to thank everybody for joining us. As we usually do. We again invite everybody, as you would like or feel the need, to contact myself, contact me or Fred, anybody at the company. We always look forward and enjoy talking to you. We'll do what we can to answer your questions. With that, thanks and it's been a great five years. All right. Thank you. Thanks, Chris