Earnings Call Transcript - EPR Q1 2025

Operator, Operator

Hello and welcome to the EPR Properties Q1 2025 Earnings Call. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question-and-answer session. Also as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I will now hand the call over to Brian Moriarty, Senior Vice President of Corporate Communications.

Brian Moriarty, Senior Vice President of Corporate Communications

Great. Thank you. Thanks for joining us today for our first quarter 2025 earnings call and webcast. Participants on today's call are Greg Silvers, Chairman and CEO; Greg Zimmerman, Executive Vice President and CIO; and Mark Peterson, Executive Vice President and CFO. I'll start the call by informing you that this call may include forward-looking statements as defined in the Private Securities Litigation Act of 1995 identified by such words as will be, intent, continue, believe, may, expect, hope, anticipate or other comparable terms. The company's actual financial condition and the results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of those factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q. Additionally, this call will contain references to certain non-GAAP measures which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most directly comparable GAAP measures are included in today's earnings release and supplemental information furnished to the SEC under Form 8-K. If you wish to follow along, today's earnings release, supplemental and earnings call presentation are all available on the Investor Center page of the company's website, www.eprkc.com. Now, I'll turn the call over to Greg Silvers.

Greg Silvers, Chairman and CEO

Thank you, Brian. Good morning everyone and thank you for joining us on today's first quarter 2025 earnings call and webcast. I am happy to report that our first quarter results reflect continued strength in our portfolio, with top line revenue up 4.7%, and FFO as adjusted per share up 5.3% year-over-year. Additionally, we are pleased to announce that we are increasing our 2025 earnings guidance. During the quarter we made progress with our investment pipeline, deploying capital into accretive opportunities that support our long-term growth strategy. As part of our investment spending during the quarter and subsequent to quarter-end, we are introducing 2 new experiential asset types to our portfolio: a construction theme attraction and a private golf club with expansive amenities. We are delighted to add these properties to our portfolio as they reflect the attributes we seek in our experiential investments. While we remain prudent in our investment spending given the current cost-of-capital, we are encouraged by our ability to continue to find attractive investments. We also advanced our capital resizing strategy focused on the sales of theater and education assets, and accretively redeploying this capital into target experiential properties. This strategy remains a top priority for us as we continue to refine our portfolio with the goal of further expanding our experiential portfolio across high quality products. Turning to an overview of our product portfolio. Our first order consolidated coverage remains at 2.0, which is consistent with reported coverage on our year-end call. We are pleased with the momentum and resilience we're seeing at the box office. Thus far we've seen success around multiple genres, including original content, as most recently evidenced by the performance of Sinners. Franchise films, including Captain America: Brave New World, and Mufasa: The Lion King, and animated features like Dog Man and Moana 2. The upcoming jump slate is strong, and we remain optimistic about seeing continued solid performance in theatrical exhibitions. Our ski properties also delivered solid results supported by robust season pass sales and favorable weather conditions. As we've discussed previously, our snow-making capabilities at these properties help to mitigate weather risk. While our eat & play sector experienced some year-over-year declines, our coverage in the space remains healthy, and we're confident about the sector's resilience. Lastly, amidst ongoing uncertainty we wanted to highlight the long-term resiliency of experiential spending in many of these sectors that we invest in. As is highlighted on the chart, spending on these experiences has consistently grown over the last 25 years throughout macro cycles. Additionally, the data illustrates that these sectors are resilient during challenging economic periods and have the potential to exhibit robust recoveries. We believe that consumers often seek away from home entertainment and leisure options, even during more challenging periods due to a mix of psychological, behavioral, and economic factors. These types of experiences offer affordable escapism by providing value-oriented entertainment and a temporary escape. History suggests there is also some substitution effect whereby consumers may drain down rather than opt out, opting for local, more budget-friendly experiences instead of expensive vacations or high-end purchases. This trade-down effect can make our venues more appealing during downturns. With that, I'll turn it over to Greg Zimmerman to go into the business in greater detail.

