EPR Properties (EPR) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter two 2008 Entertainment Properties Trust earnings conference call. My name is Nora, and I'll be your coordinator for today. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's conference, Mr. David Brain, President and Chief Executive Officer of Entertainment Properties Trust. Please proceed, sir.

Thank you. Thank you, Nora.

Good morning. Thanks for being with us. This is David Brain.

Let me start with our usual preface, and that is, as we begin, let me inform you this conference call may include forward-looking statements defined by the Private Securities Litigation Reform Act of '95 identified by such words as will be, intend, continue, believe, make, spec, hope, anticipate or other comparable terms. The company's actual financial condition and results of operation may vary materially from those contemplated by such forward-looking statements and 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 Form 10-K for the year ending December 31, 2007.

With that said, I'll say again thank you for joining us. We always appreciate your investment of time and interest.

I want to start by thanking and congratulating all the associates at EPR another greater quarter. Halfway through the year, and already we've surpassed our once upwardly revised investment target for the year of very high quality properties.

As stated in our press release last night, we're on track and raising the lower end of our earnings guidance for the year of FFO per diluted share to $4.55 to $4.62.

I want to highlight some of the elements of our progress year to date, and to elaborate and supplement all this on the call this morning are Greg Silvers, our Chief Operating Office.

Good morning.

And Mark Peterson, our Chief Financial Officer.

Good morning.

And since we're out ahead of our capital spending target already, I want to talk a bit about the outlook for the last half of the year.

But before we get fully underway with that, I want to remind all that once again there's a simultaneous Webcast available via a link from our Web site at www.eprkc.com. If you can, advise you to go there now. There's some -- been some informative slides and some pictures of properties. I think you'll enjoy it.

Before I jump into company news, I want to draw your attention to the box office performance year to date.

Over the years, we often been asked about the first run exhibition industry performance in economic downturns, and I have often shared data, as we did on our last call, about its reliable, positive performance even in economic headwinds. Well, summer of '08 is proving the point once again.

Summer box office is up more than 5% over last year, and attendance gains count for more than half of that increase. Year-to-date box office is up about 1.5% to 2%. Things are good in theater land.

I will throw in a word of caution, though. The presidential election and Summer Olympics have historically proven to draw off attendance a little bit so we are looking for a bit of a flat tenant performance for Q3.

Back on the company news front, we have, as I said earlier, already exceeded our once upwardly revised '08 investment total of $300 million. We made about $275 million of acquisitions in Q2 with major transactions involving charter public schools and vineyards. These transactions bring our total investments in those areas to about $160 and $200 million respectively, becoming true enterprises for the business.

Those transactions and a funding of a $90 million maturity of a 10-year note that was our original long-term CMBS debt from 1998 were met -- those obligations were met through $200 million -- through a sale of about $200 million of both common and convertible preferred equity and some minor draws on our line of credit.

Our investment transactions year to date have gone well, according to plan. We're pleased with the results, our balance sheet position and are comfortable raising the lower end of our earnings guidance, as I said.

So what about the second half of the year? Well, the guidance we have for you is guarded due to the very choppy and volatile nature and condition of the markets overall.

Specifically, we are raising our investment guidance to $350 million for the year, but I will also tell you that we have good visibility of several transactions that could lead us to CapEx spending in the second half of '08 very comparable to the first half of the year.

We also have an asset sale pending, quite unusual for us, but on attractive terms that would result in over $100 million in net proceeds to the company.

Due to the uncertain and choppy nature of the market, though, we are not at this time giving guidance that contemplates the results of these transactions, but we are only raising the lower end of our prior guidance range of FFO per diluted share to $4.55 -- so the range is $4.55 to $4.62 for the year as a whole.

With that overall, I'm going to turn it over to Mark. A lot of financial news to go through for the quarter, and I'll talk to you in a few minutes.

Mark?

Thank you, David.

Let me begin with the review of the significant items from our recently completed second quarter.

