Earnings Call Transcript - EPR Q3 2025

Operator, Operator

Welcome to EPR Properties Q3 2025 Earnings Call. This conference call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Brian Moriarty, Senior Vice President of Corporate Communications.

Brian Moriarty, Senior Vice President of Corporate Communications

Thank you, Sophie. Thanks for joining us today for our Third 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, intend, continue, believe, may, expect, hope, anticipate or other such 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 is 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.

Gregory Silvers, Chairman and CEO

Thank you, Brian. Good morning, everyone, and welcome to our third quarter 2025 earnings call and webcast. The third quarter marked another period of steady progress as we continue to position the company for accelerated growth and expansion. We are pleased to report a 5.4% increase in FFO as adjusted per share versus the same quarter last year and an increase at the midpoint in our FFO as adjusted guidance for the current year. Our disciplined deployment strategy is enabling us to expand our portfolio of experiential properties. Our team is leveraging both existing relationships and new partnerships, and we have a pipeline of investments that are actionable over the next 90 to 120 days. However, given the fluidity of timing, we felt it prudent to not raise investment spending guidance at this time. Larger opportunities are now accessible, and we're moving decisively to capture them as we look towards 2026. During the quarter, we also made continued progress on our strategic capital recycling program. This program has largely been focused on planned noncore theater and opportunistic education dispositions with targeted reinvestment in growth experiential sectors. Our work here has materially strengthened our portfolio and provided for accretive reinvestments. Turning to our portfolio and industry health. Our third quarter consolidated coverage remained strong at 2.0, reflecting continued portfolio stability. At the box office, we anticipate a robust fourth quarter and expect 2025 to set a new post-COVID high. The continued recovery of the box office has led to a significant increase in percentage rent from our Regal lease. We believe this percentage rent feature has strong upside in the future as we anticipate continued growth at the box office. We continue to be pleased with the resilience that our tenants have exhibited as consumers prioritize experiences. At the same time, to mitigate potential economic pressures on consumers, many of our tenants have launched new initiatives. These include annual pass programs with bundled discounts, dynamic daypart pricing, and group discount offerings. We are also seeing widespread adoption of enhanced technology across our tenant base, which has the potential to both improve the customer experience and create greater efficiencies. I'd also like to remind everyone that we've successfully navigated many economic cycles over the past 25 years. During this time, we've witnessed the importance and resilience of congregate value-oriented entertainment and leisure in the daily lives of consumers. Lastly, I would like to comment on the status of the proposed transaction involving the sale of our Catskills Land affiliated with the Resorts World Gaming property. We've been advised that the bond transaction, which we understand will be used to fund the exercise of the purchase option, will be delayed pending the recently announced proposed merger among Genting gaming entities. While our tenant has indicated their desire to complete a bond transaction and option exercise in 2026, the timing and outcome of such a transaction remains uncertain. Regardless of whether the option is exercised, our strong balance sheet and clear visibility into future opportunities position us to materially accelerate investment spending in 2026. Now I'll turn it over to Greg Zimmerman to go over the business in greater detail.

