EPR Properties (EPR) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Entertainment Properties Trust earnings conference call. My name is Eric. I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We'll facilitate a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS). I would now like to turn your presentation over to Mr. David Brain, President and CEO. Please proceed.

Thank you, Eric. Good morning to all. This is David Brain.

Let me start with our usual preface, which is as follows. As we begin this morning, let me inform you this conference call may include forward-looking statements defined in the Private Securities Litigations Reform Act of 1995 identified by such words as "will be," "intend," "continue," "believe," "may," "hope," "expect," "anticipate" or other comparable terms. The Company's actual financial condition, results of operations may vary materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause actual results to differ materially from those forward-looking statements is contained in the Company's SEC filings, including the Company's report on form 10K for the year ending December 31, 2007.

All right, with that, let me say again, thank you for joining us. We always appreciate your investment of time and interest. As always, I'm pleased to be with you. We'll go over all the current events for the Company for the first quarter of 2008. But I want to first recognize my key associates joining us this morning. Greg Silvers, our Chief Operating Officer.

Good morning.

And Mark Peterson, our Chief Financial Officer.

Good morning.

As we get fully underway this morning, I want to remind you all, once again, there is a simultaneous webcast available via link from our website at eprkc.com. If you can, please go there. I'd advise you that's the way you catch the full look of the presentation. All right. And if you have arrived there and taken the right direction from the website, you should be looking at a logo name presentation slide currently.

All right, well, I'm going to turn the page on the slide though, we'll go to our first, that is the agenda of topics we'll run through this morning. I'll have a few introductory comments and then, as usual, we'll have our financial review, capital markets update, talk about our investment activity and a few closing comments.

I think we have some insightful information to go through with you this morning. Mark is going to handle that quarter results part and Greg will detail capital spending transaction pipeline. But Greg also has some industry-specific information concerning some of our properties that several people have recently asked about. He has some detailed information about our ski and public charter school properties and the recent performance statistics. These are two of the larger areas of investment outside of cinema-based properties for EPR at this time.

Before we get to that though, I'd like to go over -- I'd like to go over a thought. First, I'd like to review some data that we covered before but often seems to be forgotten. And this is concerning the counter recession or counter cyclical nature of the exhibition industries revenues. With all the economic news about whether we're in a recession or how deep or how long one might be, we've gotten a number of questions from shareholders during our recent offering road show and the conferences to recap the record of the exhibition industry during down economic periods. Well, for sake of brevity, here's the overall record. Box office spending went up during five of the last seven recession or economic pull backs over the last 40 years. Let me detail that a bit with some more current data. According to the NBER, the National Bureau of Economic Records, since 1980, that is for the last 27 years, there have been four recession periods -- there's 1980, late '81 and '82, third was late '90 and early '91and then in 2001. In three out of four of those periods, box office grew and almost uniformly, during those periods, at a double digit clip. Only during the '90, '91 period did box office succumb to the same fate as the economy as a whole and while GDP sagged 3%, box office fell about 4%.

Another interesting fact is that this dip in box office revenues was one of only three times that revenues fell in the last 27 years since 1980. The other two times were 1985 and in 2005. In fact, both the five and 10 year compound annual growth rates for box office revenues over the past 20 years averaged 5%. The record is clear that, statistically, film exhibition is a very consistent recession resistant performer.

With that thought, I'm going to turn it over to Mark to go through the quarter and I'll join you all in a few minutes.

Thank you, David. Let me begin with a review of the significant items from our recently completed first quarter.

As you can see on the first slide, our net income available to common shareholders increased 19%, compared to last year, from $18.1 million to $21.5 million. Our FFO increased 29%, compared to last year, from $26.2 million to $33.7 million. On a diluted per share basis, FFO was $1.12 compared to $0.98 last year, for an increase of 14%. Looking at the details of our first quarter performance, our total revenue increased 30% compared to the prior year, to $65.9 million. Within the revenue category, rental revenue increased 15% to $49.1 million, an increase of $6.3 million versus last year. Percentage rents included in rental revenue increased 22% to $576,000 versus $474,000 in the prior year. Tenant reimbursements increased 56% or $2 million. This increase is primarily due to both the acquisition in May 2007 of a two-thirds interest in an entertainment retail center in White Plains, New York, which has been consolidated into our financial statements and increases at our four Canadian entertainment retail centers.

