EPR Properties (EPR) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your EPR Properties Q1 2015 Earnings Conference Call. (OPERATOR INSTRUCTIONS.)

I'd like to now introduce your host for today's call, Mr. Brian Moriarty, Vice President of Corporate Communications. Sir, please begin.

Great. Thank you for joining us today. I'll start the call today by informing you that this conference call may include forward-looking statements as defined in the Private Securities Litigation 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. Discussion of these factors that could cause results to differ materially from those forward-looking statements are contained in the Company's SEC filings, including the Company's reports on Form 10-K and 10-Q.

With that, now I'll turn the call over to company President and CEO, Greg Silvers.

Thank you, Brian, and good afternoon to everyone. I'd like to remind everyone that slides are available to follow along via our website at www.eprkc.com.

I'll start with our quarterly headlines and then discuss the business in greater detail before turning the call over to our CFO, Mark Peterson, for a discussion of our financial results and capital market activity.

The first headline is strong quarterly performance, as illustrated by double-digit growth in both revenue and FFO as adjusted versus same quarter previous year. Second, primary investment segments remain healthy, box office receipts remain on track to deliver a record year, our recreation assets continue to exhibit strong rent coverages, and demand for quality educational facilities continue to outstrip supply. Third, investment spending on track with guidance. Our current pace allows us to remain confident in our initial investment spending guidance. Fourth, balance sheet strengthened and cost of capital reduced. Our successful bond issuance and amended credit facility reinforced our balance sheet, further reduced our cost of capital and positions us well to fund our investment pipeline. Mark will give you further details on this important progress. Our final headline is earning guidance increased. We are adjusting guidance upward to a range of $4.34 to $4.44 from a range of $4.32 to $4.42, reflecting the early momentum we've established.

These headlines speak to the strength of our industries, the strength of our portfolio and the strength of our balance sheet. Our investment strategy reflects our commitment to knowledge-based investing in assets that are supported by long-lived activities, are durable and produce a consistent and reliable income stream.

With that, I'll now move on to discuss the business in further detail.

The first quarter of 2015 continued to demonstrate our ability to access quality investment opportunities across each of our asset segments, with $136.4 million of investment spending during the quarter. During today's call, I will discuss the overall business conditions supporting our assets, as well as the investment detail for the quarter.

In the entertainment segment, theater exhibition has gotten off to a very robust start, with records being set in both January and February. Our team just returned from CinemaCon, the national theater exhibition conference, and is extremely enthusiastic about the potential for the 2015 box office. The summer season kicks off officially this coming weekend with the introduction of the second installment of the Avengers series, and many are forecasting a record-breaking Memorial Day weekend.

The other exciting news coming out of CinemaCon was the strong consumer demand for new high-amenity theaters. This is a trend that we have been anticipating and preparing for, and we will continue to participate in its accelerating growth, with numerous operators announcing plans to increase capital spending. We view this as very positive for EPR, as this should translate into additional investment opportunities.

During the quarter, we funded approximately $17 million related to the build-to-suit construction of three theaters and the development of one family entertainment center, as well as the acquisition of an existing theater slated for remodeling.

As we discussed in our fourth-quarter call, we also completed the sale of a 16-screen theater in Los Angeles, California, for net proceeds of $42.7 million and recognized a gain on the sale of $23.7 million, demonstrating our focus on prudent asset management and our ability to recycle assets for attractive returns at the appropriate time.

Our recreation segment continued to exhibit strength, and both our ski properties and our 11 TopGolf operating properties demonstrate strong ongoing performance, with rent coverage of 1.85 times for our ski portfolio and in excess of 3.5 times for our TopGolf portfolio.

During the quarter, we had approximately $69 million of investment spending in our recreational segment related to the continued construction of the waterpark hotel at the Camelback Mountain Resort, the build-to-suit construction of 11 TopGolf entertainment facilities, as well as the acquisition of one daily accessible ski property in Wintergreen, Virginia.

Additionally, we are pleased to report the planned opening of Phase I of the Camelback Lodge and Aquatopia indoor waterpark on May 1, 2015. Located at the base of Camelback Mountain in the Poconos, this property features a 4-season mountain adventure experience combined with the largest indoor waterpark in the Northeast and will only strengthen the established brand and performance of the Camelback property. Phase I of the property includes 226 rooms, and Phase II, which will open later in the summer of 2015, contains 227 rooms.