As you can see on the first slide, our net income available to common shareholders increased 14% compared to last year from $20.9 million to $23.9 million.

Our FFO increased 26% compared to last year from $26.7 million to $33.5 million.

On a diluted share basis, FFO was $1.09, compared to $0.99 last year, for an increase of 10%.

As noted in the press release, the results for the second quarter of 2007 included a gain on sale of real estate of $3.2 million, as well as an offsetting charge of $2.1 million as a result of the redemption of all of our Series A preferred shares.

Now, turning to the next slide, for the six months ended June 30, 2008, our net income available to common shareholders increased 16% compared to last year from $39 million to $45.4 million.

Our FFO increased 23% compared to last year from $52.9 million to $65.3 million.

On a diluted per share basis, FFO was $2.20, compared to $1.97 last year, for an increase of 12%.

Now, looking at the details of our second quarter performance, our total revenue increased 19% compared to the prior year to $68.8 million.

Within the revenue category, rental revenue increased 9% to $49.9 million, an increase of $4.3 million versus last year.

Percentage rents included in rental revenue decreased from approximately $500,000 in the prior year to approximately $300,000. This decrease was primarily due to increases in base rent at two theaters, which, in turn, increased the break point used in calculating percentage rents. Thus the percentage rent decline was essentially offset by base rent increases.

Tenant reimbursements increased 21%, or $0.9 million. This increase is primarily due to both the acquisition in May 2007 of a two-thirds interest in an entertainment 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 $13.1 million for the quarter, for an increase of $6 million versus last year. This increase is due to the higher outstanding balance of mortgage and other notes receivable during the quarter compared to the prior year, as well as financing income recognized related to our direct financing lease.

As noted in our press release, upon completing the charter school sale leaseback transaction in the second quarter, which Greg will describer further in his comments, we determined that the underlying master lease for these schools should be counted for as a direct financing lease, rather than as an operating lease for financial reporting purposes.

The effect of this change is that, rather than recording rental income with a yield, including straight-line rent, of approximately 14%, as originally anticipated, we are recording financing income with a yield under the effective interest method of approximately 12%.

While this change has no cash or economic impact, it reduced our reported FFO per share for the second quarter by $0.01. It affected to reduce our reported FFO per share for 2008 by approximately $0.06.

It should also be noted that during the second quarter the partnership which owns Toronto Life Square exercised its option to extend by six months the 25% principal payment and the accrued interest that was due on May 31 and extended that to November 30. As of June 30, 2008, this mortgage note receivable had a carrying value of $114.1 million, and that's in US dollars.

Now, on the expense side, our property operating expense increased approximately $825,000 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 approximately $600,000, compared to $900,000 last year. The decrease of $300,000 is due to $200,000 less in expense recognized upon settlement of foreign currency forward contracts and about $100,000 less in expenses related to our TRS operations at our Family Bowling Center in Westminster, Colorado.

G&A expense increased $1.1 million versus last year to approximately $3.9 million for the quarter. This increase is due primarily 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 second quarter of 2008 includes about $400,000 in costs associated with terminated transactions.

Interest expense increased $1.8 million, or 12%. Approximately $0.7 million of this 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 notes receivable.

Minority interest was $478,000 for the quarter and is due primarily to our minority interest income of $537,000 related to our White Plains investment. As I've discussed previously, this accounting nuance related to White Plains does not impact our reported FFO.

This minority interest income was partially offset by minority interest expense of $59,000 accrued during the quarter related to Global Wine Partners, our minority partner in VinREIT.

Moving on, discontinued operations in the second quarter relates to a parcel of land in Powder Springs, Georgia, sold in June of 2008 for $1.1 million. A gain of $119,000 was recognized as a result of this sale.

Now, looking at the ratios for year to date through June, our interest coverage was 3.2 times, our fixed charge coverage was 2.3 times, and our debt service coverage was 2.4 times. All of these ratios remained very healthy.

I would now like to provide you an update on our capital markets activities.

Turning to the next slide, as we have previously discussed, on April 2, 2008, 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. Total proceeds from these offerings were approximately $195 million.

