Q3 2020 EPR Properties Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin shortly please continue to hold thank you for your patience again todays conference is scheduled to begin shortly please continue to hold thank you for your patience.
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Alright, thanks, everybody and thanks for joining us today on our third quarter of 2020 earnings call I'll start to call by informing you that this call may include forward looking statements as identified in the private Securities Litigation Act of 1995 identified by such words as will be instead continue.
You may.
Believe expect hope anticipate or other comparable terms of companies actual financial condition and results of operations may very materially from those contemplated by such forward looking statements discussion of these factors that could cause the results to differ materially from those forward looking statements are.
Are contained in the company's SEC filings, including the companies report on form 10-K and 10-Q.
Today remote work environment to help mitigate employee risk.
Additionally, we have put in place sound processes and technology to ensure employee engagement as our people work remotely.
Im extremely proud of the adaptability and dedication demonstrated by our or by our organization.
Number two ensuring strong liquidity.
Our top business objective since the onset of the pandemic has been ensuring that necessary liquidity to get to the other side.
We may have near term tenant disruption. However, the businesses that are property support are not going away.
The institutional quality of our properties gives us confidence in their resilience the key to weathering. The storm is financial stability and our liquidity gives us that stability.
Number three stabilization and re and ramping up of our tenant businesses.
Non theater tenants continue to navigate the pandemic with solid performance as consumers get more comfortable with safety protocols, yet our tenant theater tenants remain challenged by the lack of content.
The positive news is that when consistent content is available to consumer has returned.
As evidence of this China's box office has approached 2019 levels for August and September supported with only local content.
Number for a return to growth to.
The goal of the PR is to acquire experience will properties that generate consistent cash flows which translate into dividends for our shareholders.
With an experience will focus that is anchored to communal active activities. We have been in the cross hairs of this pandemic.
However, this pandemic will end and consumers will return to the activities that our property support.
As this normalcy returns LPR will likewise get back to normal.
What does normal mean it.
It means we returned to growing our portfolio and paying dividends to shareholders. As we have done successfully for over 20 years.
Now turning to the third quarter results, we continue to show steady improvement in our cash collections as over 90% of our non theatre properties are open.
Our theatre portfolio is challenged by a variety of factors, making it difficult to regain momentum.
Theatre property openings have been inconsistent and incomplete due to state and local mandates and new content has been extremely limited.
While the current operating environment remains challenging for our theatre properties, we do not see evidence of permanent structural change.
Viable alternative for blockbuster titles as it can't drive the volume required to replace theatre exhibition, even with a captive audience.
Additionally, research shows that when consumers are aware of the significant precautions that operators are taking 82% say they would feel very or somewhat safe going back to the theaters.
Our education portfolio comprises 85 properties with 15 operators and at the end of the quarter was 100% occupied.
I now want to update you on the operating status of our tenants are deferral agreements and rent payment timelines.
63% of our theaters were opened as of November Threerd openings continue with restrictions implemented by state and local governments as of today only new Mexico prohibits all theatres from opening however, many states most significantly in New York in California have county by County restrictions, which precludes.
Some theater openings.
Scheduled for 2020 have pushed to 2021.
We are optimistic that the projected film slate will provide a strong content platform for theaters to ramp up.
This 2021 slate includes a quiet place part to Black widow, no time to Die June top gun Maverick, the fast and furious nine spiderman three Ghostbusters after life Jumbo cruise Jurassic World Dominion and EMI seven.
You on our other major customer groups approximately 93% of our non theater operators are open or for seasonal businesses are closed in the normal course.
These businesses continue to implement appropriate safety protocols to comply with state and local requirements perform.
Performance remains fluid depending on the impact of COVID-19 in each locale.
For July August and September, respectively, and 41% for the third quarter versus 24% for the second quarter.
Cash collections for October were 43% and were negatively impacted by Regals decision to close most of our theaters and because many of our exhibitors are paying a percentage of sales.
The lack of product from Hollywood.