Greg Zimmerman, Executive Vice President and CIO

Thanks, Greg. At the end of the quarter, our total investments were about $6.8 billion, covering 331 properties that are 99% leased or operated, excluding vacant properties set for sale. During the quarter, we invested $37.7 million, fully directed toward our experiential portfolio, which consists of 276 properties with 51 operators, representing 94% of our total investments, approximately $6.4 billion. This portfolio was also 99% leased or operated at quarter-end, excluding vacant properties. Our education portfolio includes 55 properties with 5 operators, all of which were 100% leased by quarter-end. Regarding coverage, the latest data is based on a trailing 12-month period ending in March. Overall portfolio coverage remained robust at 2 times, consistent with last quarter. Moving on to the operating status of our tenants, North American box office performance is rebounding. The Q1 box office reached $1.4 billion, a decrease of 11.6% compared to Q1 2024, primarily due to Snow White’s poor performance. However, we have seen a quick recovery with strong results from several films so far in Q2. As of this week, Q2 box office stands at $1.1 billion, totaling $2.5 billion year-to-date—a 17.1% increase over the same time last year. The Minecraft Movie had an impressive opening of $163 million, the largest opening of 2025 and for a video game adaptation. It has grossed $398 million to date. Similar to Barbie, Minecraft became a cultural phenomenon with audiences returning for repeat viewings. Additionally, the well-received horror film Sinners has grossed $180 million, while the faith-based film The King of Kings reached $58 million. Last week, Thunderbolts, the latest in the Marvel Cinematic Universe, opened at $74 million. With these strong early Q2 results as of early May, we are on track to meet our year-to-date box office projections. As historically seen, when there’s a steady flow of quality content, box office performance is resilient, and consumers tend to frequent theaters multiple times. Looking ahead in Q2, beyond Minecraft, 8 films are expected to gross over $100 million, including 4 anticipated to surpass $175 million: Thunderbolts, Lilo & Stitch, Mission Impossible: The Final Reckoning, and How To Train Your Dragon. The remainder of this year's slate looks promising, featuring titles like The Fantastic Four: First Steps, Superman, Jurassic World Rebirth, and Avatar: Fire and Ash. Box office gross correlates directly with the number of releases, especially major films from the 9 key Hollywood studios, which usually account for about two-thirds of North America's box office. As of May, we predict 2025 will see 78 major studio releases and 60 smaller releases compared to 64 major releases at this point in 2024. The forecasted gross for these 78 major studio films in 2025 is expected to exceed 2024’s releases by $800 million. Our outlook for the North American box office in 2025 is between $9.3 billion and $9.7 billion. An important factor in maintaining exhibitor profitability is the ongoing enhancement of food and beverage offerings. These expansions are increasing consumer spending, enhancing revenue and profitability per patron. From 2019 to 2024, ticket prices per patron have increased by about 26%, while food and beverage spending rose by around 60%. Ticket margins are approximately 46%, and food and beverage margins are around 82%. This significant rise in higher-margin food and beverage spending effectively boosts gross profit per patron, positively influencing overall profitability. Adjusting for current spending trends, we estimate that a North American box office gross of about $9.5 billion now would yield rent coverage levels similar to those achieved at an $11.3 billion box office in 2019. While box office metrics remain a key benchmark, the industry's narrative has shifted; strong per patron profitability is now crucial for supporting operator health. We believe that reaching 2019 box office levels is not essential to ensuring robust rent coverage or the financial well-being of the industry. As for updates on other major customer segments, despite ongoing pressure on operating costs and, in some cases, attendance and revenue challenges, we achieved positive results across our destination venues. Our Eastern ski areas had a solid snow year, with increased Q1 and trailing 12-month revenue and EBITDARM compared to last season. Andretti Karting is