Subsequent to the end of the quarter, as David mentioned, in July we drew on our unsecured revolving credit facility to pay off a mortgage note which had an outstanding principal balance of approximately $90 million. This was our mortgage note with the infamous hyper-amortization feature that was scheduled to kick if the note was not paid off on the anticipated prepayment date. The note was secured by eight theater properties, which were simultaneously added to the borrowing base of our unsecured credit facility.

Turning to the next slide, also subsequent to the end of the quarter, we are pleased to report that we have received commitments to expand our winery and vineyard debt facility from $65 million to $117 million. These loan commitments expire on September 20, 2008, and are subject to certain documentation requirements.

To date, we have only drawn approximately $13 million on the original facility so the increased facility will provide us with substantial debt capacity or liquidity during the third and fourth quarters. We're also evaluating various options that would allow us to grow the size of our winery and vineyard debt facility even further.

At June 30, our total outstanding debt was approximately $1.2 billion, of which $1.1 billion was fixed-rate long-term debt with a blended coupon of approximately 6%.

We had $85 million outstanding under our unsecured credit facility at quarter end, which carried a spread of 150 basis points over LIBOR.

When we pro forma our availability under the unsecured credit facility for the payoff of the $90 million mortgage note that I mentioned and the availability under the winery and vineyard credit facility for the increase I just described, we have total available borrowing capacity in excess of $150 million.

At June 30, our overall leverage on a book basis was about 48%. Our overall leverage on a market basis was a conservative 39%.

Finally, turning to the next slide, based on committed projects, we are increasing our 2008 estimated investment spending from $300 million to approximately $350 million.

We are also increasing our previously announced 2008 guidance for FFO per share from the previous range of $4.52 to $4.62 to a new range of $4.55 to $4.62

This increased guidance reflects our strong year-to-date operating results and higher investment spending expectations, offset by the previously discussed unfavorable $0.06 impact of the change in accounting in our charter school investments.

And with that, I'll turn it over to Greg for his comments on leasing and investing activities.

Thank you, Mark.

In contrast to the first quarter, where I indicated that investment spending was light, I'm happy to report to you that the second quarter supplied significant capital investment.

For the quarter, we completed investments of approximately $276 million, taking us to a year-to-date total of approximately $307 million.

As you will recall, on our last earnings call we revised our capital plan upward to $300 million of acquisitions for 2008. However, as we have already exceeded this number, we will again be revising our capital plan upward.

I will speak later to our revised capital plan, but first I would like to highlight the accomplishments of the second quarter.

In April we acquired our partner's 50% interest in the public charter school venture for approximately $39.5 million.

In June we acquired for approximately $82.3 million an additional 11 public charter schools and funded expansions of 2 schools which were previously acquired.

Our school properties are located in 9 states and the District of Columbia, and all 23 of our schools are governed by a long-term triple-net master lease.

At the end of the quarter, our total investment in public charter schools total approximately $161 million.

In June we also completed the acquisition of certain vineyard and winery assets in a transaction valued at approximately $116.5 million. The investment included four wineries and over 900 acres of land with 565 acres of vineyards.

The properties were simultaneously leased through Eight Estates Fine Wines and includes such prestigious brands as Geyser Peak, Greg Farrell, XYZin, Atlas Peak and Buena Vista Carneros.

During the quarter, we continued to fund our development projects, including the Schlitterbahn development, $6.3 million; the Diamond Ridge Theater, approximately $4.4 million; and our Suffolk Retail Center, approximately $1.3 million.

During the quarter, we also commenced the construction of a winery facility in Sonoma County, California.

Additionally, we acquired two land parcels that were previously ground leased at our Canadian centers for approximately $8 million.

Regarding the operating performance of our properties, while there's very little to report on public charter schools and ski assets during this part of the year, I would like to discuss a few of the metrics of the schools recently acquired.