On the education front, the demand for quality education and associated facilities continues to be very strong, and our investment and opportunity pipelines are benefiting from this demand. We continue to see demand outstripping supply of quality facilities across the education platform, including public charter schools, private schools and early education facilities. More and more jurisdictions are embracing public charter schools as a choice-based alternative, with continued double-digit enrollment growth and over 1 million children on waiting lists. The successful extension of our platform into early childhood education and private schools continues to further diversify and strengthen our education portfolio, and 2015 is continuing the theme of increasing opportunity within the education segment. During the first quarter, we invested approximately $48 million related to the build-to-suit construction of 16 public charter schools, 16 early childhood education centers and 4 private schools. We continue to see very strong demand for real estate financing solutions within the education space and believe that the value we provide to our customers with our build-to-suit program provides us a competitive advantage in sourcing transactions that strengthen both our portfolio quality, but also our investment returns.

With regard to the Adelaar Casino and Resort project located in Sullivan County, New York, our operating partner continues to make positive progress in the license application process. The exact timing for a decision on the application has not been established. However, as we've communicated previously, upon conclusion of the licensing process, we will provide all the particulars of this investment.

Our overall occupancy remains strong at 99%. As we discussed on our last call, our current investment spending guidance remains at $500 million to $550 million. We remain highly confident in our ability to meet this target, given our large composition of investments related to build-to-suit projects that have already commenced or should commence in the near future, along with a deep investment pipeline that we are currently evaluating.

With that, I will turn it over to Mark for a discussion of the financials.

Thank you, Greg. I'd like to remind everyone on the call that our quarterly investor supplemental can be downloaded from our website.

Now, turning to the first slide. FFO for the first quarter decreased to $32.1 million, or $0.56 per share, from $52.7 million, or $1.00 per share, in the prior year. FFO as adjusted per share was $1.03 versus $0.94 in the prior year, an increase of approximately 10%.

Before I walk through the key variances, I want to discuss three items that are excluded from net income to come to FFO as adjusted for the quarter. Each of these items were anticipated and discussed on our last earnings call.

First, as Greg mentioned, we completed the sale of a theater in LA for net proceeds of $42.7 million and recognized a gain of $23.7 million. Second, in connection with the retirement from the company of our former President and CEO, we recognized $18.6 million in retirement severance expense. Third, in connection with the audit of our Canadian trust by the Canadian Revenue Agency, we recognized an additional $6.5 million in deferred tax expense, which is excluded from FFO as adjusted. We also recognized an additional $1.4 million in current tax expense due to this audit, which has been included in FFO as adjusted.

Now let me walk through the key line item variances for the quarter versus the prior year. Our total revenue increased 11% compared to the prior year to $99.4 million. Within the revenue category, rental revenue increased by $10.3 million versus the prior year to $76.7 million and resulted primarily from new investments. This increase was partially offset by the impact of the weaker Canadian dollar exchange rate versus the prior year of over 12% which [reduced] rental revenue as well as tenant reimbursements at our Canadian properties on a comparable basis -- total basis -- by approximately $1 million. Note that this decrease was partially offset on the total revenue line item by an increase in other income of $376,000 due to favorable settlements of foreign currency swap contracts. When combined with the impact of lower property operating expense and lower income tax expense as a result of the weaker Canadian dollar, FFO as adjusted per share was lower by about $0.005 compared to the prior year as a result of the movement in Canadian exchange rates.

Percentage rents for the quarter included in rental revenue were about flat versus prior year at approximately $300,000. Mortgage and other financing income was $17.8 million for the quarter, a decrease of approximately $820,000 versus prior year. The decrease was due primarily to the $76.2-million prepayment received from Peak in December of 2014 and the sale of 4 public charter schools in April of 2014 for approximately $46 million. These decreases were partially offset by the increase associated with additional real estate lending activities.

On the expense side, our property operating expense decreased by $92,000 versus the prior year due to the weakened Canadian dollar exchange rate I discussed earlier. This was partially offset by higher bad debt expense.