currently under construction in Kansas City, Oklahoma City, and Schaumburg, with openings planned for mid-2025 and early 2026. Our eat & play segment remains strong, and Q1 trailing 12-month revenue and EBITDARM were down compared to the same time last year, as many attractions closed during Q1. The new 100,000-square-foot Indoor Waterpark addition at the Bavarian Inn in Frankenmuth, Michigan opened in Q1. Our iconic Hotel de Glace at Valcartier celebrated its 25th anniversary with strong results. The Santa Monica Pier faced disruptions due to the Southern California wildfires, resulting in temporary closures. We're pleased with the performance of our fitness and wellness investments as well. The Springs Resort in Pagosa Springs unveiled its $90 million expansion in early April to favorable reviews, and ramp-up continues at Margarita Hot Springs Resort. Across our fitness and wellness portfolio, revenue and EBITDARM have shown growth like-for-like in the trailing 12 months up to March 2025 compared to last year. Our education portfolio remains steady, showing an increase in trailing 12-month revenue in 2024, though EBITDARM declined due to rising operating costs for one operator. Our Q1 investment spending of $37.7 million included funding for experiential projects that are closed but not yet operational. In the quarter, we acquired Diggerland USA in West Berlin, New Jersey for $14.3 million. Diggerland is the country’s only construction-themed attraction waterpark and marks our second investment with RAM, diversifying our tenant base. After the quarter, we made two additional investments. Our first event investment in the traditional box sector involved purchasing land for $1.2 million and providing $5.9 million in mortgage financing secured by improvements to Evergreen Partners, an existing private club in Georgia. We have researched traditional golf extensively and built solid relationships in this area, leading to this exciting growth opportunity. We also acquired our second Penn Stack eat & play venue in Northern Virginia for $1.6 million, with a commitment to provide built-to-suit financing up to $19 million, planning to open in 2026. Penn Stack will feature bowling, food and beverage, and redemption games. We continue to find high-quality opportunities for both acquisition and built-to-suit development in our focused experiential categories. Given our cost of capital, we will remain disciplined and fund these investments primarily from our cash reserves, operational cash flow, proceeds from disposals, and borrowing capacity under our unsecured revolving credit facility. We maintain our 2025 investment spending guidance of $200 million to $300 million. We've allocated about $148 million for experiential development and redevelopment projects that are not yet closed but planned for future investment over the next few years. We project that around $87 million of this will be used in 2025, which fits within our 2025 guidance midpoint. We're committed to our strategy of focusing our portfolio on diversified experiential assets. In Q1, we sold 10 leased early education centers, showcasing our ability to strategically monetize our education portfolio. Additionally, we sold one vacant theater, two operational theaters, and one vacant early childhood education center, resulting in net proceeds of $70.8 million, alongside a recognized gain of $9.4 million. We also received $8.1 million in net proceeds from paying off two mortgages secured by two more early childhood education centers. The education portfolio activity included the sale of a group of nine leased early childhood education centers to an investor at a 7.4% cap rate, underlining the quality and value of our education assets. For the other three operating early childhood education properties, existing purchase agreements and paid-off mortgage financing had a combined rate of about 8.3%. Over the last four years, we've sold 27 theaters, with only three vacant theaters remaining—two of which are under contract. Currently, we have no vacant early childhood education centers. As we mentioned in our year-end call, we've signed a purchase and sale agreement to sell two theater properties to a smaller operator that is currently leasing both sites, and while we can’t guarantee it, we expect this sale to be finalized by June 30. We're adjusting our 2025 disposition guidance to a range of $80 million to $120 million from a previous range of $25 million to $75 million.

