EPR Properties (EPR) 2002 Q4 法說會逐字稿

I would like to remind all parties, you are in a listen mode only at this time. Later, during the conference, you will be able to ask questions during the question and answer session. Today's conference is being recorded. Mr. Brian, I will turn the conference over to you and thank you for using [Inaudible] conference sir.

Thank you very much, thanks everybody for joining us this morning. I am going to start, as we normally do with our statement about this conference call, includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, identified by such words as will be, intent, continue believe, make, expect, hope, anticipate or other comparable terms. Then coming to actual financial conditions, results for operations and funds from operations may vary materially and would conflict with forward-looking statements, discussions and factors that could cause actual results to differ materially from those forward-looking statements as contained in the company's SEC filings, including the company's annual report of Form 10-K for the year ending December 31, 2001.

With that said, let me thank you again for joining us. I am David Brian, the company's Chief Executive Officer and also listening to phone with me this morning, is Fred Kennon, the company's Chief Financial Officer.

Good morning.

It is our pleasure to meet with you each quarter in this matter, but it's particularly so when things are solidly on track and going so well.

I am going go take a little bit of time this morning to fully launch into the detail, and commentary on the financial reporting for the quarter, and the year, just touch on some macro perspective numbers and information on the industry portfolio and company, not only for the past year but past three or five years as well, now that we have completed our fifth full year of operation. Our primary Canon industry to first run the [Inaudible] film exhibition industry continues to demonstrate the reliable positive performance appropriate for real estate investment portfolio. 2002 was nothing short of a terrific year.

Box office revenues were up between 10% and 14% depending on the source and cut off date you see and admissions were up between 6.5% and 8% for the year. But, the really great thing about this was that, the fact it's not really an exceptional or unusual level of performance.

The prior year 2001 box office revenues were up nearly 10%, and admissions nearly 5%, and for the last five years box office revenues are up over 45% and as mentioned our admissions nearly 15%. Our portfolio at the same time has continued to track better the industry performance.

For 2002, our properties averaged a 12% increase on a same store basis that follows a double-digit increase the prior year as well. Most importantly, our portfolio demonstrated an increase in the key rent coverage from two times to 2.2 times.

Despite rate increases, the denominator debt ratio, increasing at the majority of locations. The company's total return performance for shareholders has at last, I am very pleased to say , taken much of the consistent positive return characteristics of our Canon industry and our lease arrangements.

Entertainment Properties delivered a 32% total shareholder return for 2002, nearly top of anyone universally selected list of rates, are probably equities. More importantly, we also hit the top of most lists, with three to five year return as well. Our three year annualized total shareholder return was over 35%, and our year annual total shareholder return was 15.4%, and although the five year annualized return may be the lowest of those performance marks, it is the one probably which we take the most pride.

It is represented with the level of consistent returns, the vision at the time of launching the company and worked towards it as we continue to advance the agenda and interest of the company and shareholders.

Now in that point, advancing company's shareholder general interest, let me note to you before we go to the financial and in case you missed our announcement. We made two very nice property acquisitions during the fourth quarter of 2002.

We acquired the number one box office [Inaudible] theater in Washington D.C. [Inaudible] 22 and Alexandria, Virginia, operated by AMC and we acquired the newly opened and now box office champion Little Rock Arkansas, The Colonel Glenn 18 operated by Rave Motion Pictures (ph) . In addition, [Inaudible]Cinemas is the newest addition to our portfolio of fewer operating company clients.

Now regarding future acquisitions, I would just reiterate that we've publicly guided towards 50 million in acquisitions in 2003 and we are currently looking at and have under consideration more than ample opportunity to achieve this at even at this time.

Now, I also want to note to everybody that Entertainment Properties is currently working on a fixed rate, debt transaction which would result in a reduction or elimination of our existing floating rates. Depending on market conditions, we expect this transaction to be completed within the next several weeks.

Now I've mentioned, and some of you may have become aware of this however, I must say we are constrained by security walls in discussing this current transaction in any detail at this time and we'll be unable to any questions concerning this transaction.

So, I would ask you to bear that in mind.

Now with that, I will handle it over to Fred who will go through some detail on background financials. I look forward to open it up in your questions that we will answer as fully as we can. Thanks. Fred.

Thank you David. I will start off this morning reviewing the results of our fourth quarter operations and then touch on some of the full-year highlights in operations and acquisitions and finish with a look at the year ahead of us. Our total revenue for the fourth quarter was up 41% over last year to a record $20m.

This increase is primarily reflective of the $176m in acquisitions completed during 2002. Included in the fourth quarter was a $157,000 impairment coverage from our Westminster entertainment scene retail Center and 200,000 in percentage rents required because one of our theaters achieved the first trigger event in total revenues. More on this topic later.

