EPR Properties Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2025

There are 12 speakers on the call.

Operator

Hello, and welcome to the EPR Properties Q4 twenty twenty four 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.

Speaker 1

Great. Thank you, Leila. Thanks for joining us today for our fourth quarter and year end twenty twenty four 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 comparable terms.

Speaker 1

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 ks 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 eight K. If you wish to follow along, today's earnings release, supplemental and earnings call presentation are available on the Investor Center page of the company's website, www.eprkc.com.

Speaker 1

Now, I'll turn the call over to Greg Silver.

Speaker 2

Thank you, Brian. Good morning, everyone, and thank you for joining us on today's fourth quarter and year end '20 '20 '4 earnings call and webcast. We are pleased to have delivered 3.4% earnings growth for the full year 2024 when removing the impact of out of period deferred rent and interest collections from both years' performance. Overall, while navigating a challenging macro environment, our portfolio continued to demonstrate resilience as we continued to grow our experiential portfolio in a disciplined manner. The box office performance in the second half of twenty twenty four demonstrated its strength when supported by ample titles and we're pleased to report that it ended the year well above initial expectations.

Speaker 2

Additionally, this was the inaugural year to activate and begin to benefit from our percentage rent structure as defined in our Regal master lease. We anticipate continued upside with this structure in the coming years as we expect sustained growth in box office revenues as the number of wide releases grows. Additionally, we saw continued solid performance in our Eat and Play sector. This sector is anchored by Topgolf, which has remained resilient and is also supported by other differentiated successful operators, including Andretti Indoor Karting and Gaming with whom we continue to expand our relationship. Separately, during the first half of the ski season, our ski properties benefited from improved weather conditions versus the previous year and we look forward to a solid second half of the season.

Speaker 2

Notwithstanding our capital constrained environment during the year, we continue to expand our experiential portfolio by effectively utilizing our operating cash flow and through limited use of our line of credit. Additionally, we made further progress on reducing our theater and education investments and recycling those proceeds into other experiential assets. As we look forward to 2025, we anticipate that we will deliver approximately 3.5% earnings growth at the midpoint of our guidance through an efficient sourcing of capital, which is not dependent upon any equity issuance. Lastly, our strong balance sheet and conservative financial management have allowed us to operate successfully in the current macro environment. Within this context of this disciplined approach, we are pleased to announce a 3.5% increase in our monthly cash dividend to common shareholders.

Speaker 2

Following this increase, our dividend will remain well covered and we will retain significant financial flexibility. Now, I'll turn the call over to Greg Zimmerman who will cover the business in greater

Speaker 3

detail. Thanks, Greg. At the end of the quarter, our total investments were approximately $6,900,000,000 with three forty six properties that are 99% leased or operated, excluding vacant properties we intend to sell. During the quarter, our investment spending was $49,300,000 1 hundred percent of the spending was in our experiential portfolio. Our experiential portfolio comprises two seventy eight properties with 51 operators and accounts for 93% of our total investments or approximately $6,400,000,000 And at the end of the quarter, excluding the vacant properties we intend to sell, was 99% leased or operated.

Speaker 3

Our education portfolio comprises 68 properties with eight operators and at the end of the quarter excluding the vacant property we intend to sell was 100% leased. Turning to coverage, The most recent data provided is based on a September trailing twelve month period. Overall portfolio coverage remains strong at two times down slightly from last quarter. Trailing twelve month coverage for the non theater portion of our portfolio was 2.5 times, again down slightly from last quarter. Trailing twelve month coverage for theaters remained at 1.5 times, evidencing stabilization from the impact on the release schedule from the writers and actors strikes.

Speaker 3

Turning to the operating status of our tenants. We continue to see a rebound in North American box office. Q4 box office totaled $2,300,000,000 up 26% from Q4 twenty twenty three. '20 '20 '4 box office was 8,600,000,000 down only 4% from 2023. After the severe impact on the strikes on the release schedule dissipated, Box office recovers significantly in the second half of the year.

Speaker 3

We are confident the impact of the strikes is behind us. Box office growth ties directly to the number of titles released, particularly wide releases from the nine major Hollywood studios, which typically generate around two thirds of the North American box office gross. The current calendar reflects 138 titles for 2025, '70 '8 major studio releases and 60 small studio releases. For context, at this point in 2024, there were 64 major studio releases on the calendar down from 100 in 2023 because of the strikes. The 78 major studio releases currently scheduled for 2025 are forecast to gross 800,000,000 more than the major studio releases scheduled at this point in 2024.