Mark Peterson, Executive Vice President and CFO

Thank you, Greg. Today I will discuss our financial performance for the first quarter, provide an update on our balance sheet, and conclude with an update on our 2025 guidance. FFOs adjusted for the quarter was $1.19 per share compared to $1.13 in the prior year, reflecting an increase of over 5%. Additionally, AFFO for the quarter was $1.21 per share, up from $1.12 in the prior year, which is an increase of 8%. Before I go over the key variances, I want to highlight two gains recognized during the quarter. As Greg mentioned, we continued our efforts to reduce investments in theater and education properties and reinvest those proceeds into other experiential assets. Net proceeds from dispositions amounted to $78.9 million, with a net gain on sale of $9.4 million recognized. We also noted a net benefit for credit losses of $652,000. Both of these gains are excluded from adjusted FFOs and AFFO. Now, regarding the key variances, total revenue for the quarter reached $175 million, compared to $167.2 million in the previous year. Within total revenue, rental revenue increased by $4.1 million from last year, mainly due to the effects of investment spending and higher percentage rents. Percentage rents for the quarter were $3.3 million, up from $1.9 million in the prior year, primarily due to $1.1 million recognized from one early childhood education center tenant. The $4.1 million rise in mortgage and other financing income was attributable to more investments in mortgage notes over the past year, along with $1.8 million of participating interest income associated with ski property. I want to emphasize that both the $1.1 million in percentage rent and the $1.8 million of participating interest income were related to prior periods. Some of these amounts were under review with our customers, and we reached an agreement on these amounts during the first quarter. Later, I will explain how this affects our 2025 guidance. Other income and other expense primarily pertained to our consolidated operating properties, including the Kartrite Hotel and Indoor Waterpark and our operating theaters. As Greg mentioned, we sold two operating theaters, leaving us with four remaining. The first quarter was off-season for our two remaining unconsolidated RV park joint ventures with a carrying value of $11.4 million. Interest expense, net for the quarter went up by $1.4 million compared to last year due to an increase in borrowings from our unsecured revolving credit facility, which had no balance in the prior year. Moving to the next slide, I will review some of our key credit ratios. Our coverage ratios remain strong, with fixed charge coverage at 3.2 times and both interest and debt service coverage ratios at 3.8 times. Our net debt to adjusted EBITDAre was 5.3 times for the quarter. When adjusting this ratio to account for the annualization of investments placed in service acquired or disposed during the quarter, as well as the annual utilization of percentage rent and participating interest, along with other items, the ratio was 5.1 times at the quarter-end, which is at the lower end of our targeted range. Furthermore, our net debt to gross assets stood at 39% on a book basis at quarter-end, and our common dividend remains well-covered with an AFFO payout ratio of 71% for the first quarter. Now, let’s transition to our balance sheet, which is in excellent condition. At quarter-end, consolidated debt was at $2.8 billion, of which $2.7 billion is either fixed-rate debt or debt that has been fixed through interest rate swaps, with an overall blended coupon of about 4.4%. Our liquidity position is robust, with $20.6 million in cash available at quarter-end and $105 million drawn under our $1 billion revolving credit facility. After the quarter-end, we paid down $300 million in senior unsecured notes at maturity using available funds from our revolver. We have no other debt maturities until 2025. Our strong liquidity position offers us significant flexibility, which is especially critical in light of recent market volatility. We are raising our 2025 FFOs adjusted per share guidance to a range of $5 to $5.16, up from a range of $4.94 to $5.14, representing a 4.3% increase at the midpoint compared to the previous year. As previously discussed, due to our current cost of capital, we are limiting near-term investment spending. We are confirming our 2025 investment spending guidance of $200 million to $300 million. We are also increasing our guidance for disposition proceeds for 2025 to a range of $80 million to $120 million, up from a range of $25 million to $75 million. On the next slide, we are raising our percentage rent and participating interest income guidance to a range of $21.5 million to $25.5 million, up from a range of $18 million to $22 million. This increase is mainly due to the $2.9 million in prior period income recognized in the first quarter, along with additional amounts anticipated for the current year. We are raising our G&A expense guidance to a range of $53 million to $56 million, up from a range of $52 million to $55 million, with the primary increase at the midpoint being related to non-cash stock grant amortization. We are confirming our guidance for our consolidated operating properties, providing a range for other income and other expense. One last note regarding our FFOs adjusted per share guidance: since our anticipated percentage rents and participating interest income are weighted toward the second half of the year, as well as the performance of our operating properties due to seasonality, we expect FFOs adjusted per share to be significantly higher in the second half compared to the first half. Detailed guidance can be found on Page 23 of our supplemental materials. Lastly, we are pleased to announce that we have increased our monthly common dividend by 3.5% to $354 per share annualized, beginning with the dividend payable on April 15 to shareholders of record as of March 31. We expect our 2025 dividend to be well-covered with an AFFO per share payout remaining around 70% based on the midpoint of guidance. With that, I'll turn it back over to Greg for his closing remarks.

Greg Silvers, Chairman and CEO

Thanks, Mark. As today's results indicate, our portfolio of experiential properties continues to deliver quality results. I also wanted to comment on recent announcements about possible tariffs impacting the film industry. At this point, there is significant uncertainty about the viability, scope and timing to implement such a proposal. However, both sides of the Bay have a stated objective of producing a robust slate of films that drive a successful film exhibition industry. We will closely monitor these developments but we take comfort at the entire 2025 slate, and most, if not all, of the 2026 slate is already in post-production which we believe should limit any near-term impact. With that, why don't I open it up for questions. Alice?

Anthony Paolone, Analyst

My first question is about the golf investment. Can you provide more details about the yields and deal structure? Also, could you share information about the first transaction, such as the equity involved, the operator, and their experience?

Greg Silvers, Chairman and CEO

I think and then I’ll let Greg Zimmerman add onto this. I think what we’ve done is done a deep dive on this, Tony, and there are nearly 2,000 courses across the U.S. that have been eliminated over the last 5 years. So there clearly is a scarcity that has been introduced into it. This that we're involved in is a private club, so the actual membership and fees and everything tied to the land are run with the home ownership. So we think it's a very, very solid and reliable income flow. But we also think there are good opportunities that are going to continue to develop in this scarce environment. But, Greg?