G&A expense increased slightly to $7.7 million for the quarter, compared to $7.5 million in the prior year, due primarily to higher professional fees that were partially offset by lower stock compensation expense, primarily as a result of our former CEO's retirement.

Our net interest expense for the quarter decreased by $1.3 million $18.6 million. This decrease resulted from interest capitalized on Adelaar of $2.1 million during the quarter, as well as a lower weighted average interest rate. These decreases were partially offset by more outstanding borrowings during the quarter.

It should also be noted that the carrying value of Adelaar is now reflected on our balance sheet in two places -- $172.9 million in property under development, representing primarily the land and other costs incurred by EPR related to the planned casino ground lease, golf course and waterpark hotel projects, and the remainder of $23.7 million in land held for development. Also, beginning in the first quarter, most of the costs incurred related to infrastructure development as reflected as a receivable since it is anticipated that these costs will be reimbursed from the proceeds of IDA bonds. This receivable totaled $9 million at March 31.

Putting it all together, our investment in Adelaar totaled $205.6 million as of quarter-end.

Transaction costs increased $1.4 million to $1.6 million for the quarter due to an increase in costs associated with potential and terminated transactions.

Turning to the next slide, I'd like to review some of the company's key credit ratios. As you can see, our coverage ratios for the quarter are strong, with fixed charge coverage at 2.9 times, debt service coverage at 3.1 times and interest coverage at 3.6 times. We increased our monthly common dividend by just over 6% in the first quarter to an annualized dividend of $3.63 in 2015, and our dividend continues to be well-covered by our cash flow. Our debt-to-adjusted-EBITDA was 5.1 times for the first quarter annualized, and our debt-to-gross-assets ratio was 41% at March 31. Both of these ratios have been adjusted for the excess cash on hand of approximately $93 million as a result of our recent bond transaction.

As you can tell by all of these metrics, our balance sheet is in great shape to fund our strong pipeline.

Let's turn to the next slide and I'll provide a capital markets and liquidity update.

At quarter-end, we had total outstanding debt of $1.8 billion. All but about $70 million of this debt is either fixed-rate debt or debt that has been fixed through interest rate swaps, with a blended coupon of approximately 5.2%.

We had no balance at quarter-end on our line of credit, and we had $102.2 million of cash on hand. We are in excellent shape with respect to debt maturities. As of March 31, we have scheduled balloon maturities of approximately $65 million for the remainder of 2015, less than $100 million in 2016 and $158 million in 2017.

Turning to the next slide, we continue to reduce our cost of capital and level of secured debt. During the quarter, we issued $300 million of 10-year senior unsecured notes and a registered public offering with a coupon of 4.5%. This was upsized from the $250 million in our original plan due to significant investor demand, coupled with an attractive long-term fixed borrowing rate for the company. This issuance represented our fourth 10-year unsecured notes offering and, in comparing it to our last deal completed in 2013, we were pleased to reduce the spread on this transaction by over 75 basis points.

In addition to a strong debt market, we believe we are also beginning to see the benefits of becoming a frequent issuer of public unsecured debt in support of our robust pipeline, as well as the favorable impact of being rated investment-grade on this debt by all three major rating agencies.

Prior to the issuance of these bonds, we prepaid in full a $30.4-million secured mortgage that had an annual interest rate of 5.56%.

Turn to the next slide. As we reported in the 8-K we filed last night, we are also pleased to announce that subsequent to quarter-end in April we amended, restated and combined our line of credit and our term loan facilities. The amendments to the line of credit portion of the facility included increasing the size of our line to $650 million from $535 million, extending the maturity date by about 2 years to April 2019 with an additional 1-year extension option available at our option, and reducing the interest rate and facility fee for pricing. At our current credit ratings, interest on the line of credit is at LIBOR plus 125 basis points, a reduction of 15 basis points from the previous agreement, and the facility fee was reduced by 5 basis points as well.

Turn to the next slide. The changes to the term loan portion of the facility included increasing the size of our term loan to $350 million from $285 million, extending the maturing date also by about 2 years to April 2020, and reducing the interest rate on all senior unsecured credit rating tiers. At our current credit ratings, interest on the term loan is at LIBOR plus 140 basis points, a reduction of 20 basis points from the previous agreement. The additional $65 million in funded debt is expected to be drawn down over a period of up to 90 days. In addition, there is a $1-billion accordion feature on the combined line of credit and term loan facility that increases the maximum amount available under the combined facility, subject to lender approval, to $2 billion.