Mortgage and other financing income was $10.4 million for the quarter for an increase of $6.9 million versus last year. As of the end of the first quarter, we had eight mortgage notes outstanding totaling $339 million. The mortgage notes relate to our Toronto Life Square project in downtown Toronto, our investment in the development of a waterpark-anchored entertainment complex in Wyandotte County, Kansas, called Schlitterbahn Vacation Village, our 10 metropolitan ski areas covering approximately 6,000 acres in six states, and our investment in the development of a 9,000-seat amphitheater in suburban Chicago.

On the expense side, our property operating expense increased approximately $2.5 million for the quarter. As with tenant reimbursements, this increase is primarily due to both the White Plains acquisition and increases at our four Canadian entertainment retail centers. Other expense was $936,000 compared to $607,000 last year. The increase of $329,000 is primarily due to $381,000 in expense recognized upon settlement of foreign currency forward contracts. G&A expense increased $1.2 million versus last year to approximately $4.4 million for the quarter. This increase is primarily due to increases in personnel related expense, including share-based compensation, as well as increases in professional fees and franchise taxes. Additionally, G&A expense for the first quarter of 2008 includes about $300,000 in costs associated with terminated transactions. Interest expense increased $6.1 million or 53%. Approximately $1.7 million of the increase resulted from the $120 million of debt assumed in our White Plains acquisition in May of last year. The remaining increase in interest expense resulted from increases in debt associated with financing our additional real estate investments and mortgage notes receivable.

Equity in income from joint ventures increased $1.1 million versus last year to $1.3 million. This increase is the result of our acquisition in October of 2007 of a 50% interest in a joint venture that owns 12 public charter schools. Subsequent to quarter-end, we purchased the remaining 50% interest in this joint venture and we will begin consolidating this entity as a wholly owned subsidiary in the second quarter. Greg will further discuss this investment in his remarks.

Minority interest income was $531,000 for the quarter and relates solely to our White Plains investment. And remember, as I have discussed previously, this accounting nuance does not impact our reported FFO.

Looking at the ratios for the quarter. Interest coverage was 3.1 times, fixed charge coverage was 2.4 times and debt service coverage was 2.3 times. All these ratios remain very healthy.

I would now like to provide you an update on our capital markets activities, as we have been very active of late.

Moving on to the next slide. In January, we closed a $17.5 million 10-year non-recourse CMBS loan at an interest rate of 6.19%. In addition, in March, we entered into a $65 million secured term loan and revolving credit facility with a bank to finance our vineyard and winery investments. The advance rate is 65% of the lesser of cost or appraised value and the interest rate is LIBOR plus 150 basis points on loans secured by real property and LIBOR plus 175 basis points on loans secured by fixtures and equipment. The maturity date of each loan is the earlier of 10 years from disbursement or the end of the related lease term. The credit agreement also includes an accordion feature that allows the facility to expand to $100 million subject to lender approval. During March we received a total of $12.7 million in loans under this agreement. Additionally, we entered into two interest rate swap agreements to fix the interest rate at a weighted average interest rate of 5.52% on $9.5 million of such loans through their maturity date. The term loan and revolving credit facility provides us an attractive source of debt financing as we grow our vineyard and winery investments.

Moving on to the next slide. Subsequent to the end of the first quarter, in April, we completed two concurrent registered public offerings of a little over 2.4 million common shares and about 3.5 million, 9%, Series E convertible preferred shares. This was a one-day marketed deal. The common offering was based on a closing price of $48.18 per share. Due to very strong demand, the common offering is up-sized from 1.5 million shares and the over-allotment option was exercised by the underwriters. Total proceeds from the common offering were about $111 million.

Turning to the next slide. The Series E preferred shares have a liquidation preference of $25 per share and are convertible at the holder's option into the Company's common shares at an initial conversion rate of 0.512 (sic -- see Press Release) common shares per series E preferred share which is equivalent to an initial conversion price of $55.41 per common share. The over-allotment option was exercised by the underwriters on this deal as well. And the total proceeds from the convertible preferred offering were about $83 million, bringing the total on both offerings to a little under $200 million.