Greg Zimmerman, Executive Vice President and CIO

Yes, Tony. I would say this is a private club, we're also monitoring daily feed growth which we would have an interest in as well. I think the deal structure we will see is flexible like our traditional deal structures; we’ll either approach this as a sales leaseback. Well, in this case, it was mortgage financing. The operator is a growing operator; they have a couple of clubs, and a deep bench of talent; so we believe this is an opportunity to grow them. And lastly, I will say, as we always do, we spent a lot of time over the last 5 years understanding the industry and developing deep roots. I think as we’ve said repeatedly over the last year or so, we really believe in fitness and wellness as a growth opportunity in this portfolio, and that helps us round out our confidence.

Anthony Paolone, Analyst

Thank you for that. My second question is a two-part question regarding dispositions. First, I would like to understand the types of buyers you are encountering. It appears there was effective portfolio management with the early childhood education sale. Secondly, I am curious about the guidance you provided regarding the approximately $40 million in mortgage receivables due later this year. Will you be expecting repayment on those, or might they be extended? How does this factor into the disposition guidance or what is the expected outcome?

Greg Silvers, Chairman and CEO

I would say that it was a strong process with multiple bids and buyers involved, and the quality of buyers was good. This transaction involved a private fund that specializes in education. I think Greg would mention that currently for our sales, we have at least two or three strong bids for our assets, which is encouraging. Regarding the repayment of the mortgages, I believe we have one included, but maybe Mark can provide more insight.

Mark Peterson, Executive Vice President and CFO

Yes. There were 2 mortgages, as you say, mature. I think we gave the guidance that more than a $10.75 million number that we have under our guidance. The other one, we'll see what happens when more likely it gets extended.

Bennett Rose, Analyst

I wanted to ask you just two questions. One, I'm sure you saw that Six Flags is closing their Hurricane Harbor, Annapolis, and apparently doing kind of a strategic review of a number of their properties. Just wondering if they are communicating with you about any of your Hurricane Harbor properties or kind of what coverage looks like there?

Greg Silvers, Chairman and CEO

Again, I would say, clearly, we’re in contact with Six Flags all the time as a good tenant. We don’t anticipate any of our properties closing. And I think as it develops, that will show you that they’ve got a higher and better use for that property and will generate substantial value associated with it.

Bennett Rose, Analyst

Okay. And then I was just wondering, I used the credit line to pay down the bonds that were coming due. Would you expect to do kind of a term that out later this year? Or maybe you could just talk a little bit about how you’re thinking about that.

Mark Peterson, Executive Vice President and CFO

Yes, we have some flexibility regarding that. We have $105 million on our credit line and paid off the debt after year-end, which brought us to around $400 million available. When considering investment spending and cash flows for the rest of the year, we're looking at a net increase of about $100 million. The positive aspect is that if we take no action, we're only about halfway drawn on the line. In our guidance, we do plan to conduct a bond transaction. If we were to execute a $400 million transaction, we'd be down to about $100 million by year-end. So the good news is we have flexibility in this situation; we're keeping an eye on the market in both the 5-year and 10-year areas, but we are likely to move forward with a bond transaction. We're also looking into sale transactions.

Bennett Rose, Analyst

Our first question will come from RJ Milligan with Raymond James.

RJ Milligan, Analyst

Sorry about that. Dispositions in the quarter, a little bit more than expected. And so I think on a standalone basis that would lead to a decrease in guidance, but guidance was up. And, Mark, you touched on this in your comments, but I’m just curious if you could maybe quantify some of the components. Obviously, higher percentage rent but what else is going in there? And then the second part to that question is, as we think about the $5.08 at the midpoint for the year, how much of that is sort of non-recurring or one-time collections that we should strip out for a run rate for 2026?