Gregory Zimmerman, Executive Vice President and CIO

Thanks, Greg. At the end of the quarter, our total investments reached about $6.9 billion, covering 330 properties that are 99% leased or operated. During the quarter, we spent $54.5 million on investments, entirely within our experiential portfolio. This portfolio includes 275 properties with 53 operators and makes up 94% of our total investments, roughly $6.5 billion, also 99% leased or operated. Our education portfolio consists of 55 properties with 5 operators, all 100% leased at the quarter's end. In terms of coverage, based on data from the June trailing 12 months, our overall portfolio shows a strong coverage at 2x. Regarding our tenants’ operating status, the Q3 box office reached $2.4 billion, a decrease from $2.7 billion in Q3 2024. Seven films grossed over $100 million, led by Superman, Jurassic World: Rebirth, and Fantastic Four: First Steps. The comparison for Q3 2025 was challenging since Q3 2024 was boosted by hits like Deadpool & Wolverine, Despicable Me, Twisters, and Beetlejuice. The fourth quarter is set to feature three films expected to earn over $200 million: Zootopia 2, Wicked: For Good, and Avatar: Fire & Ash. The box office for the first three quarters totaled $6.5 billion, marking a 4% increase from the same period in 2024. We estimate the North American box office for the full year 2025 to be between $9 billion and $9.2 billion, indicating about a 6% rise at the midpoint compared to 2024. Moving on to updates about our major customer groups, Andretti Karting had a successful launch in Oklahoma City in mid-July. The Kansas City location will open in mid-November, while Schaumburg, Illinois is slated for the second quarter of 2026. A second Pinstack in Northern Virginia is also expected to open in Q2. Despite overall consumer pressures, our Eat & Play coverage remains robust and above pre-COVID levels, with metrics stable compared to Q3 2024. We saw an increase in EBITDARM across our attractions portfolio, driven by strong performance in our Canadian assets and at Enchanted Forest Water Safari. We remain positive about the potential in the hot springs sector and are pleased with the performance of our three hot springs investments. Attendance growth and the $90 million expansion at the Springs Resort in Pagosa Springs have led to increased EBITDARM and revenue year-over-year. Iron Mountain Hot Springs and Murietta Hot Springs Resort are also experiencing growth in attendance and revenue. Due to Iron Mountain's strong performance, we provided $18.25 million in accordion financing, reflecting our cautious acquisition underwriting practices. Our thesis indicates that this asset will continue to grow and exceed expectations. We collaborated with our operator to incorporate an accordion feature allowing additional investments once predetermined metrics are met. The expansion of our Jellystone Kozy Rest RV Resort near Pittsburgh has contributed to the overall growth of our experiential lodging portfolio, leading to increases in EBITDARM and revenue in Q3 versus Q3 2024. Our ski properties saw revenue growth during the summer months, though it's too early to gauge the upcoming ski season. Our education portfolio is performing well, with trailing 12-month revenue for Q2 remaining flat, though EBITDARM has declined due to rising expenses. In Q3, we invested $54.5 million entirely in experiential assets, which includes funding for projects that have closed but are not yet operational. Our total investment spending year-to-date is $140.8 million. This quarter, in addition to the $18.25 million accordion funding for Iron Mountain, we made our first investment in the high-end Canadian fitness firm, Altea Active, with approximately $20 million in mortgage financing for their club in Winnipeg, Manitoba. We are excited to establish a relationship with one of Canada’s top fitness operators and support Altea in their expansion. We plan to continue increasing our investment spending in the upcoming quarters, as we observe high-quality opportunities in both acquisitions and build-to-suit development within our target experiential categories. As Greg mentioned, our disciplined deployment strategy has allowed us to enhance the variety of our experiential property portfolio. We remain enthusiastic about the fitness and wellness sector, supported by our strong relationships, the growing interest in these areas across various generations and demographics, and a diverse range of investment opportunities from hot springs to spas to fitness. Our investment spending this quarter highlights these fruitful connections and high-quality prospects. As we near year-end, we are refining our investment spending guidance for 2025 from a previous range of $200 million to $300 million down to $225 million to $275 million. We have already committed over $100 million for experiential development and redevelopment projects that are closed but not yet funded, which we expect to deploy over the next 15 months. Approximately $25 million of this is anticipated for deployment in Q4, fitting within the midpoint of our 2025 guidance range. Our team is using both existing and new partnerships to develop a pipeline of actionable investments over the next 90 to 120 days. Since some may extend into 2026, we felt it was premature to raise investment guidance at this time. Looking ahead to 2026, we are identifying larger opportunities and aim to seize them swiftly. We mentioned in our Q2 call that we sold our last vacant AMC theater in Hamilton, New Jersey, to the Children's Hospital of Philadelphia early in Q3, along with a vacant parcel. The total net proceeds from these sales were about $19.3 million, contributing a combined gain of approximately $4.6 million. Over the past four years, we have sold 31 theaters and have one remaining vacant theater. After the quarter ended, we received about $18 million in a mortgage paydown from Gravity Haus following their asset sale in Steamboat Springs. By the end of Q3, we had sold roughly $133.8 million in assets. We are raising our 2025 disposition guidance to a range of $150 million to $160 million from the previous range of $130 million to $145 million. Now, I’ll hand it over to Mark for a discussion about the financials.