Turning to the next slide, year-to-date, through April, we have raised a little over $225 million in long-term debt and equity, further strengthening our balance sheet. At March 31, our total outstanding debt was approximately $1.1 billion. Substantially all of our debt outstanding at March 31st is fixed rate, long-term debt with a blended coupon of approximately 6%. We had only $5 million outstanding under our unsecured credit facility at quarter-end and this was paid down to zero upon the closing of our equity offerings in April. At March 31st, our leverage on a book basis was about 51%. Our leverage -- overall leverage on a market basis was a conservative 39%. Keep in mind, both of these ratios are prior to the April equity offerings that I just discussed.

In summary, in an environment where many other companies are capital constrained, we are well positioned to execute our plan for 2008 and take advantage of additional opportunities.

Finally, turning to the next slide, we are confirming our previously announced 2008 guidance for FFO per share of $4.52 to $4.62 per share. We're increasing our 2008 estimated investment spending from approximately $250 million to approximately $300 million. In simple terms, this guidance reflects the fact that dilution created by our up-sized equity offerings is offset by the returns we expect from increased investment spending over the remainder of the year.

Now let me turn it over to Greg for his comments on leasing and investment activity.

Thank you, Mark.

The first quarter of 2008 did not contain a significant amount of investment. However, with the addition of the capital that Mark previously discussed, combined with our ongoing discussions with tenants and developers, we're confident that we can meet our investment objectives for the year. At our last call, we presented a capital plan of $250 million for the year, of which we have completed approximately $75 million year-to-date. As Mark indicated in his presentation, we are now revising our capital plan upward to $300 million to reflect the increased investment opportunities that we feel can be accomplished this year.

I will speak later to our revised capital plan, but first I would like to highlight our investments for the quarter. For the quarter, our capital expenditures totaled approximately $31 million and included the funding of a $10 million loan to Louis Cappelli. This transaction was essentially a refundable deposit evidenced by a promissory note which allowed us to secure an option to acquire 50% of Cappelli's interest in three New York metropolitan retail projects.Two of the construction projects, LeCount Place and Trump Plaza, are adjacent to our existing New Roc investment and the third is an entertainment and retail center to be built in Yonkers. The two newer shell projects, when combined with our existing New Roc project, form a complete entertainment and retail destination. And we believe it's in our best interest to keep these projects integrated. The option provides that we can acquire the interest in the project at the actual cost of construction and would be structured similarly to the terms of our existing Cappelli partnership.

We continued funding the development of the Schlitterbahn Vacation Village. As of the end of the quarter, we've invested approximately $108 million of our $175 million commitment. We continued funding the development of the AMC Diamond Ridge 12 in Gondor, California, our first development project with AMC. We continued expansion of our Canadian retail centers and continued the development of our Suffolk retail center.

Subsequent to the quarter's end, we also acquired our partner's 50% interest in our public charter school joint venture for approximately $39.5 million. In addition to the $80 million already invested, we have the option to acquire an additional $120 million of property over the next two years. As of this date, we're currently completing due diligence on the next traunch of schools and would anticipate making an additional investment of approximately $60 million in the near future.

In our last call, the question was asked regarding year-over-year performance for some of our non-theater asset types. We have now compiled the data and I direct your attention to our slide show for a further discussion of their performance.

For our ski properties, as you note on the slide, skier visits increased over 200,000 representing a 17% year-over-year growth. Revenues increased over $11 million for a 25% year-over-year growth and revenues per visit increased $2.43 for a 7% year-over-year growth.

Next slide, please? For our public charter schools, the metrics are different; however, the results were equally impressive. Year-over-year we increased the capacity of the existing schools from 6,888 students to 7,461 students. This 8% increase in capacity represents the continued acceptance and growth of the public charter school movement. Year-over-year enrollment increased 18% from 5,341 students to 6,284 students, result ing in overall occupancy increasing 6% to 84% notwithstanding the capacity expansion. Without the expansion, overall enrollment would have been at 91%.