Mark Peterson, Executive Vice President and CFO

Let me explain that. We had a midpoint of $5.04. We raised our percentage rent guidance at the midpoint by $3.5 million, which is about 4.5%. Of that, approximately $2.9 million to $3.5 million was from prior periods, meaning that roughly 3.5% of the 4.5% increase in percentage rents came from there. On the other hand, we increased general and administrative expenses by about $0.01. For the two explicit items, this brings us to around $5.07. As for the other two items, there's an estimated $0.02 impact from the additional dispositions. From a GAAP standpoint, those average about $0.05, although our cash basis is significantly lower. So, with $0.02 from the dispositions and $0.25 reduction in interest expense, which is partly due to delaying the timing of our bond offering, we end with the $5.04. The two explicit items lead to $5.07, along with a net impact of roughly another $0.01, factoring in the lower interest expense positively and the negative impact from the incremental dispositions. I view it as negative from an earnings perspective, but it was certainly a positive for portfolio management.

Unidentified Analyst, Analyst

And then just the follow-up to that is in the $5.08 number, how much of it is prior period rent collections that we should think about pulling out for a run rate for 2026?

Mark Peterson, Executive Vice President and CFO

Right. Really, it’s just that percentage rents $2.9 million; we don’t have any auto period deferral collections in this quarter nor do we plan any in our guidance. So it’s really through the first quarter, the expectation for the year right now is just the $2.9 million this prior period. So that’s about $3.05.

Unidentified Analyst, Analyst

Okay, that's helpful. Thank you for that. The stock has performed well so far this year. Clearly, you have been funding yourselves through asset sales and free cash flow. At what stock price do you plan to become more aggressive about issuing equity to boost investment activities?

Greg Silvers, Chairman and CEO

Again, it's Greg. It's really about accretive growth. It's a function of the spread you can achieve and where you can issue. I credit the team here; we are delivering at the top end of sector growth without needing to issue equity. As opportunities arise, we will evaluate them. From an absolute standpoint, as we approach an 11 multiple, it becomes much more interesting. We've discussed the depth of our opportunities. However, driving 4% growth with a 7% dividend and delivering 11% total shareholder return, with minimal execution risk and no capital markets, should be very appealing to investors. We aim to demonstrate our ability to execute further.

Unidentified Analyst, Analyst

Can you just provide some color on the investment pipeline and the types of opportunities in the market?

Greg Silvers, Chairman and CEO

Yes. I'll let Greg elaborate on this. Overall, we're trying to leverage our depth and breadth. As we've discussed previously, we are looking at opportunities that can lead to future growth. For instance, in golf, we've signed agreements that we hope will pave the way for expansion moving forward. Greg and his team excel not only at identifying deals but also in building a steady pipeline of opportunities while supporting our current tenants.

Greg Zimmerman, Executive Vice President and CIO

Yes. And to follow up on a couple of things there, Justin. If you look at the depth and breadth, I mean we’ve announced deals in eat & play attractions and fitness and wellness this year. To Greg’s point, on the golf deal, we have a forward commitment for funding. Our Penn Stack deal is our second with this operator, and our IAM deal is our second with that operator. So that’s the way we like to grow the business. As I’ve said and I mentioned earlier on the call, I think we see a lot of opportunities in the fitness and wellness space which we broadly define and includes our Hot Springs Resorts and now golf. So I would say we’re seeing opportunities in all of our sectors, probably not so much in gaming right now but all the other verticals, a lot of opportunities.

Unidentified Analyst, Analyst

And then last one for me. Can you just expand on the current macro environment and how that could impact your underlying tenant base? And then, any impacts on future investment activity?

Greg Silvers, Chairman and CEO

Again, as we kind of laid out, there’s actually, notwithstanding the label of consumer discretionary, there’s a lot of resilience in what we think is affordable entertainment and leisure options. It will ebb and flow within, like what we said. Eat & play was down a little, ski was up, theaters are up 17% year-to-date. So, again, those things will ebb and flow, but people don’t give up fun. And we’ve continued to see that kind of resilience both in the current environment as we look back through history. And we’ll continue to be mindful of what we think are those value-oriented drive-to-destinations that demonstrate that kind of resilience and continue to deploy capital in a way that we think creates high quality and resilient cash flow streams that support rising dividends.

Greg Zimmerman, Executive Vice President and CIO

Greg, I would also add. One of our strong thesis is in the fitness and wellness space is that that’s the change in culture and that people are going to want to continue to spend money in those spaces despite the economic conditions. And, again, we’re seeing that in our fitness and wellness portfolio.

Unidentified Analyst, Analyst

My first, AMC on their earnings call said they expect 2026 box office to surpass 2025. So is that consistent with the conversations that you’re having with others? And does that at all influence how you’re thinking about theaters in the longer term?