In summary, thus far in 2015, we have been very successful in terms of raising new debt and lowering our cost of capital while, at the same time, extending duration and increasing our financial flexibility. As we move forward in a potential rising interest rate environment, we think we are well-positioned with over 95% of our debt at fixed rates and manageable debt maturities over the next several years.

Furthermore, we believe that our leading market positions in unique niche categories will allow us to continue to invest with higher relative yields versus more commoditized real estate types and will provide a significant cushion against any future spread compression that may come with rising interest rates.

Turn to the next slide. We are increasing our guidance for 2015 FFO as adjusted per share to $4.34 to $4.44 from $4.32 to $4.42 and maintaining our guidance for investment spending of $500 million to $550 million.

Included in our earnings guidance is lower expected G&A costs, now estimated at $30 million for the year, partially offset by an increase in interest expense as a result of upsizing our recent bond offering that I discussed earlier.

Now with that, I will turn it back over to Greg for his closing remarks.

Thank you, Mark.

I've had the opportunity to speak to many of our investors over the past several weeks and discuss our differentiated approach and exciting opportunities that lie in front of us. We are continuing to execute on established strategies in order to grow EPR's leadership position in our key non-commodity investment segments. We have an outstanding team of highly-skilled professionals who possess deep industry knowledge within our core asset segments. This knowledge and a disciplined underwriting approach, when combined with our industry relationships, will allow us to continue to grow and expand these segments while delivering consistent and reliable results. As you've heard today, our performance is strong, our opportunities are robust and we are committed to being a results-driven organization, anchored to an underwriting discipline founded on knowledge-based investing.

With that, I'll open it up for questions.

(OPERATOR INSTRUCTIONS.) Our first question comes from the line of Nick Joseph with Citigroup. Your line is now open. Your question please?

Thanks. I was just wondering if you could touch on guidance. You increased guidance $0.02 at the midpoint, but the first quarter actually came in $0.03 ahead of where you thought you would be. So you mentioned the lower G&A going forward and the increase in interest expense. Can you put numbers around both of those and give us a walkthrough for the previous guidance to update it?

Yes. Sure. Actually I think we were $0.02 higher than the midpoint of our guidance for the first quarter. And if you look over the balance of the 9 months, you'll find that G&A -- we expect G&A to be lower, but that's offset by interest expense being higher, and interest expense being higher is primarily a result of the extra $50 million we decided to take down in the last public debt deal that we did. That's partially offset by the savings we're going to enjoy on the refinancings that we did, but it's still a net negative if you compare it to what otherwise would have been the line of credit. So the $0.02 really is from the first quarter and G&A savings over the balance of the 9 months, so really offset by additional interest expense beyond what was originally planned.

Okay. Thanks. What was the cap rate on the ski resort acquisition as well as the megaplex theater?

The cap rate on the ski was approximately a 9% return on that, and the theater was right in the -- around 8% or a little above 8%.

Thanks. And then finally, can you talk about the acquisition pipeline today?

Sure. I think what we've said is -- and it's reflective of kind of our first-quarter performance. If you look at -- compared to even last year, at $137 million, I think that's nearly twice what we came out of the first quarter last year. So again, we're seeing really good opportunities, both -- in all of our primary segments. I think, as we talked about, the opportunity for high-amenity remodeling is very strong at this point. We're seeing a lot of interest in that from our operators. Likewise, we've got good things going on in our recreational portfolio with our TopGolf construction, and we have several of those under construction. We closed an acquisition, as we reported, with the Wintergreen ski facility. And our schools continue to present a very strong pipeline of opportunity, and we continue to get a lot of inbound opportunities as we grow that opportunity pipeline.

Thanks.

Thank you.

Thank you. Our next question comes from the line of Dan Altscher with FBR. Your line is now open. Your question please?

Thanks and good afternoon, everyone. Following up on Nick's question around the acquisition pipeline, specifically as it relates to ski, is there a -- is that a very lumpy kind of deal flow right now or are you kind of seeing maybe a little bit of a consistent basis and there's abilities to pick and choose?