Speaker 3

Q1 is off to a nice start with box office through this week at $991,000,000 We are pleasantly surprised with the strength of Dogman which grossed $36,000,000 on its opening weekend making it the second highest grossing animated film released in January and has grossed $80,000,000 to date. In Q1, '2 titles are projected to gross over $200,000,000 Captain America Brave New World, which opened over Presidents' Day weekend generating the best overall Q1 weekend since 2020 and has grossed $143,000,000 to date and Snow White which opens March 21. We are optimistic that the quantity and quality of the slate for 2025 and into 2026 will continue to propel an upward trajectory in box office. The 2025 slate includes the Fantastic Four First Steps, Mission Impossible, The Final Recony, How to Train Your Dragon, Superman, Jurassic World Rebirth and Avatar Fire Mash. We are estimating North American box office for calendar year twenty twenty five to be between $9,300,000,000 and $9,700,000,000 Turning now to an update on our other major customer groups.

Speaker 3

Despite some pressure on operating expenses and in select cases of revenue, we saw good results across our drive to value oriented destinations. Both Q4 and Q4 trailing twelve month revenue and EBITDARM were up across our ski portfolio over the respective same periods in 2023. Most of the portfolio has benefited from early season snowfall and past sales continue to help drive business. Andretti Carting is under construction in Kansas City, Oklahoma City and Schaumburg with openings scheduled for mid-twenty twenty five and early twenty twenty six. In 2025, we anticipate Topgolf will self fund at least four refreshes at EPR properties.

Speaker 3

The refreshes generally include replacing the outfield turf and lighting, repainting and updating sign. While our Eat and Play coverage remains strong and above pre COVID levels, both Q4 and Q4 trailing twelve month revenue and EBITDARM were down slightly over the respective same period in 2023. Many of our attractions were closed for the season in Q4. In December, the Hotel de Glace at Delpartier celebrated its twenty fifth anniversary. We anticipate the 100,000 square foot indoor water park addition at the Bavarian Inn in Frankenmuth, Michigan will open in Q1 twenty twenty five.

Speaker 3

Over the past two years, our customer has added a family entertainment center with an ice cream shop and laser tag, a ropes course and bowling lanes, all of which have driven revenue growth. Construction of the extensive expansion at the Springs Resort in Pagosa Springs continues with opening schedule for spring twenty twenty five. Across our fitness and wellness portfolio, we saw increases in both revenue and EBITDARM in the trailing twelve months through December 2024 over the same period in 2023. Our education portfolio continues to perform well. Our customers trailing twelve month revenue across the portfolio through September was up 2%, while EBITDARM over the same period decreased by 3% driven largely by operating cost increases.

Speaker 3

With respect to our consolidated operating properties, managed theaters continue to show improvement with a box office recovery. This improving performance is being offset by some of the revenue and expense pressures we're seeing at our Cartwright Hotel and indoor water park. We continue to work in good faith with our joint venture partners and lender to identify a path forward for our two St. Beach hotels significantly damaged by hurricanes in 2024. And as noted in our Q3 earnings call, we expect this will result in the eventual removal of the hotels from our portfolio.

Speaker 3

Additionally, during Q4, we made the decision to exit our unconsolidated equity investment in the Camp Margaritaville RV Resort in Breaux Ridge, Louisiana. The park meaningfully underperformed expectations and will require significant ongoing capital infusions to service the non recourse debt and property operations. As a result, subsequent to the end of the quarter, we reached an agreement with our joint venture partner to exit the joint venture and our interests in the assets. We continue to have interest in two unconsolidated joint ventures that hold the Jellystone Park Warrens and Yogi Bear's Jellystone Park Cozy Rest RV Parks with a total combined carrying value of $14,000,000 as of the end of twenty twenty four. These two assets showed Q4 trailing twelve month growth in revenue and EBITDARM over the same period in 2023.

Speaker 3

We are disappointed with the performance of our operating properties. The volatility of performance and expense pressures, including significant increases in insurance, are all part of the normal course of business for our tenants. However, they are not for us. Fundamentally, we have decided that Juice isn't worth the squeeze in terms of performance, especially given the depth and strength of our net lease portfolio. Accordingly, we will no longer pursue these types of investments.

Speaker 3

During Q4, our investment spending was $49,300,000 to fund experiential projects which have closed but are not yet over, bringing the total in 2024 to $263,900,000 dollars Subsequent to the end of the quarter, we acquired Diggerland USA in West Berlin, New Jersey 20 miles east of Philadelphia for $14,200,000 Diggerland is the only construction themed attraction and water park in the country It is our second investment which with IAM which further diversifies our tenant base. In 2024, we added the award winning Iron Mountain Hot Springs Resort in Glenwood Springs, Colorado to our list of outstanding hot springs properties. We also acquired Water Safari Resort in the Adirondacks and funded the development of three new Andretti Karting locations, Greater Kansas City, Oklahoma City and Schaumburg, Illinois. We continue to see high quality opportunities for both acquisition and build to suit redevelopment and expansion in our target experiential categories. Given our cost to capital, we will continue to maintain discipline and to fund those investments primarily from cash on hand, cash from operations, proceeds from dispositions and with a borrowing availability under our unsecured revolving credit facility.