Mark Peterson, Executive Vice President and CFO

Thank you, Greg. Today, I will discuss our financial performance for the third quarter, provide an update on our balance sheet, and close with an update on 2025 guidance. FFO as adjusted for the quarter was $1.37 per share versus $1.30 in the prior year, an increase of 5.4%, and AFFO for the quarter was $1.39 per share compared to $1.29 in the prior year, an increase of 7.8%. Before I walk through the key variances, I want to explain two offsetting items excluded from FFO as adjusted and AFFO. First, regarding dispositions for the quarter, net proceeds totaled $19.3 million. We recognized a net gain on sale of $4.6 million. Also included in the gain on sale for the quarter was a $3.5 million gain related to the exercise of an early termination option of a ground lease. Second, provision for credit losses net was $9.1 million for the quarter, and related to fully reserving one mortgage note receivable for $6 million related to our only investment with one small borrower, and changes in our estimated current expected credit losses, mostly due to macroeconomic conditions. Now moving to the key variances. Total revenue for the quarter was $182.3 million versus $180.5 million in the prior year. Within total revenue, rental revenue increased $6.2 million versus the prior year, mostly due to the impact of investment spending, rent bumps, and higher percentage rents. Percentage rents for the quarter were $7 million versus $5.9 million in the prior year, and the increase was due primarily to higher percentage rent recognized from one of our theater tenants, offset by lower percentage rents recognized from our attraction properties. Both other income and other expense related primarily to our consolidated operating properties, including The Kartrite Hotel and Indoor Water Park and our four operating theaters. The decrease in other income and other expense versus the prior year is due primarily to the sale of three operating theater properties in the first half of this year. On the expense side, G&A expense for the quarter increased to $14 million versus $11.9 million in the prior year, due primarily to higher estimated incentive pay, including noncash share-based compensation expense. Interest expense net for the quarter increased by $371,000 compared to the previous year, due primarily to an increase in our weighted average interest rate on outstanding debt due to additional borrowing on our unsecured revolving credit facility to pay off lower-rate senior unsecured notes at their maturity last quarter. Equity and income from joint ventures for the quarter was $2.9 million compared to a loss of $851,000 in the prior year. This increase is due to our decision to exit our joint ventures in Broadridge, Louisiana and St. Pete, Florida in late 2024, as well as better performance at our two RV Park joint ventures. FFO as adjusted for the nine months ended September 30 was $3.81 per share compared to $3.64 in the prior year, an increase of 4.7%, and AFFO for the same period was $3.83 per share compared to $3.61 in the prior year, an increase of 6.1%. Turning to the next slide, I read some of the company's key credit ratios. As you can see, our coverage ratios continue to be very strong with fixed charge coverage at 3.6x in both interest and debt service coverage ratios at 4.2x. Our net debt to annualized adjusted EBITDAre was 4.9x at quarter end, which is below the low end of our targeted range. Additionally, our net debt to gross assets was 38% on a booked basis at quarter end, and our common dividend continues to be very well covered with an AFFO payout ratio of 64% for the third quarter. Now let's move to our balance sheet, which is in great shape to support our expected growth. At quarter end, we had consolidated debt of $2.8 billion, of which $2.4 billion is either fixed-rate debt or debt that has been fixed through interest rate swaps with an overall blended coupon of approximately 4.3%. During the quarter, we amended our unsecured revolving credit facility agreement to remove the SOFR index adjustment, which decreased our all-in interest rate by 10 basis points. Our liquidity position remains strong with $13.7 million cash on hand at quarter end and $379 million drawn on our $1 billion revolver. While our leverage is below the low end of our range and our 2025 guidance continues to have no equity issuance assumed, we plan to finalize our new ATM program in Q4. We currently have a direct share purchase plan in place for equity issuance, but the ATM program will provide us with an additional tool in our toolbox for raising such capital. We are increasing our 2025 FFO as adjusted per share guidance to a range of $5.05 to $5.13 from a range of $5 to $5.16, representing an increase over the prior year of 4.5% at the midpoint. Please note that as in prior years, our fourth quarter FFO as adjusted per share is expected to be lower than our third quarter primarily due to the seasonality related to The Kartrite Hotel and Indoor Water Park and our joint venture RV properties. We're also narrowing our 2025 investment spending guidance to a range of $225 million to $275 million from a range of $200 million to $300 million. We are increasing guidance for disposition proceeds for 2025 to a range of $150 million to $160 million from a range of $130 million to $145 million. On the next slide, we are narrowing our percentage rent and participating interest income to a range of $22.5 million to $24.5 million from a range of $21.5 million to $25.5 million, and raising the low end of our estimate for G&A expense to a range of $54 million to $56 million from a range of $53 million to $56 million. We are also updating the guidance for our consolidated operating properties, which is provided by giving a range for other income and other expense. Guidance details can be found on Page 23 of our supplement.