I think, for us, it groups into kind of two different areas. The ski aspect of that has always been kind of lumpy, meaning that it's opportunistic as to the opportunities. Our TopGolf is much more of a build-to-suit. So it is very -- not lumpy in the sense that we're able to forecast that out. So it truly is kind of depending on the product, Dan -- dependent on -- I think that -- like I said, I think we're seeing more opportunities in that area and -- but it will be a little more lumpy on the non-TopGolf build-to-suit.

Right. Okay. Got it. And just sticking with the ski aspect, just from a market standpoint, are you seeing any maybe -- I guess you'd call it maybe non-traditional players starting to get in the market -- maybe a little bit more on the private equity side or alternative guys or maybe some newer entrants in this space, or is it still fairly concentrated?

It's actually -- we've seen a couple of players that have come in, both a fund and another publicly-traded triple-net REIT, who've closed on ski transactions in the last quarter. So as within all of the segments that we're in, the competition continues to be strong as more and more people are trying to find product to fulfill their investment spending guidance. But we're seeing it -- all of those players coming to play.

And then just a follow-up from Mark. Based upon the comments, I think you quoted 95% fixed-rate debt. I assume that means you're also swapping the amended term loan. Can you kind of just give us a sense of what the -- I guess the swap cost is or the all-in kind of fixed financing rate then on that borrowing?

Yes. We've actually -- so that new $350 million loan is not funded yet, so we still have the $285 million outstanding. $240 million of that is swapped, so of that $70 million that's not fixed, a chunk of that is part of the fixed -- of the term loan that's not swapped. That rate is -- there's two different swaps, but I think it's something like 2.17% or 2.2% on the term loan as far as the swap. And then as we take down the additional $65 million -- taking it from $285 million to $350 million -- we'll likely swap out a part of that as well to provide a little more fixed term to that.

Okay. And then I apologize. I didn't read the document carefully enough. But there's no sort of amortization or principal repayment around that, right?

No. It's freely-prepayable and there's no amortization. Just a 5-year (inaudible).

Okay. Perfect. Thanks so much.

Thanks, Dan.

Thank you. Our next question comes from the line of Craig Mailman with KeyBanc. Your line is now open. Your question please?

Just to clarify back on guidance. So the G&A and the interest expense offset each other, so it's really just you guys are seeing a higher volume of investment activity earlier in the year relative to what you guys had previously budgeted? Is that fair?

No. I don't -- I think the investment spending was on track with what we were thinking. The interest expense is (inaudible) taking down more of the 10-year debt as opposed to funding on our line of credit. It really was unrelated to the timing. It was more of a financing activity.

I think -- Craig, from our standpoint, this is consistent with our plan. I think what Mark mentioned is we have some G&A savings as he gave you the run rate, but some of that savings is -- we don't get the full [bit] of that savings because we're losing some to taking down this additional debt. But as far as tracking with our plan of investment spending, I think that what we've delivered this quarter is consistent with our internal plan.

Okay. Apologies. I thought the whole G&A savings was getting offset by interest. So you actually are getting a net benefit from G&A.

Well, for the last -- we got a benefit in the first quarter from G&A, so that was the $0.02 effectively. There was a couple other things --

Right.

But G&A was the primary. Going forward, the G&A benefit is offset by the interest savings -- the interest cost, I should say. But that interest cost isn't due to volume -- unexpected volume -- it's due to --

Financing --

Financing more long-term debt -- yes -- versus line of credit.

Right. Right. Right. No, I got that. I just -- I was a little bit confused there. So apologies on that. Then just on the spending you guys did in the quarter, how much of that was stuff you had in the bag and kind of hauled over from last year versus newly-identified projects?

Last quarter, when we -- if you look at page 20, we showed $260 million of costs that we expected for projects that already started by the end of the year. So that $260 million was roughly half of our -- half of the midpoint of our guidance of $525 million. Now if you look at page 20, obviously as the year goes on, that number's going to creep up. About 70% of our guidance roughly is projects that have already started as of March 31. It either happened in the first quarter or are in process as of March 31. So we feel good about the -- about hitting the guidance, and I think we're right on track with what we expected.