Speaker 3

We're issuing investment spending guidance for funds to be deployed in 2025 in the range of $200,000,000 to $300,000,000 We have committed approximately $150,000,000 for experiential development and redevelopment projects that have closed but are not yet funded to be deployed over the next two years. We anticipate approximately $105,000,000 of the $150,000,000 will be deployed in 2025 which is included at the midpoint of our 2025 guidance range. In Q4, we sold a vacant former regal, a vacant former escape theater, and a vacant former kinder care school were combined net proceeds of 9,300,000.0 resulting in a net gain of approximately under 12,000. For 2024, disposition proceeds totaled 74,400,000.0 and the company recognized a net gain on sale of $16,100,000 Subsequent to the end of the quarter, we sold a vacant early childhood education asset for a gain of $1,000,000 and net proceeds of $3,000,000 As of today, we have no vacant education assets. Also subsequent to the end of the quarter, we sold another vacant Regal theater for a gain of $2,700,000 and net proceeds of $6,100,000 Since early twenty twenty one, we have sold 25 theaters.

Speaker 3

We have one remaining AMC theater for which we have an executed purpose and sale of duty. Twenty months after the conclusion of the regal bankruptcy, we have sold 10 of the 11 former regal theaters we took back in bankruptcy. We currently have two former vacant regals, one from the bankruptcy and one which SynMark was operating and as we previously announced was closed last September. Cinemark currently manages three former regal theaters. Coming out of the regal bankruptcy, it was our intent to sell the vacant theaters first and once on a good trajectory to turn our attention to selling most of the managed theaters.

Speaker 3

Because we made significant progress in disposing the vacant regals, we are actively marketing the remaining three CentiMark managed theaters. We have signed purchase and sale agreements for two of these three. Although there can be no assurance, we anticipate these sales will occur in the first half of twenty twenty five. In addition, we have assigned purchase and sale agreement to sell two theater properties to a smaller operator that currently leases both locations. Again, although there can be no assurance, we anticipate this sale will occur in the first half of twenty twenty five.

Speaker 3

We are issuing 2025 disposition guidance in the range of $25,000,000 to $75,000,000 dollars Finally, given the events of COVID and the subsequent writers and actors strikes over the past several years, we believed it was important to bifurcate our coverage universe to demonstrate the impact of these events on our theater versus our non theater portfolio. As we are now twelve months removed from strikes and film production is normalizing, for calendar year 2025, we will return to our normal coverage reporting on the portfolio as a whole. In addition, over the past several years, we have worked closely with our tenants to get more timely and detailed reporting. As such, our coverage metrics will be based on a trailing twelve month basis as of the end of the quarter we are reporting other than the education component, which will be through the previous quarter. I now turn it over to Mark for a discussion of the financials.

Speaker 4

Thank you, Greg. Today, I'll discuss our financial performance for the fourth quarter and the year, provide an update on our balance sheet and close with introducing 2025 guidance. FFOs adjusted for the quarter was $1.23 per share versus $1.18 in the prior year and AFFO for the quarter was $1.22 per share compared to $1.16 in the prior year. Before I walk through the key variances, I'd like to explain some items excluded from FFOs adjusted and AFFO. During the quarter, we continued to make progress reducing our investments in theater and education properties and recycling those proceeds into other experiential assets.

Speaker 4

First, we recognized a net gain of $112,000 on the sale of two vacant theaters and one vacant early childhood education center for which we received net proceeds totaling $9,300,000 For the year, disposition proceeds totaled $74,400,000 We recognized a net gain on sales of $16,100,000 Second, we have two operating theater properties as well as two theater properties leased by a smaller theater operator under contracts to sell. With closings expected on all four properties in the first half of twenty twenty five. During the quarter, we recognized non cash impairment charges of $40,000,000 related to these properties. However, we expect that the proceeds from these sales once redeployed into other experiential assets will be accretive to earnings, while also reducing the volatility in reported earnings associated with operating properties. In addition, during the quarter, we made the decision to exit our unconsolidated equity investment in operating RV property located in Broadridge, Louisiana.

Speaker 4

The RV property underperformed expectations and would have required an ongoing capital infusion to service the non recourse debt and property operations. We finalized our exit of this investment earlier this month. Accordingly, during the quarter, we recognized $16,100,000 in impairment charges on joint ventures to fully write off our carrying value. We also received $1,000,000 in exchange for the sale of our remaining subordinated mortgage note receivable on the property. Accordingly, during the quarter, we recognized $10,300,000 as provision for for credit loss.