The overall enrollment for the 2007-2008 school year for the 11 schools was 4,302 students with a total capacity of 6,636 students, which resulted in overall occupancy of approximately 65%. As we've indicated previously, we generally acquire these assets at these levels and expect the occupancy rate to continue to grow as the properties season.

Given the delay between the production of fruit and the ultimate sale of a bottle of wine, it is difficult to have meaningful data on 2008 production. However, I can give you some general numbers regarding revenues on two of our largest winery and vineyard investments.

For Cosentino Wineries, revenues year over year increased 39%, and for EOS Wineries, revenues year over year increased 21%.

As I promised earlier, I'd like to spend a second on our capital expenditure plan for the balance of the year.

Our current commitments will take our capital plan to approximately $350 million for the balance of the year. However, as David indicated, we are reviewing several additional transactions that could result in a significant upward adjustment to this plan.

We continue to see high quality opportunities across all of our asset types, and we are currently evaluating these transactions, along with the various capital alternatives to fund these acquisitions, including recycling of capital.

While we have not traditionally been a seller of properties, we are considering the disposition of certain assets and currently have at least one significant asset under purchase agreement. As this transaction is currently in due diligence, I cannot give specific details or assurances that any such sale is imminent; however, we are exploring all possibilities to maximize shareholder value, and we will update you further as we achieve greater clarity on these projects.

A quick update on occupancy in our other assets, we continue to have 100% occupancy of our theater assets and 95% occupancy of our nontheater retail assets.

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

Thank you, Greg.

Thank you, Mark.

Good report. Couple of highlights as we go to questions.

Mark spoke of the double-digit metric increases, great coverage ratios, and as Greg alluded to, we have good visibility of a pipeline of transaction opportunities, and combine that with what Mark talked about of the dry powder we're sitting on and the potential asset sales we have, we're in a real -- we feel like we're in a good position for the balance of the year as well.

So with that, I'll open it up to questions, and, Operator, if you're there. Nora?

Thank you. (OPERATOR INSTRUCTIONS)

Your first question comes from the line of Michael Bilerman of Citi.

Please proceed, sir.

Hi. This is Ambika Goel with Michael.

Can you give some color on the asset sale? What triggered you deciding to sell the asset? Were you approached by a buyer? And if we look at the current valuation of where your stock is trading at an implied cap-rate basis of about 7.3%, by my estimates, how do you -- is that what you would say is in line with what you're expecting for the theater that's on the market?

Ambika, we were approached by a buyer, and without giving too much details, we do think that the numbers that we can achieve are in line or better than the cap rate that you're talking about.

I think the (inaudible) -- we're pleased with the valuations. Probably stronger than the market gives us credit for, and the thought is the redeployment of that could continue to be accretive to our shareholders because we have opportunities to reemploy the capital. And it was -- really all of our transactions that -- have come to us pretty unsolicited, Ambika.

Okay. Great. And then on the vineyards, can you give some color on the investment? I know that the party that you bought the vineyards from this past quarter, they just bought the whole brand and vineyards from Constellation for, I think, $200 million. So just how you kind of piece together that acquisition price that they paid relative to the price that you paid for the vineyards and wine-making facilities? And then also if there's any potential for more acquisitions with the same partners that you bought the vineyards from?

Okay. Couple of things. I mean, the way that we're able to breakout what -- I think what you're saying brand value versus hard asset value -- is clearly the appraisal method is the easiest way for us to do that because we are acquiring land assets. And so we have our advisors and third-party advisors who give us kind of input on that.

So if you break it down -- just to give you some color on that. Of the -- call it -- $116.5 million, roughly $63 million of that was land and vineyard improvements -- being vines, trellises -- with approximately $53 million of that being winery buildings and the nature.

As far as additional transactions with that group, right now we're not talking about doing anything right now, but they continue -- I think they feel very aggressive in the space, and we think they're a good partner who's willing to put, as you said, significant equity into deals for us to look at, and that's a combination that we're excited about.