Greg Silvers, Chairman and CEO

I think that is consistent that we think it’s really driven by the content and the slate of movies, and that’s kind of where everybody starts that and the slate continues to get deeper. I don’t think it changes our perspective on theaters; we have continued to say that we want to lower that level of concentration and increase our diversity. Probably what it does is it creates better opportunities to execute on that strategy. But listen, it continues to improve the health and sustainability of the environment. If you look at someone like Cinemark, they are now trading back at levels pre-2019. So, again, we’re very, very excited about kind of that continuing involvement of the box office. And as we’ve said on the slide that we presented, the mix has changed and we now have with food and beverage, even at $9.5 billion which is kind of the midpoint of what we’re talking about this year, kind of the EBITDAR contributions should be at or near back to box office levels that were $11.3 billion. So we’re really excited about where the direction would go.

Greg Zimmerman, Executive Vice President and CIO

Just to add to that, you know, that should increase our real percentage rent that goes through July. So we’ve got a nice momentum this year and expect an increase given the box office improvement expected for the following year. And keep in mind, we also have the other half of the AMC bump. So I think we have good results forecast over this year, and that momentum continues into next year.

Unidentified Analyst, Analyst

Got it. Thank you. That’s helpful. And then my second question, you discussed the tariff and inflation resistance of the existing experiential portfolio. But I was wondering, maybe a little bit more on tariffs. How are you thinking about the possible impact to your development pipeline? Has the tone of negotiation shifted at all following April 2? Are there any concerns for things like projects getting delayed or paused at all or anything like that?

Greg Silvers, Chairman and CEO

That's an excellent point. Clearly, there are ongoing discussions about build-to-suit projects. Currently, everything we have is priced under GMP, meaning pricing was determined before the tariffs took effect. Moving forward, it's certain that these issues will be considered. Based on our current forecast, we feel optimistic because we have secured pricing. However, we anticipate that topics like lumber and steel will come into play as we progress, and we’ll have to monitor how this unfolds. For now, we are satisfied with our situation and will assess any impacts as we advance.

Unidentified Analyst, Analyst

I think there was some previous commentary by an industry group, in the theater industry, about a significant amount of capital spend, several billion dollars of capital spend plan for theater upgrades. And I’m curious if that process is underway and you think there could be any disruption given what’s happening in the macro.

Greg Silvers, Chairman and CEO

The process is already underway and we’re seeing it impact some of our properties. It involves expansions into large format, IMAX, new seating, and similar enhancements. We don’t anticipate any negative effects from that, nor have we noticed significant impacts from tariffs since most of those commitments have already been ordered and scheduled for the future. So far, I haven't seen any delays related to that. Greg?

Greg Zimmerman, Executive Vice President and CIO

No. And Mitch, I would say even though it’s a big number they announced, it’s per house a relatively limited impact; so it doesn’t take that long to make these conversions and they’re all economically beneficial. So we’re very supportive of that.

Unidentified Analyst, Analyst

Great. That’s helpful. I hope I didn’t miss it, Mark. Was there anything specific that drove the percentage rent activity in the first quarter?

Mark Peterson, Executive Vice President and CFO

Yes. We recorded $2.9 million in prior period percentage rents that affected our percentage of rents and interest. Additionally, there were some new percentage rents. We raised our guidance by $3.5 million, primarily due to events in Q1. The percentage rents and percentage interest impact two different line items; percentage rent contributes to rental income while percentage interest contributes to mortgage and financing income, which accounts for the significant difference.

Upal Rana, Analyst

Greg, maybe you can talk about the strength of the consumers today and if you’re seeing any impact on consumer spend, at least in the near-term. The longer term chart that you provided was helpful, but just curious what you’re seeing today as it relates to consumer spend and behavior. Thanks.

Greg Silvers, Chairman and CEO

I think the situation is quite resilient. We are noticing areas of strength alongside areas of weakness. If there's one trend emerging, it's related to spending on food. While people engage in activities, they're not spending as much on food when it comes to eat and play. This aligns with what we've observed historically. Fitness and wellness are performing well, while eat and play is slightly down. This is the advantage of having a diversified portfolio in the experiential sector, which has remained stable. However, there may be significant pressure at the lower end of the consumer market. In the lower middle to middle segments, we still see strong support. Our tenants confirm this when we speak with them. The important factor here is that as long as employment remains stable, people will continue to seek out these experiential opportunities in their daily lives, and we have no reason to believe that this will change.