Speaker 4

We continue to have interest in two remaining unconsolidated joint ventures that pulled two operating RV properties with a total carrying value of $14,000,000 at year end. Now moving to the key variances. Total revenue for the quarter was $177,200,000 versus $172,000,000 in the prior year. Within total revenue, rental revenue increased $378,000 versus the prior year. The positive impact of investment spending was offset by a decrease due to a $2,500,000 lease termination fee and $600,000 in out of period deferral collections from cash basis customers recognized during the prior year.

Speaker 4

Within rental revenue, percentage rents for the quarter were $4,700,000 versus $6,200,000 in the prior year. The decrease was due to less percentage rent recognized in the current period from two cultural properties that were sold early in the year, as well as lower percentage rent from our gaming tenant and from certain attraction properties. The increase in mortgage and other financing income of $3,700,000 was due to additional investments in mortgage notes over the past year. Both other income and other expense relate primarily to our consolidated operating properties, including the Cartwright Hotel and indoor water Park and our operating theaters. Please note that we had six operating theaters during the current period versus seven during the prior year as we closed one of the operating theaters during the third quarter of twenty twenty four that we plan to sell.

Speaker 4

As I mentioned earlier, we also have two of the remaining six theater properties we are operating currently under contracts for sale. On the expense side, G and A expense for the quarter decreased to $12,200,000 versus $13,800,000 in the prior year due primarily to lower payroll costs, including non cash share based compensation expense as well as lower professional fees. Interest expense net for the quarter increased by $3,100,000 compared to prior year due to an increase in borrowings under our unsecured revolving credit facility as well as a decrease in interest income on short term investments. Lastly, FFO as adjusted from joint ventures for the quarter increased by about $900,000 versus the prior year due primarily to the avoidance of off season losses and interest expense from the decision to exit joint venture investments in two hotel properties in St. Pete Beach, Florida as discussed last quarter, as well as the JV investment in BroBridge, Louisiana I discussed earlier.

Speaker 4

These increases in FFO were partially offset by higher expenses including insurance and interest at the remaining joint ventures. Shifting to full year results, FFO as adjusted was 4.87 per share versus 5.18 in the prior year, and AFFO was 4.84 per share compared to 5.22 in the prior year. On the next slide, I thought it'd be helpful to illustrate the impact on growth in FFOs adjusted per share for 2024 when you remove the impact of out of period cash basis deferral collections from 2023 of $36,400,000 or $0.48 per share and from twenty twenty four zero point six million dollars or a penny per share. As you can see on the slide, FFO as adjusted per share growth without deferral collections from 2023 to 2024 was 3.4%. Turning to the next slide, I'll review some of the company's key credit ratios.

Speaker 4

As you can see, our coverage ratios continue to be strong with fixed charge coverage at 3.2 times and both interest and debt service coverage at 3.8 times. Our net debt to adjusted EBITDAre was 5.3 times for the quarter. If you adjust this ratio to include the annualization of investments put in service, acquired or disposed of during the quarter, and the annualization of percent of rent and participating interest as well as other items, this ratio was 5.1 times at quarter end, which is at the low end of our targeted range. Additionally, our net debt to gross assets was 40% on a book basis at year end and our common dividend continues to be very well covered with an AFFO payout ratio of 70% both for the fourth quarter and full year. Now let's move to our balance sheet, which is in great shape.

Speaker 4

At year end, we had consolidated debt of $2,900,000,000 of which $2,700,000,000 is either fixed rate debt or debt that has been fixed through interest rate swaps with an overall blended coupon of approximately 4.4%. Additionally, we only have $300,000,000 of debt maturing this year. As you can see, our liquidity position remains strong with $22,100,000 of cash on hand at year end and only $175,000,000 drawn on our new $1,000,000,000 revolver, which positions us well going forward and provides us great flexibility in our approach to refinancing the upcoming $300,000,000 debt maturity. We are introducing our 2025 FFO's adjusted per share guidance of $4.94 to $5.14 representing an increase over the prior year of 3.5% at the midpoint. Note that due primarily to the timing of expected percentage rents, which are heavily weighted in the last three quarters of the year, as well as the fact that the first quarter is off season for our operating properties, we expect results for the first quarter of twenty twenty five to be lower than the full year divided by four by about $0.1 per share.