As I promised earlier, I'd like to spend a second on our revised capital plan. Our initial plan called for $250 million of spending; however, we are now revising our plan upward to $300 million. As you can tell, with the planned acquisition of the next traunch of public charter schools, we will have accomplished almost 50% of these planned investments. At this point, we are seeing good opportunities across all of our asset types and, while existing theater transactions may appear light, let me assure you that we are looking at a number of standing theater opportunities as well as theater development projects. Our theater tenants are very positive about their outlook and are looking to grow their circuits.

It should be noted, however, that theater development projects, especially those targeted in lifestyle centers, are being impacted by retailer delay. Even though the exhibitors may be ready to proceed, many of the lifestyle developers are having a difficult time convincing their retail tenants to proceed. Notwithstanding these delays, projects will get done and these projects will contain theaters.

Additionally, we continue to gain traction in our vineyard investments. During the quarter we pursued the acquisition of a private REIT in the vineyard space; however, we were unable to agree upon terms satisfactory to us. As we have stated, we are committed to growing this asset type; however, we are disciplined in our approach and we will not pay prices or acquire assets simply to be larger. As indicated above, we continue to see a robust investment pipeline and we believe our increased liquidity will allow us to harvest these opportunities for this year and beyond.

A quick update on occupancy. We continue to have 100% occupancy of our theater assets and 96% occupancy of our non-theater retail assets.

With that, I'll turn it back over to David.

Thank you, Greg. Thank you Mark.

Before we go to your questions. Let me take a moment. I'd just like to reiterate some of the news you heard on today's call with regard to capital formation, and also heard on some prior calls. I just want to shine a spotlight, if I may, on some significant steps that have been achieved recently that have the Company in a very strong position of liquidity.

It seems like earnings and growth always get the lead or starring roles, to steal a movie analogy, while balance sheet is a background or supporting player. It is in economic slowdowns and credit market pummel like the present, that balance sheet strength gets its moment in the limelight.

As I go through some of our balance sheet reflections, let me share with you some context. Balance sheet management had a lot to keep up with at EPR because the Company has been growing quite rapidly. Over the last four years, the compound rate of growth in net assets has been 24%. And last year it was 38%. During this period of rapid growth, leverage has stayed completely under control; consistently at 50% on a book basis. And during this same period, our key credit ratios have improved. Interest coverage has risen from 2.9 to 3.2. Debt service coverage from 2.2 to 2.5. Fixed charge coverages remained essentially flat at around 2.5 due to our employment of some preferred stock elements. What this has meant for the Company is flexibility.

EPR has been able to deepen its market dominant positions and expand its base of business accretively for our shareholders with adequate and appropriate access to the capital markets. Even while credit markets were deteriorating or actually nearly collapsing in some respects, we've been able to continue to advance the agenda and business of the Company. In 2007 we raised over $500 million total capital with more than half of that in the last half of the year. Further this year, we've again raised $225 million in the first several months resulting now in more than $500 million raised since really the beginning of the credit crisis in the last half of '07. This again has been achieved without raising our leverage and with about 95% of our debt placements at fixed rates of about 6%.

All this has left us again with flexibility. We are currently positioned with nearly $300 million in undrawn credit facilities and have improved our credit ratios beyond their excellent position as of the year-end of '07. Our strong sense is that the market is increasingly becoming advantage for buyers and we're poised to take advantage of these opportunities.

All right. With that, I'll call upon Eric and we'll open it up to questions. Are you there?

Ladies and gentlemen, if you'd like to ask a question (OPERATOR INSTRUCTIONS). Your first question is from the line of Anthony. Please proceed.

Thanks. Could you guys give us an update on Schlitterbahn and just refresh us on what that entire capital structure looks like, and what parts are done and in place and what has yet to be uh, finished on the financing side and where things are at construction-wise?

Tony, it's Greg.

The capital structure has really not changed. You know, we have our money, we have the star bond's money, we have construction and we have some owner's equity and that. As far as what's going on, we would anticipate, and the plan has been to, for the star bonds to be issued sometime this year. So, you know, the anticipation would be that sometime this summer, and everything is proceeding in that form.

The continued construction that we're funding is relating to the land cost and land acquisition and kind of grading and uh, kind of doing the site work type improvements that, you know, we signed up for. Uh... as far as the construction financing, I know our tenant is in negotiations on finalization of that. We are, our plans have been submitted to the city and to the municipal authorities and I think we're getting our permits and we're working through those things.