Gregory Silvers, Chairman and CEO

Thank you, Mark. As our results demonstrate, our portfolio continues to be strong and resilient. We have executed on a very aggressive capital recycling plan this year with our guidance implying over $150 million of sales. Notwithstanding this capital recycling, we are projecting to deliver over 4.5% growth in FFO as adjusted. As a result of this recycling and cash flow generation, we have positioned ourselves to materially accelerate our capital deployment in 2026. We are very pleased and excited as we bring 2025 to an end and look forward to 2026. With that, why don't I open it up for questions? Sophie?

Operator, Operator

We'll take our first question from Smedes Rose from Citi.

Bennett Rose, Analyst

I wanted to ask more about the credit losses you're reserving for. You mentioned a $6 million mortgage note and some changes in expectations related to the broader macro economy. Could you elaborate on that a bit more and provide any additional details about what happens with the underlying property?

Gregory Silvers, Chairman and CEO

Sure, Smedes. First of all, it's a small tenant and we will see how they continue to perform. We thought it was wise to reserve for that. If necessary, we have related assets that we can consider taking control of and selling. The bigger macro issue is related to CECL and how that works, as there are many factors involved. Mark, perhaps you can provide more details on that.

Mark Peterson, Executive Vice President and CFO

Yes. So there are macroeconomic indicators that go into that. That can move up and down as it does every quarter, sometimes positive, sometimes negative. So really, I think just the outsized number this quarter was really the $6 million note that, as Greg said, that we determined we needed to reserve. Again, it's the only investment we have with that small tenant.

Bennett Rose, Analyst

Okay. And then, I just wanted to ask you, too, you've talked a little bit about accelerating acquisition volumes in 2026. Could you maybe just put some sort of scope around that in terms of where you think volume could go and let's putting aside the whole Genting thing for a minute, but if you wanted to stay leverage-neutral for '26?

Gregory Silvers, Chairman and CEO

I believe that's the key question. It's important to clarify that Genting was never a necessity for us in this acceleration plan. We have significantly reduced our leverage to the lower end of our leverage range. Considering our target leverage of approximately 5.3 and our cash flow generation, we are confident that we can reach the $400 million to $500 million range without needing additional capital recycling. Therefore, our ability to achieve those levels is not dependent on Genting or any transaction related to that property. Thus, the notion that we require this to reach those levels is incorrect. But Mark, would you like to elaborate?

Mark Peterson, Executive Vice President and CFO

Yes. And just to add to that, if you just do the math, forget Genting, do the math on, say, $500 million of investment spending when you utilize our cash flow, a little bit of disposition kind of do the math. You end up still probably below the midpoint of our targeted leverage range, again, because we're beginning so low at about 5x. So we'll be below 5.3 if you just do the math. The Genting thing purely becomes an opportunity to delever our balance sheet by about 0.3 turns if you do the math on that. So again, as Greg said, we view Genting as an opportunity, not an overhang, not necessary to execute our plan, but would provide us additional dry powder, but again, not necessary to execute our plan next year to grow significantly.

Operator, Operator

We'll take our next question from Kathryn Graves with UBS.

Kathryn Graves, Analyst

My first, I'm wondering if you could just provide some capital on the duration of the mortgage financing investment with Altea Active? And then, maybe just talk a bit about how that kind of investment fits within your larger array of investments that you have available to you?

Gregory Silvers, Chairman and CEO

Sure. Greg, do you want to...

Gregory Zimmerman, Executive Vice President and CIO

Yes. So it's structured as a mortgage mostly because of implications of Canadian currency, et cetera. And the idea is to provide growth capital for Altea as they grow their business. It's structured as, I believe, a 20-year mortgage. So long-term mortgage, not short-term financing, and we expect to be in a long-term partnership with Altea.