Speaker 4

As we have discussed previously, given our cost of capital, we are limiting our near term investment spending. We are providing our 2025 investment spending guidance of $200,000,000 to $300,000,000 We are also providing guidance for disposition proceeds for 2025 of $25,000,000 to $75,000,000 We expect percentage rents and participating interests of $18,000,000 to $22,000,000 The midpoint of this guidance reflects an increase of over $5,000,000 versus the prior year. This increase is primarily related to percentage rents expected from theaters subject to the Regal master lease and is offset by certain properties that have base rent increases in 2025 causing the break point for percentage rents to go up. We expect G and A expense of $52,000,000 to $55,000,000 The midpoint of this guidance reflects an increase from prior year of about $3,400,000 This is primarily due to an increase in payroll and benefit costs including non cash stock grant amortization, and to a lesser degree, an increase in franchise taxes due to a refund received in 2024, an increase of costs associated with adding additional board members. On the next slide, guidance for our consolidated operating properties is provided by giving a range for other income and other expense.

Speaker 4

Since our remaining investments in JVs is only $14,000,000 and the FFO impact going forward is expected to be nominal, we are no longer providing guidance for our operating JVs. Guidance details can be found on Page 24 of our supplemental. Finally, based on our expected 2025 performance, we are pleased to announce a 3.5% increase in our monthly dividend, beginning with the dividend payable 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 continuing to be at about 70% based on the midpoint of guidance. Now with that, I'll turn it

Speaker 2

back over to Greg for his closing remarks. Thank you, Mark. Our results continue to demonstrate the consumer demand for experiential offerings. With box office off to a strong start, we're excited about a more normalized release schedule. I want to thank all of our tenants, partners and associates for their contributions in 2024.

Speaker 2

Facing many challenges, we delivered solid results and we are excited about the opportunities before us in 2025 and beyond. With that, why don't I open it up for questions. Leila?

Operator

Thank you. At this time, if you would like to ask a question, please click on the raise hand button which can be found on the black bar at the bottom of your screen. When it is your turn you will receive a message on your screen from the host allowing you to talk and then you will hear your name called please accept, unmute your audio and ask your question if you are on a mobile device using the app Our first question will come from Rob Stevenson with Janney Montgomery Scott. Please go ahead.

Speaker 5

Good morning. How are the two remaining RV parks performing versus Louisiana one that you exited?

Speaker 2

Again, I'll let Greg also jump and Greg Zimmerman also jump in. But I think we're seeing better performance. I think, again, if we go back and look at Bowbridge, we would look and say the Margaritaville conversion of that did not work for that property. It was not the right decision. And but the others have been more established.

Speaker 2

We didn't really change the branding of that. We just kind of have expanded the offerings. But Greg?

Speaker 3

I think that's great. Rob, they're both Jellystone products, which have been around for a long time. On cozy rest, we have a number of things that have been under construction for a couple of years, so we're not really normalized yet. We expect a number of cabins that we had added last year come online this year along with some of the other amenities. So we're feeling better about those performances.

Speaker 3

Yes. As I said in

Speaker 4

my comments, we expect the go forward contribution for those two for '25 to be nominal. The ones up and running and doing well and the other ones, as Greg said, is kind of normalizing. So it was put in service this year as the full interest expense burden, but it's certainly on a good trajectory. But overall, that number should be pretty nominal from an FFO point of view.

Speaker 5

Okay. That's helpful. And then, in terms of future sort of investments, how are you thinking about some of the other sort of lodging type assets like the hot springs and other assets that aren't attached to a water park? Is that something that you're still interested in or is that not likely to be a significant investment going forward for you guys?

Speaker 2

No. What I think you should think about this in terms of, Rob, is not the fact that we don't like that space, but we don't like operating versus net lease or fixed income structures. So where we can be in a situation of, like I said, net leasing, And likewise, we have a Margaritaville RV Park that's on a lease that's doing very well. Again, what we have experienced with whether it'd be insurance costs or some of these others, the volatility that is introduced to us as a result of being the operating partner is not something I think investors value nor is it something as Greg pointed out candidly the juice isn't worth the squeeze. So again, we still like some of these sectors, but we like them in our kind of net lease environment.

Speaker 3

And then you you had also mentioned, Hot Springs Resorts. I mean, we we are very bullish on the Hot Springs area. I think we're one of the leading investors in the country in that. And I would say, you know, there is a lodging component of those, but it's really part of the overall attraction, which includes, you know, the ability to do a day pass. And so we don't view those as pure lodging plays well.

Speaker 5

Okay. And then beyond your development pipeline, where are you seeing the best investment opportunities given your improved cost of equity in the back in the strong balance sheet today?

Speaker 3

Well, again, we're very bullish on on fitness and wellness. And again, we're just really proud to have a great portfolio, including we added Iron Mountain last year. We're seeing a good traction in the attraction space. We mentioned, you know, we were able to acquire Diggerland in q one. And I think we're seeing good opportunities in almost all of our verticals, right now.