I think there has been a few delays as we mentioned before resulting from the casino application and how those are rippling through and people are kind of trying to gauge the uh, the placement of that and it's importance to the project. So, I think there have been a few delays on that, but I don't think it's materially changed the deliverable date for the park.

Yeah. Tony to reiterate, this is David, our piece is in place. The star bonds have been committed. There's an underwriting commitment in place for the star bonds for the $225 million, the last piece of the project. The $250 million or so is really construction loan and equity, and that's really left to the Schlitterbahn people negotiating that. The other outlier is on the site. It would be another $600 million invested if the casino's awarded for the site. Otherwise, that land will be left in reserve.

So that's kind of the major player and somewhat the scale of what goes in in Phase I and Phase II. And exactly how the construction line is sized is, is being determined by the whole question of the casino. The good news is, the casino uh, license award process is gaining some clarity. They're now has been a scheduled date for hearings at the Lottery Gaming Commission in Kansas and that's going to be in May.

Mm-hmm.

And that was just announced in the last couple of weeks. So, those are scheduled. They're going to actually go on right during ICSC. But uh, so if they haven't, they haven't set out a calendar for the actual award date. But these hearings are part of that process. We're getting some clarity and at least we know they're going to reach the stage by that time.

Do you see as much of an issue or risk with the Schlitterbahn folks obtaining their construction financing given the debt markets and whether that could create any obstacles?

Well, clearly, you know the markets out there is much difficultt than it was. But again, you know, this is a process where there's significant capital with the star bonds and everything being in the process and the leverage ratios they're trying to achieve are significantly lower than traditional construction projects.

They're very modest. So it's our impression that's, that's not a real risk, but...

And we have talked to the development partners. They've got retail developers and hotel development partners that those, uh, that debt is achievable and I know there are, there are term sheets that are floating around.

We've seen those.

Okay, uh, and then on the charter schools, you talked about the $120 million pipeline there with $60 million potentially near term. How does the option work on the balance of that? What needs to happen to do the whole $120 million?

Generally at every school year they present a group of schools and we have some criteria as far as occupancy and we've talked about those kind of in the, you know, to acquire them being in the 60, mid-60s or so occupancy to acquire those. So they present a group of schools. We look at the schools, underwrite the schools, decide how much of the package that we want to take and then we proceed forward.

So generally you'll see those, uh, again at this kind of time of year where the school enrollment gets certified. We have good numbers that generally takes, you know, school starts, I think in September, we get certifications, kind of in the first part of the year. We begin our underwriting, and then we uh, we then proceed to decide which schools we want to take down. We do think they will have significantly enough schools that we can fulfill that remaining commitment over the next two years.

Okay. Uh, and then this final question with respect to vineyards, it seemed like, you know, even absent the deal you passed on in the quarter, it seems like that pipeline has gotten a little bit bigger, this is something you looked at for a few years it seems. Why's it seem like there's more deal flow now than maybe before? Is it just your comfort level? What's changed there if anything?

I think a couple things we talked about is you do have some of the bigger spirits guys coming into the space. There were major transactions over the last, (talking simultaneously) Six months to a year. I think the other side is, uh, you know, the tightening of the credit markets for these guys and they're looking at other capital alternatives. So I think it is, and I don't think that you can overlook the fact that we got deals done and that validated us. And therefore, you know the credibility of saying we're going to do this, that we're going to do these types of transactions and then going out and executing on those transactions gives you a lot of credibility to people that you were talking to.

Okay, thank you.

Thank you, Tony.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Amika. Please proceed.

Hi. Just on the $10 million note to Capelli could you give some color on, like, what the use of the note was and why it was needed?

Really it was a deposit and we characterized it as a promissory note because we liked to get security and, and things of that nature. So we characterize it as note of deposit, but really at the time we did that, we entered into the option agreement to acquire those interests. When we did that, as you can imagine, with the liquidity markets, we didn't want to commit to those projects. We thought we wanted to acquire the option, give ourselves the flexibility to look at all of those projects and then kind of decide whether or not we want to execute on all three of them or selectively.

So we, as I said, we entered into that at the same time, so it's reflected as a promissory note. We also, uh, wanted to have a personal level of security so we asked Mr. Capelli to sign on that note personally so we felt we had really good security on that.