Gregory Silvers, Chairman and CEO

I agree with what Greg mentioned. In Canada, we've observed that mortgage structures can offer a more efficient setup for tax purposes. We've embraced this concept, but I want to clarify that the mortgage is more akin to a synthetic mortgage; it operates similarly to a synthetic lease.

Kathryn Graves, Analyst

Got it. That's helpful. And then my second question, several of your more retail-focused peers have reported seeing increased competition for deals from private players, family offices, et cetera. I'm wondering if you've also seen any of this competition in your acquisition landscape or whether your asset class and sort of the uniqueness of it may help buffer from some of that competition. And then has that also allowed cap rates to kind of stay where they are? Have you seen some compression more recently in your current pipeline?

Gregory Silvers, Chairman and CEO

I’ll let Greg add his thoughts. However, I believe there is competition present. It's not as prevalent as in the retail sector, but there has been an increase in deal flow, which is beginning to work in our favor. Additionally, I think cap rates have remained fairly stable.

Gregory Zimmerman, Executive Vice President and CIO

Yes. I think cap rates are stable, for sure. And again, we'll run into all those kinds of investors in larger deals. But as we say repeatedly, we've got a pretty granular approach, our team is out all over the country in Canada, looking for deals. So that's how we're able to find great assets like Altea Active and some of our Hot Springs resorts. So I think we're pretty comfortable that in that space, we've got a very nice run rate, and as we increase our ability to participate in larger ticket deals, we'll probably run into more of the competitors' change.

Operator, Operator

We'll take our next question from Upal Rana with KeyBanc Capital Markets.

Upal Rana, Analyst

Could you touch on the larger investment opportunities that you're seeing in the market today?

Gregory Silvers, Chairman and CEO

Well, without disclosing any specifics, I think it's pretty broad-based. I think we're seeing nice large opportunities in several of our verticals, so it's not limited to one area. And like I said, we think of those as over $100 million and over. And I think there's probably somewhere between 3% and 5% in the market right now. So I think it's, again, somewhat of a change from what we've seen from the first half of the year, no doubt. So it's both exciting. And as we talked about in the spaces that we play, we're very much known to all the players. And so we're seeing all these deals, and we're excited about the opportunity set.

Upal Rana, Analyst

Okay. Great. That was helpful. And then I appreciate the ATM program status update you provided. Could you provide some color on your strategy and how you plan to issue equity in terms of what your pricing is and when?

Mark Peterson, Executive Vice President and CFO

Yes. As we mentioned, we're not relying on equity for next year's plan. With just debt financing and our free cash flow, we would be under the midpoint of our range. That said, we might consider raising equity opportunistically. The price would need to be at a level that makes sense, allowing us to reduce our debt further and have more resources available. Our ATM program will enable us to achieve this effectively. Currently, we have a direct share purchase plan in place, and we can also issue stock gradually, but we are optimistic about the ATM program and the ability to engage in forward-type deals. However, this is entirely dependent on market conditions, which are favorable for us right now, and it wouldn't be wise to issue equity to decrease our leverage.

Operator, Operator

Our last question comes from Jana Galan with Bank of America Merrill Lynch.

Jana Galan, Analyst

Thank you for quantifying the larger deals on the market that you're looking at. Can you also give some color on the smaller ones and then maybe kind of yield differentials between the large and smaller investment opportunities?

Gregory Silvers, Chairman and CEO

Yes. I’ll let Greg add to this as well. Over the past few years, we've focused on deals ranging from $25 million to $75 million, and those opportunities are still available. These deals are often more tailored and have been a consistent part of our strategy. They tend to be less competitive due to their custom nature, and we believe we can secure these deals effectively. However, competition increases with larger deals where the focus shifts to volume. Although large deal yields may shift slightly, we are confident in our ability to compete based on our understanding of these transactions. Greg, please go ahead.

Gregory Zimmerman, Executive Vice President and CIO

No, I think, you covered this.

Operator, Operator

This completes the allotted time for questions. I will now turn the call back over to Greg Silvers for any closing remarks.

Gregory Silvers, Chairman and CEO

Thank you, everyone. We appreciate your time and attention. Look forward to talking to you guys many times in the fall, and have a great day. Thank you.

Gregory Zimmerman, Executive Vice President and CIO

Thank you.