Q4 2021 EPR Properties Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to <unk> fourth quarter 2000 to anyone EPR properties earnings Conference call.
This time all attendees are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad.
If you require any further assistance. Please press star zero. Thank you.
Now I would like to welcome Mr. Brian Moriarty, Sir Please go ahead.
Thank you operator, thanks for joining us today for our fourth quarter and year end 2021 earnings call and webcast participants on today's call are Greg Silvers, President and CEO , Greg Zimmerman Executive Vice President and CIO, and Mark Peterson Executive Vice President and CFO .
Start the call by informing you that this call may include forward looking statements as defined in the private Securities Litigation Act of $19 95 identified by such words as will be intend continue believe may expect hope anticipate or other comparable terms the companys 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 report on Form 10-K and 10-Q.
Additionally, this call will contain references to certain non-GAAP measures, which we believe are useful in evaluating the company's performance.
A reconciliation of these measures to the most directly comparable GAAP measures are included in today's earnings release, and supplemental information furnished to the SEC under form 8-K.
If you wish to follow along today's earnings release supplemental and earnings call presentation are all available on the Investor Center page of the company's website Www EPR Casey Dot com.
Now I'll turn the call over to the company President and CEO , Greg Silvers.
Brian Good morning, everyone and thank you for joining us on todays fourth quarter and year end 2021 earnings call and webcast.
As we enter 2022 I am very proud of the significant and consistent progress we made throughout 2021, our cash collections improved meaningfully as the year progressed and ended the year at the high end of our expectations. Additionally.
Additionally, during the quarter, we took several important steps to further enhance our balance sheet.
This progress has given us the flexibility and liquidity to pursue attractive opportunities and drive our growth strategy in the quarters ahead.
Turning to our tenant industries.
We're pleased by the significant resolve demonstrated during the year by theater exhibition.
This was highlighted by the extraordinary performance of Spider Man No way home, which was released in December 2021.
Notwithstanding the fact that the title was released during the heart of the spread of the Omicron variant. It has become the third highest grossing title of all time.
Over the past two years studios and content providers have experimented with various methods of film delivery. These include premium video on demand and day and date presentation. However, the data is clear that neither of these alternatives is an economically viable replacement for exclusive theatrical release.
We look at streaming as a competitive threat data is also compelling.
Reset 2021 Nielsen streaming statistics again affirmed that streaming services are primarily vehicles for series based viewing as 85% of total minutes are spent with either acquired or original series.
The reality is that theatrical exhibition will continue to play a major role in the movie release value creation as it maximizes revenues creates brand awareness and downstream value for studios and is valued by the consumer as the recent spiderman success demonstrates.
While there can be no assurance that we will achieve 2019 box office revenues again highly productive theater locations will endure as society resumes its path towards normalcy, we believe that streaming services and theatrical exhibition will continue to successfully coexist just as they have for many years.
We look forward to the continued recovery of theatrical exhibition throughout 2022 with a strong lineup of titles on the calendar.
Our non theatre properties continued to show strong recovery throughout the year with many tenants even outpacing 2019 performance. We believe this is strong evidence of the durability of demand for experiential properties in our portfolio.
As we consider the near term environment of higher inflation levels, we believe our portfolio of value want value oriented drive two offerings will continue to lead in the recovery of the experienced economy.
We are also excited to provide solid earnings and investment spending guidance for 2022.
Our earnings our earnings guidance clearly demonstrates the productivity of our portfolio. We also understand that investment growth is the engine that drives increasing shareholder value and we are excited about our investment pipeline as tenants are once again growing their businesses. Additionally.
Additionally, we are pleased to deliver a well covered 10% increase in our monthly cash dividend to common shareholders.
As we migrate from defense to offense, we believe our current valuation represents a significant discount and a compelling long term investment opportunity.
As we've stated before we are uniquely positioned to deliver consistent growth in experiential real estate and our guidance demonstrates this commitment.
Finally last week, we announced the addition of Lisa trim Burger and Coccidia Ziegler to our board.
These individuals bring highly valued experience along with new and unique perspective to the company and expand the diverse experience of our board members I am excited about working with Lisa and Cox you in the future as we continue to chart. The path to success now I'll turn the call over to Greg Zimmerman.
Thanks, Greg at the end of the fourth quarter. Our total investments were approximately $6 4 billion with 353 properties in service and 96% leased during the quarter. Our investment spending was $25 6 million, bringing the total in 2021% to $133 5 million or one.
Percent of the spending was in our experiential portfolio and included an acquisition build to suit development and redevelopment projects.
Our experiential portfolio comprises 279 properties with 41 operators and accounts for 91% of our total investments were approximately $5 8 billion and at the end of the quarter was 96% occupied.
Our education portfolio comprises 74 properties with eight operators and at the end of the quarter was 100% occupied.
Now I'll update you on the operating status of our tenants.
Exhibition ended the year with momentum Q4 total box office was $2 6 billion, bringing the total domestic box office in 2021 to $4 four 8 billion, a 113% increase over 2020.
Through the past weekend Spiderman, no way home has gross $771 million, becoming the third highest grossing domestic film of all time and only the fifth to exceed $700 million.
The 2022 film slate is solid with a potential for $18 tent pole titles to gross $100 million or more up from 11 in 2021.
Uncharted significantly exceeded expectations, bringing in $51 million over Presidents' day weekend.