M'bika, we did this note just really a sign of good faith. It's a matter of he wanting to have a partner that he wanted to be sure is interested and he has a reliable partner otherwise he was going to move and talk to other people. So, that's what we agreed on the discussions. That we were going to put down as a deposit and do our diligence on the projects.

And it's really structured as a, as a one-year transaction which allows us to see how those projects uh, mature and how he is able to attract and, and convince retailers to be parts of those projects.

Right.

And then, I guess, can you give us an update on the White Plains project and how that's progressing?

The White Plains project is doing remarkably well. Fully opened.

I've got the uh, the, I'm looking at our occupancy here. We're at 97% occupied. When we acquired it, we were at 92%. We continue to see, I mean, you--

Capelli is finished across the street. We don't own any, but he's completed the Ritz Carlton Tower Hotel and Condominium project. That's also helping to give a little girth to the location.

Within the quarter, if you recall when we talked about that, we had an Office Max in that, in that project that, Office Max had stated intent to close that. They were still on the lease. In the quarter we subsequently converted that to a Nordstrom's Rack and they expanded the space and we did it at rates above what Office Max was paying.

So based on the way the note is structured, are you, in, in the point where you're reaching your preferred return threshold or can you just talk about the yields on the project at this point?

We're hitting our preferred returns on the way the deal is structured. As we said, the 10%, we hit that from the outset and continue to maintain that.

So the project yielding overall?

Yes, yes.

What yield?

Uh, I'm looking. M'bika, can I get back to you on that? I don't have that information right in front of me.

Yeah and you mentioned on the theater developments, that one of the reasons there's been delay is potentially because of the Lifestyle centers pushing back, um, retailers pushing back at Lifestyle centers. In general, some of the (inaudible) have commented that that product type might slow longer term. And I just wanted to know how you think that will impact your theater development pipeline going forward.

We're talking about ,M'bika, with theater guys right now. I think if you looked, oh, call it, five to seven years ago the theaters were comfortable with being in the same area as, as this retail and then we got into this lifestyle center and we were incorporated into it. These projects that we're looking at, the areas need theaters, so I think if they need to be stand-alone or limited retail opportunities, they will proceed, they will not let that opportunity just set forever. So we don't think it's an um, it's a foreclosure of those opportunities as much as it is. We may have to rework that and it may look more like a stand alone theater as opposed to an integrated lifestyle center.

Okay, that makes sense. And you mentioned you're looking at several theater opportunities that aren't all developments. Can you comment on um, you know, the size of these deals and um, you know, generally you've shied away from doing acquisitions given where cap rates are, you know, what's the range of current cap rates on deals you're looking at?

I think um, you know, they range in size from single tenant to three, four, five locations. Opportunities. I think you're correct, M'bika, I think the market for standing theaters is coming back to our acceptable cap range. You know, where we've said it's getting back into the double digit range whereas it has drifted and we saw transactions, you know, trading even to the mid-7s. It's coming back with these, as David said, it's becoming more of a buyer's market. So I think reluctantly people are getting there, but they know we, for quality theaters were a good standing bid and they know what zip codes we live in and people are coming back to us and we're, we're feeling very good about those.

Some of these standing portfolios may be in the 9s, but it's really a matter of really the sellers getting comfortable. That's their best bid and uh, it may take some time, it's hard to tell.

Right and these theaters are you know, producing over two times--

Right, we're able to be selective and get the kind of quality theaters we're looking at as well. Trust me, there's a tremendous amount of theater opportunities that we look at that don't meet our criteria and you know, just because someone's desperate to sell, if it's not a quality theater we're comfortable owning for the long haul, we don't look at it as economic juice.

Okay, great, thank you.

Thank you, I'll get back to you on your question.

Okay, great.

(OPERATOR INSTRUCTIONS) It appears we have no more audio questions at this time.

Well, okay. With that, I guess I'll thank everybody for joining us. We appreciate your attendance, your attention, and look forward to seeing you next quarter and feel free to, as they always say, call the company, we're glad to talk to you otherwise. Thank you, bye-bye

Thank you for your participation in today's conference. You may disconnect and have a good day.