Greg Zimmerman, Executive Vice President and CIO

I think probably the best metric is we’ve had 5 straight weeks of $100 million or more at the box office, including 2 weeks of over $200 million; so people are still spending. And as we mentioned, both Cinemark and AMC reported in the past week, and they have per caps of around $8 that are holding steady through the first quarter. So, that’s a real-time indicator that things aren’t so bad.

Mark Peterson, Executive Vice President and CFO

And the other metric I’d point to is the fact that we’re 2 times covered across the portfolio. That’s higher than 1.9 times pre-COVID. So we’re still tracking on a trailing 12-month basis higher than pre-COVID.

Unidentified Analyst, Analyst

Thank you. That was helpful. The box office has started off strong in Q2, and there’s some expectation that we could exceed $4 billion this summer. This has only occurred once since the pandemic, thanks to films like Barbie and Oppenheimer. I'm interested in your thoughts on how the box office might trend as we move into summer and into the second half of the year.

Greg Silvers, Chairman and CEO

Yes, currently, our analysis is built from the ground up. I can confidently say that we are not great at predicting individual movie performances. For instance, no one here expected Minecraft to generate $400 million this weekend. However, the overall selection and volume of titles appear promising. For example, Lilo & Stitch is currently trending higher in presales than Minecraft. It seems we have a strong possibility of achieving an all-time Memorial Day weekend record with the releases of Mission Impossible and Lilo & Stitch, potentially exceeding $200 million together. When we have a consistent stream of releases, as we've mentioned before, it's not just about individual films, but the accumulation of movies week after week that encourages audiences to develop a habit of going to the theater and watching previews. We are starting to see that momentum again. Looking at Greg's comments, with eight films expected to earn over $100 million in the upcoming months, we're set to have major hits every weekend. This kind of performance definitely heightens the excitement for the summer and beyond.

Greg Zimmerman, Executive Vice President and CIO

And then the second half of the year, pardon me, looks really strong with franchises; Fantastic Four, Superman, Jurassic World, Avatar ending out the year.

Greg Silvers, Chairman and CEO

We have the second half of Wicked coming up, along with many other promising titles. It’s a great mix; we’re getting back into that. There's Mission Impossible, Lilo & Stitch, which appeals to 18 to 24-year-old males while also attracting families. With this type of strong content and a steady stream of high-quality films, we anticipate good box office performance.

Operator, Operator

Our next question will come from Spencer with Green Street.

Spencer, Analyst

Well, just one for me. As you look across your various investment opportunities as you continue recycling capital, have you noticed changes to bid-ask spreads or cap rate movements in any of the sectors you’re underwriting?

Greg Silvers, Chairman and CEO

Not big movements. I mean, again, we’ve consistently said we’re comfortably in the 8s; that’s kind of stayed there. And now, again, I would say Spencer, when you look at quality variations, may move that a little bit but not a lot of changes in the bid-ask spread. Greg?

Greg Zimmerman, Executive Vice President and CIO

No. I think that’s accurate.

Operator, Operator

Our last question will come from Yani with Bank of America Merrill Lynch.

Yani, Analyst

Just a quick follow-up on the $2.9 million percentage rent and participating interest true-up in the first quarter. Just wanted to clarify, is that completely retroactive? Or you mentioned some type of agreements; just curious if that impacts level of percentage rents or participations going forward.

Mark Peterson, Executive Vice President and CFO

Yes. As I mentioned, we are providing guidance of $3.5 million. The $2.9 million is from the prior period. This indicates an additional impact on current year percentage rents from those tenants and borrowers, as well as a consideration of the overall mix. There are two components to this: a significant portion relates to the prior period, but there is also a current year factor involved.

Greg Silvers, Chairman and CEO

And I’ll jump in and add on that. Again, credit to our asset management staff who are kind of constantly evaluating these and this related to kind of discussions with these tenants and how they were calculating versus how we were calculating. It resolved favorably to our interpretation; so not only does it impact prior periods but it’s going to benefit us as we go forward as well.

Operator, Operator

There are no more questions. So I will now turn the call back over to Greg Silvers for any closing remarks.

Greg Silvers, Chairman and CEO

I just want to thank everyone. I appreciate the opportunity to spend time with you and we look forward to seeing you at NAREIT in June. Thanks, everyone.