Speaker 3

So, we're just being very careful given our cost of capital, and we're still seeing a lot of opportunities.

Speaker 4

And just to add to that, in the Eat and Play area, we've got the Andretti Carton that we're doing three new locations and that's performing well.

Speaker 5

Okay. Thanks guys. Appreciate the time this morning.

Speaker 2

Thank you, Rob.

Operator

Our next question will come from Anthony Paolone with JPMorgan. Your line is open. Please go ahead.

Speaker 6

Great. Thanks. Good morning. And just to maybe continue with some of the questioning along Rob's lines. If you look at your guidance, your growth rate is pretty competitive with the peer sets.

Speaker 6

And if we look at the midpoint of your capital deployment net of sales, a lot of that's already even in the bag it seems with what you've committed to. So I guess where do yields need to be right now for you to get interested and kind of deploying more? And I guess you talked about what areas are most interesting, but just how does the deal flow look like relative to history?

Speaker 2

I would say the deal flow is pretty consistent, kind of, Tony. And I think where we get excited more about there's two different standards there. Again, I don't think our equity cost of capital is where it needs to be for us to raise capital. But on the margin, could we get to the higher end of our range depending upon when some of these asset sales happen? Yes.

Speaker 2

I mean, I think we think the depth of our opportunity set is would allow us to do that. We just need to kind of we're conscious of our balance sheet and maintaining that kind of investment grade fortress balance sheet. But Mark, maybe you have Yes.

Speaker 4

On the cost of capital side, you know, both our equity cost has come down quite substantially recently and our debt cost continues to come down. So if you kind of do the equity multiple approach in your debt at a sixtyforty relationship, we're in the low eight's right now, cost of capital. We like to see at least 100 basis points or 150 basis points of spreads. We're not quite there yet to do incremental over the 200 to 300 that we're talking about here for next year and what we did this year, but it's certainly moving in the right direction.

Speaker 6

Okay. Thank you for that. And then just my second one on Cartwright, appreciate the exit from operating and what you've done with some of the other ones. But I mean, how do you think about the long term options with that one because it is, I think, still the most sizable in the pack there?

Speaker 2

Yes. Tony, again, we've had numerous challenges every year, whether it's been shut down or last year, the balcony challenge. Again, we have to remember that we entered into that transaction to activate the gaming. And on an overall basis, we look at those on a combined basis and we're doing quite well on the ground lease of that. Yes, again, we'd like to at some point in the future get out of the operating of that asset.

Speaker 2

Its performance needs to step up to allow that, but it's definitely something we will and will continue to look out and explore.

Speaker 6

Okay. Thank you.

Speaker 7

Operator?

Operator

Question will come from the line of Bennett Rose from Citi. Please go ahead.

Speaker 8

Hi, thanks. I appreciate the time. I wanted to ask you just on the percentage rents, you mentioned, I guess, continued expected improvement in the box office. But just to achieve kind of the higher end of the range, is that really a box office dependent factor? Or is there something else in there that could help drive you those numbers up?

Speaker 4

I mean, the performance there's percentage rents across a number of different properties. So, you could have outperformance in any of the properties. But probably theater box office driving that regal percentage number is probably the most significant to get to that higher end ranges, which is only our range is only $18,000,000 to $22,000,000 So we're talking about maybe $2,000,000 more at the high end.

Speaker 2

I think also against Meats is like all of us additional investment timing of that investment, all of those things factor in to get to the higher end of the range. When we think about getting to the higher end of earnings range, so I think there's better performance in some of the operating part. So there's a lot of contributing factors that could drive us to better than the midpoint. I think we've given the market our best expectations on where box office will come in. And I think our stated range at the midpoint is consistent with that.

Speaker 8

And then would you for the two remaining JV properties, I realize that they're, I guess, relatively small overall, but are you would you expect to exit from those the Jellystone and Yogi Bear properties that you mentioned?

Speaker 2

Again, we're just going to have to see on a relative value on what they contribute. As you said, it's relatively insignificant. I don't think we're committed to necessarily owning them for the long term, but their contribution is such that it's they're performing fine. If we get an opportunity to exit and redeploy that into a more net lease investment, I'm sure we'll take a look at that over time.

Speaker 9

Okay. Thank you.

Speaker 3

Thank you, Steve.

Operator

Our next question will come from the line of Michael Goldsmith with UBS. Please go ahead.

Speaker 7

Good morning. Thanks a lot for taking my question. First question is just can you outline what you're assuming for credit loss for the year and just some of the thought process around that and how that compares to maybe prior years?