G&A expense increased over last year by $84000, which reflects overall increases in most categories of expense including insurance, personal cost and professional fees, largely the results of running a significantly larger business when compared two years ago. Interest expense increased above $1.2m compared to Q4 last year.

At year end, we had debt totaling $347m and that's up about $32m year-over-year. Depreciation and amortization expense increased $1.5m compared to the prior year. The increase includes the impact of the additional property acquisition as well as increases in stock grant amortization for non-invested shares issued to management for both annual and long-term incentives taken in stock. Our fourth quarter also includes a one-time true up adjustments of 270000 in stock run amortization.

Joint venture income is lower by about $174,000, compared to last year. During the year, our partner continued to purchase increments of our equity interest in Cantera Theater joint venture and in the fourth quarter they completed their purchase up to the allowable total of 80% ownership, leaving EPR with a 20% ownership in the joint venture.

So, on a go-forward basis, our income from that joint venture will be approximately $350,000 to $400,000 per year, reflecting a lower ownership percentage.

Fully diluted FFO increased 26% over the prior year to an $11.3m for the quarter. On a per share basis FFO of $0.62 compared to $0.60 last year.

Now turning to some of the highlights of the full year results, total revenue increased 31% to $71.6m.

This primarily reflects the significant increase in our real estate portfolio, which is 34% larger today compared to last year, based on the $176m of acquisitions completed in 2002. The $176m include an L1megaplex theater properties in some related retail shop space. Out of the 11 theaters 8 were new leases written (ph) by a 20-year base term and 3 repurchased from a third party for which some of the original base term lease life has elapsed.

The result is an overall base term lease life for our 2002 acquisitions of approximately 19 years. G&A expense declined about 9%, primarily as a result of some abnormal expenses incurred in the prior year related to the successful proxy contest in 2001. Interest expense increased 20% year-over-year for the full year.

Our $347m of debt at year-end has a weighed coupon of 7.1 at year-end. And the composition of that debt includes $256m of fixed rate debt with an average coupon 7.9%. And $91m of floating rate debt with a coupon of about 4.9%.

Also included in interest expense in 2002, was $2.1m in amortized fees related to those debt facilities, this was up approximately 400,000 compared to the prior year. This increase in fee amortization included some acceleration on our part based on our expectation of reducing or eliminating some or all of our floating rate debt. We view the use of floating rate debt as an opportunistic tool and not a long-term strategy.

Now, our debt as a percent of total assets was considerably more conservative at 47% at year-end compared to 54% the previous year. This reduced leverage, added a diminishing effect on per share FFO results for the year, which grew only 2%.

We opportunistically used a large volume of equity capital to achieve the increased acquisition pace (ph) of 2002. The equity raise included $43m in common equity in February of 2002 and $57m in preferred equity in May 2002.

As our results for 2002 show, we were able to put that equity to work and lower our overall debt leverage and do so in a manner that was accretive to shareholders.

We expect to use additional debt to finance future acquisitions and accordingly;we should see the accretive per share results begin to accelerate as we complete anticipated acquisitions going forward.

Now, as we start to look ahead, as we indicated in our earnings guidance our expectation for 2003 FFO is in the range of 260 to 270 per share. I want to go through some of the factors which may affect achievement of that range and the high or low end of that range.

The first one brings me back to an item mentioned earlier, the percentage rents in certain of our properties. Our 2002 revenues included approximately 600,000 in percentage rents, with 390,000 recognized in Q1 of 2002 and the additional 200,000 mentioned earlier that we recognized in Q4, which relates to a lease - which relates to a lease year that ends in 2003. Both of these percentage rents pertain to one of [Inaudible] . Based on the strength of the industry's record box office yeay in 2002 and the strength of our portfolio, we have had five of our theaters performing at a run rate that, if continued, and I stress if continued, would provide some level of percentage rent during 2003.

We also have two other theaters that are tracking very close to the percentage rent threshold. Although we have reason to be optimistic about realizing percentage rents, let me stress that these are earned only at various points of individual theater-level performance and with that said, please go to the movies frequently in 2003. Personally, last year I went to see 23 movies at the local megaplex. I enjoyed all of them so, please go frequently - you will enjoy it.

Other factors which may affect anticipated results for 2003 include the obvious, such as overall increases in the cost of operating this business, changes in debt facilities or any potential vacancies, and on that topic let me point out that for a fifth year in a row, occupancy of our theater portfolio is 100% and with that I am going to turn it back over to David and he has got some closing comments and then we will answer your questions. David.

Thanks, Fred. Very, very good growth through (ph) and no better advice, I guess just to reiterate get up and go to the show. But I know, with that, I guess we will turn it over to questions. Betty are you there? She should join us shortly here to allow for questions and open it up.

Excuse me. At this time, we are going to open up the lines for questions and answers. If you have a question, please press star one on your touch-tone phone at this time. If you have a question press star one. Thank you. David Ronco (ph) has a question. Go ahead, please.