And I'll echo Mark's comments there that it clearly -- that page 21 does give a real good -- or 20 -- sorry -- does give a real good snapshot of kind of projects -- you can see the account of projects that we've added. And so, as he said, we've probably come up overall 20% from where we were before. So again, strengthening our belief that we have great confidence in hitting that number.

Okay. And then how do you guys kind of look at bigger portfolio deals these days versus kind of one-off investments? And kind of what -- is there a pricing premium at all for bigger portfolios in the market?

I think that's a fair point that I think (a) for aggregation, there is sort of a pricing premium. It's that 50 basis points or so, but I think it would be fair to say that they're generally the aggregation of assets and the immediate deployment of that would have some degree of premium, but it's still -- as we've talked about, would need to meet our criteria and we'd need to take our discipline and apply that to it and make sure that it qualified under our asset qualifications. But if it did that, definitely we would look at some level of premium for the aggregation.

Okay. And then just lastly for Mark, debt-to-EBITDA creeped up a bit here, but clearly you guys took more in the bond deal and you have a good amount of cash. But just thinking from a leverage perspective to keep the investment-grade rating here, how high do you want to let that float before you guys think about introducing a little bit of equity? And maybe how much of a benefit is developments coming online to kind of offset that increased debt balance?

Yes. I think you can think of debt-to-EBITDA -- we like to operate in the low 5s. It was a little bit lower the previous quarter because we had done the equity offering. So I think low 5s is where we operate. And you will see a nice balance of new projects being started, and we pay a little bit of the price of that while we're building them with the debt being there and not the EBITDA, but you'll have projects coming in that'll offset that. So I think low 5s is sort of where we'll live, and I think that's consistent with the investment-grade rating.

Great. Thank you, guys.

Thanks, Craig.

Thank you. Our next question comes from the line of Rich Moore with RBC Capital Markets. Your line is now open. Your question please?

Hi. Good afternoon, guys.

Hi, Rich.

You had talked a bit in the past, Greg, about the possibility of doing some dispositions -- maybe having a (inaudible) more defined disposition program on certain assets that may not grow as fast as other assets -- certain assets that aren't strategic. Where are you with the notion of a disposition program?

Sure. We're -- thank you, Rich. We're constantly looking and we're probably doing a more deep dive. What we've said is that we would like to probably prune our Imagine exposure down. And so we have nothing to announce, but it's something that we would look at. Likewise, as our assets -- if we have assets that are not performing or we think are getting a valuation that are greatly in excess of our cost of capital, that it's an area that we should look at. Right now, we don't have anything really as far as forward guidance on that, but we are considering it. And as we get more detail on that, we'll share that with you guys.

Okay. Good. Thank you. And then you had also -- I think you have one theater conversion that is sort of a value-add play, and I'm curious -- where do you see that going? Do you see more of these kind of cropping up after CinemaCon or (inaudible) there, but --

Sure. I -- yes. You saw our announcement of that. What we're really seeing is an opportunity to buy existing inventory and convert that to a high-amenity theater, and that's what you saw -- the beginning of that -- one of the deals that we announced this part of the first quarter, and we're seeing more opportunity in that where it's actually buying an older theater and then kind of partnering with our operator where they're going to bring capital and we're going to bring capital and we're going to triple-net lease that as a high-amenity theater. And we think over the next 12 to 18 months, that could be a nice complement to our traditional ground-up construction.

Okay. Good. Gotcha. And then last thing, on the TopGolfs. I think you guys have 11 and you have 11 more in progress? Is that right?

Yes.

Okay. How big does that get for you guys before you reach that sort of right of first refusal maximum that you have with TopGolf?

Right. We think that's a -- that's probably around $500 million total, which we think equals about 30 units.

About 30 units. So you could build another 8 more --

No. Yes, about another 8 more. That's correct.

Great. Truly. Thank you, guys.

Thank you.

Thank you. And I'm showing no further questions in the queue at this time. I'd like to hand the call over to Mr. Greg Silvers for any final remarks.

Well, thank you, everybody, for attending today and we will talk to you at the end of next quarter. Have a good day.

Thank you.

Ladies and gentlemen, thank you very much for your participation. This does conclude the program. You may now disconnect.