Immediately 5% to 7% of annualized pre covid contractual cash rent however, because of the continuing challenges facing theatrical exhibition depending on the length of time it takes to bounce back additional permanent rent reductions may be required.
19 of our top 20 customers are either paying their pre COVID-19, contractual runner interest or have executed deferral agreements.
We have made significant progress with the one remaining operator beach.
Between executed agreements and those customers for whom no agreement was required we have addressed approximately 90% of our annualized pre covid contractual cash rent and interest payments.
Our agreements are generally structured the ramp up rent and mortgage payments through the end of 2020 and in some cases beyond 2020.
Repayment of deferred amount typically commences in 2021 depend.
Depending on the deferred amount and to allow our customer some breathing room.
At September Thirtyth related to these tenants, including $33.4 million from prior prior periods.
FFO as adjusted for the third quarter of 2020 includes the full impact of these write offs. While AFFO includes all but the straight line portion totaling $23.9 million.
Note that the receivables written off are still owed by these tenants and we booked as revenue in the future if and when received however, there will be no receivable risk on the balance sheet for these tenants going forward as a result of moving them to cash basis accounting.
This decrease is due primarily to lower payroll and benefit costs as well as lower travel expense.
Transaction costs were $2.8 million for the quarter compared to $6 million and the prior year. The decrease is related primarily to lower costs incurred related to the transfer of early education properties to chrome della crime.
Interest expense increased by $5.1 million from prior year to 41.7 million. This increase was primarily due to the precaution every measure we took in march to draw $750 million on a revolving credit facility.
Which provides us with additional liquidity during this uncertain time.
As I will discuss later in my comments, we're also paying higher rates of interest on our bank credit facilities as well as our private placement notes during the covenant relief period.
Category is for new vacancies.
Note that the only significant change in these categories from what was reported last quarter was moving Regal from the second category, which is full accrual basis to the fourth category that includes customers on a cash basis.
Now, let's move to our balance sheet and capital markets activities.
Our debt to gross assets was 42% on a book basis at September Thirtyth.
At quarter end, we had total outstanding debt of $3.9 billion of which $3.1 billion is either fixed rate debt or debt that has been fixed through interest rate swaps.
With a blended coupon of approximately 4.5%.
Additionally, our weighted average debt maturity is approximately five years and we have no scheduled debt maturities in two 2022, when only our revolving credit facility matures.
Our revolving credit and term loan facilities are now at LIBOR, plus 1.625% and LIBOR, plus 2% respectively and.
And the facility fee on the revolving credit facilities, 0.375%.
And after the Covenant relief period based on current ratings the rates for the revolving credit and term loan will be LIBOR, plus 1.2% and LIBOR, plus 1.35%, respectively and the facility fee will be 0.25%.
Note that at Moody's where to further downgrade our unsecured debt rating all in pricing on both of these facilities would increase by 35 basis points during the covenant relief period, and 40 basis points. After the covenant relief period from what is shown on this slide.
Additionally, the rates on our $340 million of private placement notes are currently set at the maximum rates during the covenant relief period of 5.6% and 5.81% for the notes due in 2024 and 2026, respectively.
After the Covenant relief period. These notes are scheduled to return to the pre pre waiver levels of 4.35% and 4.56% respectively.
Lastly, due to the rating agency downgrades during the Covenant relief period, we are required to provide subsidiary guarantees for our bank credit facilities private placement notes and other outstanding senior unsecured notes and if Moody's were to further downgrade or unsecured debt rating. We will we will be required to provide an equity pledge of certain subsidiaries during the cover.
It really period to secure the obligations under our bank credit facilities and private placement notes.
Finally, as previously announced to the uncertainties.
Created by the COVID-19 disruption, we're not providing any forward earnings guidance.
Performance continues to improve and you gave a lot of good details I'm wondering if you could provide kind of some numbers behind what your scene for open tenants. How performance has been kind of sense opening maybe either versus pre covid or from a wreck coverage perspective, just to give an indication of how.