Speaker 4

Yes. Let's start with mortgages. Credit loss on mortgages is booked through the credit loss model per GAAP. So that's kind of booked on ongoing basis. I'd say overall, it's probably about 1% of EBITDA, which is about $5,000,000 So we've got, I think about that amount of cushion kind of baked in for bad debts.

Speaker 2

And I think that's consistent with what we do every year.

Speaker 7

Got it. And then just a follow-up question is on funding the 2025 investments, right? You've got a little bit of room on the revolver, but then you also mentioned kind of how, you know, you also have 2025 debt maturities of $300,000,000 So can you talk a little bit about how you plan on funding, maybe just on the debt as well? And it sounds like you're not quite there on issuing equity. So can you just talk about the interplay of those three?

Speaker 7

Thanks.

Speaker 4

Sure. Yes. Let me just run through the sources and uses. At the midpoint, we got uses of investment spending at $250,000,000 And like you said, we have a loan maturity for $300,000,000 so $550,000,000 on the uses side. And on the sources side, we've got $50,000,000 of dispositions at the midpoint and free cash flow of about $120,000,000 roughly.

Speaker 4

So it's $175,000,000 of sources. So that if you didn't do any long term financing, that would increase your line of about $380,000,000 So we'd be about, you know, add that to the $175,000,000

Speaker 1

that

Speaker 4

we're at at year end. We would be about half drawn on the line. So we've got, you know, we could do it that way or, you know, and more what we have on our plan is ultimately to term that out and do a bond deal, which would call it a $400,000,000 bond deal, which would take our line down to under $200,000,000 So I think the point is we have flexibility, given the fact that we could fund the whole thing on our line and only be half drawn. But our intention is to ultimately term that out. And I think with respect to that, we've got a lot of flexibility also.

Speaker 4

We've got room in our laddering for a five year, a seven year or a course of ten year. So I think we've got a lot of flexibility to kind of watch the market and determine the right time to potentially do a bond deal.

Speaker 7

Thank you very much.

Operator

Our next question will come from the line of Michael Carroll with RBC Capital Markets. Please go ahead.

Speaker 10

Yes. Thanks. I wanted to touch back on percentage rents that you guys were kind of highlighting. I guess, Mark, can you kind of break out what is the non theater percentage rents versus the theater percentage rents? And do you expect the non theater percentage rents to be largely stable in 'twenty five or 'twenty four?

Speaker 10

I guess, how does that specifically change between the two years?

Speaker 4

Yes. We don't break that out. I mean, the large part of the increase is the regal master lease. And the rest of the properties, we've got some puts and takes. But in some cases, there is a rent bump.

Speaker 4

So the percent rent might go down slightly, but you're getting at a minimum rent to shift location on the income statement. But overall, fairly stable year over year, but for the caps and then, of course, you have on the Regal side the increase from the box office.

Speaker 1

Okay.

Speaker 10

And then related to the Regal lease, what's included in guidance, I know that that lease year ends in July and you provide us a box office guidance for 2025. So does the full year 2025 box office guidance differ too meaningfully from the Regal lease year box office expectation?

Speaker 2

No. I would say, Michael, that it's not meaningfully different when you look at a July to July. If you look, remember last year, we started talking about the acceleration of the box office in the second half. And so on a run rate basis, those are fairly consistent.

Speaker 10

Okay. Great. And then just one clarification on Cartwright. I know you're talking to Tony about this. How is or how are those properties performing?

Speaker 10

I know if you look at the other income guidance, it looks like you're assuming it's largely flat between '25 and '24. So should we assume that your expectation for cart rates, it kind of stays where it is right now through 2025? And do you think that's a conservative estimate?

Speaker 2

Again, I think here is the thing that again what we talked in operating properties. Even when we get better performance, we get slammed with insurance costs like we did this year. So it's very difficult to climb out and kind of make continued progress. So, I think we're keeping it in the fashion that we have. We continue to work to make progress on that.

Speaker 2

It's, as I said earlier, it's had a multitude of challenges getting started with shutdown, the balconies, things of that nature. Operating expenses are running significantly higher than we anticipated. So, we continue to work through that.

Speaker 4

Yes. I'd say overall other income and other expense obviously are both coming down as we sell these two operating theaters and the timing of that could affect those two numbers, but that's one thing to point out. The second thing is in the theaters that we do operate this year, we do expect performance to improve given the box office improvement. But it's kind of as Greg said kind of being offset by some of the Cartwright, particularly on expense side, expense pressures like insurance. So that's why we guided kind of at the midpoint sort of a breakeven net breakeven scenario.

Speaker 9

Great. Thank you.

Speaker 2

Thank you, Russell.

Operator

Our next question will come from the line of Uphol Rana with KeyBanc Capital Markets.