Well, the partnership that bought that, really it's a combination of prior management that ran them under the Beam organization. It's Deutsche & Company that was the sponsor --

The leader marketer of the --

-- Yellow Tail that really made a success out of that and then a private equity fund out of Los Angeles. And really the private equity group has great designs to continue to build their market position in the space. So I think there is the potential for greater transactions, Ambika, but we're -- and I think we're all anxious to work together with each other further.

Okay. Great. And then on the upsizing of the credit facility -- or the secured facility for the wineries, right now the capital environment is pretty distressed, and I was possibly just surprised to hear that it was upsized. I guess, what do you think allowed the lenders to get comfortable with upsizing that term loss?

Well, in part these are farm credit guys, and so they're looking to the land and their cost of capital. They're not as impacted by this credit crunch. So it's partly the nature of the guys we're talking to, and, frankly, they're land lenders, and they like the real estate, and so their spreads are favorable.

And I think, if you think about it, Ambika, these are truly kind of ag lenders so they're commodity lenders, and the commodity markets right now are quite strong. And so I think these guys are still very interested in putting out -- these are lenders who are loaning, likewise, on corn and almonds and wine and appreciating values, as Mark said, in the Napa and wine space is very attractive to them.

I was saying on CNBC on Friday, Ambika, overall the ag lenders are in much better shape, being the ag product area is very strong. This is the crisis that otherwise is in the market is not really extended to them right now. So this is a very strong space for us.

And I think it's a credit to our group here, who've identified kind of the right lenders to pursue this kind of product type.

Okay. Great. And then I think about a year ago you had mentioned that there was a portfolio of theaters that was on the block. It was previously owned by Liberty One or One Liberty -- I forget the name of the company -- but did that portfolio ever sell, and if it did, what was the cap rate of that transaction?

That portfolio from One Liberty sold to a fund in Chicago about, I think 18 months ago or so for a 757 cap.

And then they were -- then again marketing that deal --

Correct.

to buyer.

Correct.

Did that end up selling?

It has not sold. We have had discussions with them, but as you guys know, we have discipline in what we think we should pay for those type of assets, and to date we've not been able to successfully bring them to that point.

And then on the property that is on the market right now that you are potentially selling, does that financing in place?

It does currently, yes. But it's --

It's repayable so it's --

It's something that can be dealt with.

It's something that can be dealt with by the new owner or the (inaudible).

Okay. Great. Thank you.

Your next question comes from the line of Anthony Paolone of J.P. Morgan.

Please proceed.

Hi. It's Sarah King here for Tony.

I just have a couple of questions on Schlitterbahn. Can you provide an update on the construction financing and the star bonds for Schlitterbahn?

Sure. During the quarter, the venture that's kind of responsible for that has secured a term sheet for construction lending. So that's one of the things they're working through that now. So that's a successful -- one of the successful triggers that was out there on the star bonds. So I think the star bond issuance it's still not happened due to that. They're working through that term sheet. I think it's just a matter of getting through and getting the acceptable term sheet and then proceeding forward with that, but it was good news that in this difficult market a construction loan term sheet has been delivered.

What about expectations for timing, and when do you think that --

I think we're still -- as we had said earlier, I think we still think it's the fall.

Okay.

And I've said anything that kind of changes that perception at this point.

Okay. Excellent. And then another question is the $114 million funded to date on Schlitterbahn, is this inclusive of the accruals, or is it just cash draw downs?

It's cash drawn down.

Yes. That's cash drawn down. There's a little bit of accrued interest, but we get paid in the subsequent months. But it's $114.2 million is the drawn-down amount.

Right.

What is the accrual to date?

The accrual as of June 30 is about a little under -- a little over $500,000.

Okay. All righty. Thank you very much.

Sure.

Sir, you have no questions at this time.

Okay. Well, with that, then we'll thank everybody for joining us and look forward to next quarter report, and in the meantime, of course, we're always available. If somebody would like to call the company directly, we're always happy to try and talk to you and address your questions.

So thank you, and we'll see you next quarter and at the movies.

Thank you.

Thanks.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.