Subs kind of major windows when product is available our next major kind of window will be kind of the holiday season and do those movies hold if not then we're probably looking for tent Poles as is the spring I think that's that's kind of the timeframe, but Greg maybe you can.
To add something to that no.
No I agree the other thing I would say Nick is it's dependent on a lot of things happening in Europe as well.
As of last week, the UK, France, Italy, and Germany put restrictions on theatres there.
Air how much of a minimum rents what was variable ramp based on percentage of sales in the quarter.
Well we of course, we had percentage rents that were calling percentage rents that was 3.1 million and then there were other percentage rents that we're treating as minimum rents because early payments towards their minimum rent and.
I don't think we share that level of detail. It wasnt tremendous because a lot of that is based on box office and box office.
Wasn't that great obviously in Q3.
Uhm, you know to take place that they might be contemplating.
I I don't think we think there'll be any additional openings and their plane. I mean, there is some sporadic product that that's coming out I I think they're still.
It was very interesting and Greg can comment on this is you know when several weeks ago, when Orange County opened up a few locations in California's shot to the number one kind of theaters in the country. So that there you know when we see these openings, we see the consumer respond but.
Without without true flow of content, it's very hard and and I think Cineworld decision was based upon the fact and if you if you've followed them. They said they could open within two weeks once there's a dermometer will cut off content flow.
And so I I think right now we're we're just not seen that but when they do open they're they're they're performing very solidly, but Greg maybe you have something more.
Can you give us what the collections or in the portfolio excluding the theaters.
Mark I don't know if we if we have those those numbers excluding theaters.
The restrictions are not uniform I mean, so we we have some.
Some jurisdictions, where they're operating it at at you know almost at capacity. So I I think it's it's really going to depend but it. It appears that they are able to scale their expense structure to their to their revenue side and it appears to be working and candidly they've been ramping throughout Ah.
This quarter and continue to do that but Greg maybe you have something you could add on top of that no. I think those are the important points and you know you know, especially in the early childhood education utilization is steadily improving in the private school. It's just been a relatively stable environment. You know, we'll have as I said in my script and we'll have a.
A little more color on that at the end of the quarter as as we see what happens going into next year with restrictions [laughter].
Okay, Toni I'm like just.
It just looked up your answer to your question in third quarter. We collected you know in the low sixties as far as cash right that 41% of pre covid.
<unk> Avenue and the theater number was about roughly about 15 million.
Okay. So.
And is there a way to take the remainder and just you know try that break what was due.
I'm, sorry, what was that.
He he said low sixties million right.
Right with 15 of it being the theaters.
So you.
Four at high Forties, I guess thereabouts from everything else.
Okay. I guess, we can kind of back into then what that collection react kind of 40.
Kind of high forties everything else right, if it's low sixties so high.
Hi for Ya.
Over 40 plus million of everything else.
Okay and your last question.
In 2021, you're supposed to deliver about 65 million a build the suits, what's the expectation that that those will be able to pay.
Pay ran like what's in that mix.
Greg maybe you have some color on that I I think you know we're evaluating all of these Tony and again, it's I I think.
You know, where we can where we can delay things. We are so we'll we'll see if those those come online, but I I think most of those are non theater.
Kind of of of.
Shortening the window they are treating it as a aberration, but it would not surprise me that they're going to play it during that just given the dart the product that's out there, but Greg maybe you have some thoughts.
Great and.
I agree I doubt Regal, we'll be open given what's going on in Europe.
Okay.
And then on the theater deferral agreement.
So can we assume that the REIT would the timing for the right to flip from per site rent. The cash rent was that somewhat aligned with the studio or the box office release schedule. It yeah. It was somewhat aligned but I wouldn't say, we took a more conservative approach in kind of backed it up so.
I think you know we thought that we.
Luckily the.
Some of the transition related to moving or some early ed facilities to crumble a crime frankly that was elevated this quarter, we don't expect that same level to persist.