[Inaudible] had a series of questions, I guess related to our 2003 acquisitions. I wonder, if you could go over your targets in terms of dollar amounts one more time? Also just wondering about the nature of acquisitions these days, wondering if there are still a number of good opportunities out there, and I am wondering if the pricing has become more aggressive or [Inaudible] good deal?

Well David let me give, I guess I will reiterate what we said, we talked about our level of acquisitions for '03 at $50m, we certainly see good acquisition opportunities in terms of yield and real stage qualities, [Inaudible] quality that meets standards that we find acceptable, so we don't worry about scarcity of transactions in anyway.

I think with regard to yield, I think, the yields will still be consistent with the type of transactions we have done throughout our history, you know, it's a little bit lower rate environment, probably something to that is a flow-through with regard to yields but it describes in its over cost-to-capital base is still [Inaudible] but if they are very much in the both acceptable and accretive column and are valuable to shareholders.

So, we write the equations down there, ample opportunity, good quality, and you know, the pricing that's desirable, fully desirable.

Great. Could you, as anyway, you could give us, may be a range of cap rates for past may be a most recent transaction and all those comparable with what you probably get out on the market today?

David, we usually, I don't think it's in the favor of the company and the shareholders interest to discuss s lot of cap rates (ph) to great sale, I just, you know, what we have generally said is, let people know if there is a transaction, and the inconsistence with the cap rates (ph) they see broadly in the portfolio and the answer is, those of [Inaudible] generally when making acquisitions.

We started with high disclosure of our cap rates with full disclosure of revenue we are doing with, you know, back five years ago, 10.5% cap rate. We talked about some transactions that have been made, you know, somewhat modestly lower than that and though a double-digit rate and some even up in the 11th. [Inaudible] for capital was of extreme scarcity in this industry, really in 2000 and 2001, we talked about things being in the at annuity average yield of our portfolio, which is about a 11% on a unlevered basis now and I think that's the answer I can give you, I think we will, for the benefit of the share holders, will keep it in there, we don't talk about individual cap. rates on property.

Great, that's actually very helpful. Just one last question, I guess, two-part question.

You talked, you went through some statistics pretty quickly, kind of, going through the health of your tenants in the improvement in year-over-year operating results in 2002, you referred to a 12% same store increase for 2002 for your theatres, was that with regard to revenues or profits or what were you reporting there?

That was regarding revenues.

Okay.

They're revenue performance [Inaudible] .

Okay. And then, you also spoke about coverages 2.2 times improving over 2.0 times, was that EBIDTA to rents or what?

Yeah, that's an EBITDAR to rents, exactly.

Okay.

That is a store level EBIDTAR to rents, and the earlier 12% increase was what with regard to box office, David, we don't have a full reporting for the end of the year for everybody and on concessions and other things but with regard to box office.

Excellent, thanks a lot guys.

Our next question comes from David Ronco (ph) of Foster (ph) .

I just went.

Yeah, we just had David.

The next question come from John Bodcy (ph) , please go ahead sir.

Good morning David.

Hi John.

Couple of things. First of all, you mentioned the amortization of these banking fees and accelerated for this year. Is there still, I assume there are still balances that might be written off assuming you complete a new banking deal?

Well, I think, we really, I am going to have to go to the EBIT statement.

Okay, all right, that's fine. I wasn't sure about, that was part of that statement or not. Okay, fine. In your 2003 guidance, 260, 270 FFO, are you assuming any, are you assuming the completion of the $50m in purchases, acquisitions issue?

Yes, we are, John.

Okay. And for the sake of convenience, would you characterize that as a mid-year event or early 2003 event or how would you characterize that?

Yeah, I'd say about a mid-year event. You know, we don't plan form at any specific time, so, kind of, space them through the year, or kind of, on average mid-year.

Okay. All right, thank you.

Okay.

Our next question comes from John Roberts, CIB Foster (ph) .

Good morning. First question is, and actually most of mine have been asked, but would you feel comfortable for a debt equity ratio going forward? I know you have had it, you got 47% right now, you had in the mid 50s, based on how we are looking as far the transactions you are working on right now versus where you want to be from a debt equity perspective?

Again without making any reference or comments to any potential transactions, what we have expressed in the past is a comfort with a leverage range between about 45% and 55%.

Now what would be, assume you closed the $50m in deals this year. What would that put in the low 50s [Inaudible] ? That's fair?

That's fair.

Now looking at, I know it's early to be looking at '04, but they also need to have a little bit of guidance in order to offer some estimates at that time period. You anticipate a similar level of acquisitions in '04, and I understand, you know, very early and looking in forward to then, but do you see any reason not to anticipate a similar amount of acquisitions in '04 as we are looking at in '03?