Speaker 9

Great. Interesting question. What do you guys think that drove the stronger second half in the movie theater business? Because it came in ahead of even your projection that you gave during 3Q earnings. Was it just more movies or is it something else that you think will continue to '25 and beyond?

Speaker 2

Again, and I'll let Greg jump in. I think fundamentally, as we've always said, quantum of titles matters. And we got back to a more normalized kind of titles. And when you have a quantity, the number of titles, the consumer gets into the habit of going to the movies. So again, we think that that kind of it feeds itself.

Speaker 2

And so that tenor and tone of enough movies to get people more into the habit, we think will carry into 'twenty five and beyond. But Greg?

Speaker 3

No, I think that covers it.

Speaker 9

Okay, great. That was helpful. And then of the $200,000,000 to $300,000,000 investment guidance you provided, how are you planning on allocating that capital across either development, asset acquisitions, mortgage notes or JVs given in '24 almost half year investment volumes were towards mortgages?

Speaker 3

Yes. So as I say all the time, it's an art, not a science. We try to do the best deals that come before us. In general, it usually ends up being about $50.50. I can't say we target that, but that's generally how it comes out.

Speaker 3

Now we mentioned we we, you know, we're finishing up a couple of development projects, including the Andretti karting deals, and then obviously Digger Land, which we've already acquired was an acquisition.

Speaker 2

I do think it's important though that we draw a distinction. Most of our mortgages lead to ownership. So again, most of these investments that you saw last year where we are investing in, it's a mortgage structure. It may have historic tax credits that we can't convert until we get outside the period or things of that nature. But these aren't long term mortgages.

Speaker 2

There are a structure to a path for an ownership and that's what most of ours are. Not short term as any. Not yet. Not yet.

Speaker 9

Okay. Great. That was helpful. Thank you.

Operator

Our next question comes from the line of Janet Gallon with Bank of America. Please go ahead.

Speaker 11

Thank you. Good morning. You've had a lot of success and traction with the theater dispositions. I was hoping you could talk to kind of the depth and breadth of buyers out there. And as the box office improves and you pivot to non vacant asset sales, kind of any cap rate expectations around that?

Speaker 3

So thanks. Yeah. First of all, I gotta shout out to my team. I mean, they're just fantastic, at the ability to source these deals. For vacant theaters, we're agnostic.

Speaker 3

We just market them as real estate. So the better the real estate, the better the transaction that we're able to execute. I would say, we're not really seeing a lot of visibility on theater transactions for lease properties yet. We did mention that we have one under contract, and we're pleased with the cap rate on that. It's probably gonna come in about 9%.

Speaker 3

Again, as we mentioned, that's subject to closing. It hasn't closed yet. But I do think you're right. As the box office recovers, there will be more of these trades starting to happen.

Speaker 11

Great. Thank you. And then just in conversations with tenants and what you've experienced directly from the operating properties, where do you think we are in terms of kind of the expense pressures? Have we kind of, you know, will we, kind of lap already the peak expenses? Or do you still see some kind of wildcards with insurance?

Speaker 2

Again, I think the insurance, what we're starting to see is that, again, it seems to be kind of topping out. I mean, we just had a meeting yesterday where we were talking with insurance people who said that it again, that's going to be a function of what events occurred. I mean, fortunately, the California wildfires didn't hit many commercial properties. So that one will flow back through on kind of the reinsurance issues. But again, what we're kind of 20%, thirty %, forty %, fifty % kind of impacts over the last two years, hopefully, we've seen the peak of that.

Speaker 3

I I would say we've seen the peak, but we're gonna still see it. Oh, there's Again, that's the challenge. It just it's hard to get your handle on it.

Speaker 2

And that's all but not just our operating properties, our tenants are facing that too daily. Yeah. But again, what we've seen so far is they're managing through that. I mean, we saw, as we said, a slight tick, a down $0.1 in coverage, which is really kind of driven by those kind of expenses, but still considerably higher than where we were pre pandemic. So I think they're managing through it, but it's not without its challenges.

Speaker 11

Great. Thank you.

Operator

And our final question will come from the line of Ki Bin Kim with Truist. Your line is open. Please go ahead. Ki Bin Kim, your line is open. Please go ahead with your question.

Operator

Unfortunately, we're not able to hear you, Ki Bin. So we'll hand it to Greg Silver for closing remarks.

Speaker 2

Thank you, Leila. And thank you, everyone, for your time and attention today. We greatly appreciate it. We look forward to talking to you through the remainder of the balance of the year and look forward to another solid year. Thank you.

Speaker 2

Thanks.

Operator

Thank you for joining EPR Properties Q4 twenty twenty four earnings call. This concludes today's call. You may now disconnect.

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EPR Properties Q4 2024
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