Okay. Thank you guys.
Thanks right.
Your next question comes from the line of our J Milligan with Raymond James Your line is open.
I think you covered a great.
Okay and my second question is what percentage of AB are of the theaters pre Cove. It is now on a cash basis and sort of what what are the factors that might push more of that exposure onto a cash basis.
Really the primary to that on a cash basis, or AMC, and Regal and I think pre cobot AMC was roughly 17% to 18%.
And I think Regal was 12% to 13%. So those are the primary too. There's some others that are on kind of a modified cash basis, where we're not recognizing anything during the deferral period, so that percent overall, the little higher than the sum of those two which is about 30% or so so probably.
Probably be around I would say.
35% something like that.
Okay, what would need to happen in terms of converting the rest to a cash basis.
Oh really its about their credit quality and our ability to see that they can't can they pay is the is there credit strong.
So you know as as this thing moves on we are constantly looking at their credit and their ability to satisfy the receivables because anytime we decide to accrue a receivable we've got to be you know 70.
75% are confident they're going to collect.
75% confident the recollect, 90% of the lease rules. So it's a pretty stringent rules. So we are looking at those and then this quarter as we've talked about Regal.
You know.
Deteriorate enough credit wise that we thought it it didnt meet that threshold and that we were should put them on cash basis.
Okay. Thanks, guys that's it.
Thank you.
Your next question comes from the line of John Massocca with Ladenburg Thalmann. Your line is open Sir.
Good morning.
Good morning, John.
Everything is some of the stronger non theater operators in the context of cash flow and when would you expect some are the bulk of repayment of those deferred amounts maybe that happened earlier in the year to come to you.
And was any of that flowing through in Threeq 20.
Yes, I don't think we had I'll, let mark answer. This I think this is mainly starts starts flowing through in 2021, just because of that.
We took a kind of conservative approach and how long that ramp would take.
But I think it it would it would begin to flow some in 2021, but mark maybe you have more on that.
No that's correct I agree with that they generally start in 21 and generally go beyond 2021 in some cases over the remaining lease term some.
Some of our theater tenants, but I think what Greg said is accurate.
But things like non theater with those come sooner rather than to me, obviously theatre is a little bit in flux, but you know.
People, who see maybe a little more recovery could that potentially you positive tailwinds, the cash flow and maybe at that.
Tony Tony event, but okay.
It wouldn't be I don't think its going to be a 2020, because everybody is a little still skittish about second wave and how that's going to impact I do think though it could accelerate some of our payback in 2021, just because the impact has not been as severe as was anticipated when these deals were cut.
Okay.
And then as we think about.
Some of the commentary on moving subsidiaries to guarantee some of the current lease obligations. I mean is that largely procedural or clerical act or is there some factors that.
Keep that from happening.
I think and I'll, let mark add on this but I think it's largely a procedural which the subsidiary guarantees and things like that are pretty common for non investment grade and when we when we dropped below these credit ratings the the.
It's it's it is more procedural than it is kinda something unique to PR, but mark maybe you have something to add beyond that.
Yes, I would agree we had two or three ratings go below investment grade we were required to provide those really to all unsecured debt. So everyone will get that subsidiary guarantee but it's frankly.
Just procedural there's not much to it.
Okay.
Understood and then the increase in liquidity requirement and so.
On the modification that occurred was announced yesterday as you negotiate with the.
The private placement holders I mean is there potential for more liquidity requirements. There is that probably the kind of high watermark for liquidity requirements.
Going forward.
Yes, I mean, it was an easy give I mean, we held a how their interest rate schedules and everything else. The way we had it before so if you think about it we get the kind of cash on hand, plus undrawn.
Amounts on our line of credit so we have a billion over a billion to have liquidity. So the idea of you have to maintain it was 250 go into $500 million was a pretty easy given that I've got 700 million.
700 million plus of cushion there so.
You know that takes us all the way through the end of next year.