John, I guess and I would take the questions kind of on the [Inaudible] I don't have any reason to dispute that. We continue to look for and we look for in future years, you know, acquisitions to continue to grow the company that are going to accretive to shareholders and so I am [Inaudible] , I don't have any specific guidance to offer you, but you just have [Inaudible] the acquisition environment going forward to be the same as it has been over the last couple of years in other words.

Yes sir, and we did, I think that's what we did in prior calls. We have talked about the fact. It really, the tide of the trend that we referred to with the re-screen (ph) America or the megaplex is a replacement cycle on the theater store format.

Kind of got interrupted half way through, it's what we saw as is logical market share in that 2000, --- 2001 area where its success caused such hemorrhaging that some of the [Inaudible] operators want to bank. They are still up. There is still a development build cycle to take place in the industry over the next we think, it will be a little more measured over the next three to five years that will give us very ample opportunity for continued acquisitions.

So really what you are saying is a very high level of the acquisition activity, and early 2002 was somewhat of an aberration?

Well it certainly was-- you know, I guess it was compared to the prior years and I don't think it makes sense to provide guidance to that level which is not, it may not be what the normal course we said. At the same time, there are lots of transactions out there and we'll pursue them, we are not going to, we don't set a limit, which just give a little a guidance of what we think is a reasonable thing to kind of count on.

Good. And what are the lease terms on the types of properties we are looking at acquiring going forward are they pretty much just settled on the same lines of what you bought this year because those obviously 20 year lease terms are very nice and do you have any model going forward?

Yes sir. That is what we target and we frame our expectations. I don't think it's possible in the terms it might vary outside of that, we had some leases of 15 years and so forth but we very very much expect 20 years and the type of high quality locations we deal in our once very much that the operators usually want to secure for 20 years, so that of, that is the norm, has been the norm and our expectation of the norm.

Okay. And a final question on the percentage rents. You know, you had pretty big bump here going from basically one theatre is going to pay percentage rent in '02 to five potentially seven in '03, do you expect that kind of progression on increases in the numbers of theatres paying percentage rents going forward?

Well, you know John we start getting this back-to-back double-digit revenue growth years and we had a good number of our, we probably have those something on the order of half the portfolio that has rent rates that are way out of the money that will take more than a couple of years to get into.

So I expect a kind of progression, up to a point that we have something on the order of a third to half of our portfolio in the percentage rent column and then it's going to, just coming up all the debt levels pending any other acquisitions we add to it. But, really, we universally, in our lease terns we have percentage rent of clauses and arrangements and the way the industry continues to progress and we talk about some of the very positive things out there of it, we want to believe that there will be a continued, very robust growth in this industry concluding the demographics and things that are going on in terms of the tenants metrics.

So, I expect that progression to kind of, continue for a while, but I would not say that the whole portfolio starts lapsing over into percentage rents because as I say some of our initial leases fall in the order of a dozen in those 15, 18 leases probably have rate points way out of the money still set.

Great. Okay thanks a lot.

Okay.

Our next question comes from John Barsia (ph) [Inaudible].

This part, David on the percentage front, I think you answered most of it. It sounds like 100% of your pieces do have; your contracts do have percentage ramp clauses. That's correct?

That's correct.

Okay. Now, as we look forward, my family, my kids go to movies all the time and I think also send your percentage rent check directly?

That's great, we'd appreciate it.

No, problem. Any-- can you give us any sound some on potentially what the upside on the percentage rents might be you're on 600,000 this year?I'd say we'd get of 3 or 4, 5% increase next year in terms of overall attendance and so on?

What type of upside potential is there in terms of that piece of your business?

Gosh, I hate to really speculate on that, John but as you start taking this kind waterfall we talked with regard to stores that fall into that, I mean it's certainly and I want to stress that this is very conditional on everything we are talking about here, but you know, it's a type of thing that could triple, triple, quadruple over the near term, few years.

Okay, I will hold you to it.

Okay thanks.

All right thanks.

If you have any other questions at this time please press star one on your touchtone phone please. Our next question is from David Ronco (ph) . Please go ahead sir.

Hi, guys. Just a follow up on balance sheet strength. I wonder if you guys do calculate interest at fixed charge coverage ratios and if so, what are those these days?

We mentioned that, I remember mentioning that specifically I guess in a webcast presentation I made at an investor conference so I'll go to that. What we used is better than two and three quarter times on a fixed charge-, on an interest coverage better than a two in a quarter times on a discharge coverage.

Excellent, thanks guys.

Once again if there are any other questions please press star one on your touchtone phone please. There are no further questions sir.

Okay. I appreciate again everybody joining us. We do enjoy the opportunity to check in touch base with you and update everybody on a quarterly basis. We look forward to that again and it's good-bye, so, I'll reiterate. Get on, go to the show, enjoy. We look forward to talking to you soon. Thank you.