As far as that liquidity requirements. So number one we don't anticipate another modification knock on wood number two the 500 million is pretty easily achievable when you're sitting at a.
1 billion to currently.
Okay understood Thats. It for me. Thank you very much thanks, John Thanks, Jeff.
Your next question comes from the line of Joshua Dennerlein with Bank of America. Your line is open.
Yeah. Good morning, guys All me Josh.
In the past I think you flagged, 5% to 10% of maybe.
Right.
<unk> adjusted or restructuring.
Is that still how you're thinking about the portfolio or do you think that maybe increase.
Well again Josh.
That's what we talked about earlier and Greg's comments. He said you know what it's reflective of our agreements right now with some cushion built into that what we what in Gregs comments. What he said is you know that doesn't anticipate any sort of major restructuring I E bankruptcy of of those I think when you.
Look at our tenants right now that risk is really in kind of the theatre portfolio orbit did the majority of that risk is in the theatre portfolio. So I think what we've what we've tried to do is quantify the risks that we know now we have some cushion in that risk, but it at least acknowledge.
That you know it doesn't accommodate you know for a full bankruptcy risk now we've tried to address that with AMC and the fact that we've already kind of felt like we've restructured or or restructured our portfolio to address that.
And as I said earlier, we don't think that's in a mark is a restructuring risk. So it really comes down to us from the theater side ups in a world and some of our smaller operators, but.
When you go beyond our.
Kind of our fourth largest theatre tenet.
We really.
You know, it's three or four theaters or two theaters and one theater. So the real risk is in the bigger but the bigger groups, but Greg maybe you have something to add beyond that.
No I think that's absolutely right, Greg I mean, that's a plus or minus 150 theaters that we own or in our top four tenants. So the other 30 are sprinkled among a number of other operators and as Greg said from anywhere from four to one theater.
Okay.
Appreciate that Greg.
And then I.
I guess.
Movies, just keep getting pushed out now or like the leases.
Do you know what the studios are doing as far as like.
New new movies like I was wondering if.
The way to think about it if they keep pushing think back maybe they're not making new ones at this point and maybe get out two years.
There's kind of a a hole in the movie theater window any kind of insight there would be great.
I think what we saw Josh was kind of what what has occurred yet we've seen some pushing out but we also had pushing out of production during the during the cold period, you know, California, just resumed production probably in the last kind.
Kinda six to eight weeks, so I think that it created a whole and.
You know I, but I think that that is starting to ramp up but I think you will see what it will lead to his strong good strong.
Portfolio of titles in 2021 in probably 2022, just because of that back backdrop.
And by then given when this when we get some return to normalcy I.
I think it will be as we get out to 2023, it will be fine, but I do think there you know all of production was impacted probably from you know April to August so things that that were in pre production or in post production probably have gotten pushed and so we may see some titles and you've already seen it with.
Some of the major studio start moving titles it even late 21 titles into 22.
Okay. Thank you.
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And your next question comes from the line of RJ Milligan, we'd Raymond James.
Hi, guys just one quick follow up on the during the quarter. There was a big income tax expense and I'm. Just curious if you could talk about that and if we can expect you know if thats, just a onetime thing or there's potential for.
That to be elevated going forward.
Really that was a deferred tax write off non cash that was really a onetime thing we just won't record deferred tax assets going forward or provision will be.
More or less our cash provision so that related to a you know.
As a result of COVID-19 us not being feeling comfortable within the entities that fit that caused that deferred tax asset which is.
Related to cart right and.
Some of our Canadian entities in terms of with the Cove and disruption.
Did we feel confident that we were going to realize that asset so we reserved put.
Put an allowance of that 18 million on that deferred tax asset, but that's not something that will repeat itself.
Okay. Thanks.
Thank you.
Excuse me speakers I'm not showing any further questions. At this time you may continue.
Well. Thank you everyone for joining us today, we appreciate your time and attention. We look forward to talking to you all soon and probably most of you and they read so have a great day and.
We'll talk soon thank you. Thanks.
Thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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