Sony has protected the 45 day window and its films have outperformed over the weekend, Tom Rothman, Sony CEO noted on the heels of venom, let there be carnage, Ghostbusters afterlife, and spiderman, no way home uncharted as yet another blow to theatrical naysayers and further proof of the.
Efficacy of our model the.
Batman opens in early March the remainder of 2022 includes several highly anticipated sequels top gun Maverick Jurassic World Dominion Aquaman and the loss Kingdom Avatar, two and John Wick four along with four Marvel Universe films.
Turning now to an update on our other major customer groups. We continue to see positive performance across all segments of our drive to value oriented destinations.
We're seeing continued strong performance across eat and play throughout the country without performance in areas without significant COVID-19 restrictions.
Most of our attractions were closed seasonally in Q4, our attractions and cultural or offerings that were open in Q4 recovered very nicely in attendance and revenue after a difficult 2020 and early 2021 as our attractions reopen for the spring and summer we anticipate continued solid demand in 2012.
Two.
Fitness is making its way back to 2019 membership and revenue levels. After a very challenging 2021.
2020, and early 2021, we're happy with the recovery in our assets.
High demand continues across our experiential lodging portfolio with year over year growth in occupancy and ADR and all our assets that were not subject to ongoing COVID-19 restrictions or under renovation.
The larger camp Margarita Bill the hotel component of our camp Margarita Bill RV resort in Pigeon Forge, Tennessee opened in early February .
The entire camp Margaritaville project has been so well received that we're working with our operator to add significant additional amenities to further enhance the guest experience.
<unk> Spa at our Alyeska resort will open in March adding yet another reason to visit this high quality four season resort south of Anchorage.
As I noted on our last call. We completed the renovation of the Bellwether Beach resort on Saint Pete Beach in October we will complete the renovation of the Beachcomber in March we've already seen substantial year over year growth in ADR and occupancy at both locations are.
Our jelly Stone Park Warren's exceeded our expectations in 2021, and we are continuing to implement upgrades as we reposition the park to better serve our customers.
The Cartwright resort and indoor Waterpark as open Thursday through Sunday until Memorial Day, We will return to full week openings from Memorial day to Labor day.
After all the challenges presented by Covid, we're looking forward to what we hope will be our first full normal summer season.
Turning to scheme.
Conditions were challenging in the early part of the season, but improved after Christmas we've seen good demand fueled by solid season pass sales. The omicron variant created some additional impact, particularly in staffing, but because we own drive to value oriented ski destinations our assets were not materially impacted by flight.
Cancellations.
With improved weather conditions after Christmas and a decrease in Covid cases, we expect strong visitation numbers in the second half of the season.
Our education portfolio continues to perform well with 2021 enrollment and revenue both solid exceeding 2020 levels.
As has been the case for the past year and a half our primary capital recycling focuses on vacant theaters. Since Q3 2020, we sold six vacant theaters for various uses including two in the fourth quarter. We have four remaining vacant theaters. One is under an executed contract of sale and as the only.
<unk> theater included in our disposition guidance, we continue to market. The remaining three theaters for sale with multiple expressions of interest on each and disposition proceeds could grow during the year as we make additional progress.
In addition to the two theater properties sold in Q4 as previously reported we made the strategic decision to sell the wisp in Wintergreen ski resorts to our tenants. We also sold a vacant eaten play location and a vacant land parcel.
Total net proceeds for these six transactions were $65 3 million.
With a gain of $16 4 million.
For 2021 disposition proceeds and mortgage note payoffs totaled $101 2 million.
Finally, as we turn our focus to once again growing the business, we're seeing increasing investment opportunities through most of our verticals, including Eaton play experiential lodging fitness and wellness and attractions and our pipeline is building.
Since our last call. We have commenced two top golf build to suit projects in Ontario, California, and King of Prussia, Pennsylvania, and we acquired an operating movement climbing fitness yoga and the Lincoln Park section of Chicago. The investment in these three projects will total approximately $82 million on <unk>.
<unk> and.
In Q4, we funded $22 million and to date in 2022, we funded an additional $19 million were thrilled to add these three high quality assets to our portfolio all in a plus real estate locations and dominant markets with strong operators.
And to have movement, the leading climbing gym, operator in the country in our portfolio.
We're either under contract or in advanced negotiations for an additional approximately $350 million of investments in multiple experiential verticals.
These opportunities include acquisitions build to suits and redevelopment investments consistent with our historical approach cap rates remain in the 7% to 8% range and we should create compelling long term value.
With this growing pipeline, we're introducing investment spending guidance of $500 million to $700 million for 2022.
In summary, we're pleased with the backdrop as we head into 2022 consumers continue to engage in experiential activities and operators are pivoting to growth with our unparalleled experience in network in experiential real estate, we're ideally positioned to take advantage of these growth opportunities.
I'll now turn it over to Mark for a discussion of the financials.
Thank you Greg today, I will discuss our financial performance for the quarter and year provide an update on our capital markets activities and strong balance sheet and close by introducing our 2022 guidance.
<unk> as adjusted.
For the quarter was $1 eight per share versus 18 <unk> in the prior year and <unk> for the quarter was $1 11 per share compared to 23 in the prior year.
Before I go through the variances I want to call out three favorable items that benefited our results this quarter each of which is about $1 million and in total represents about <unk> <unk> per share.
I'll have more on each of these items in my comments, but they relate to deferred rent received from prior periods periods from cash basis customers.
And nonrecurring benefits in both property operating expense and G&A expense.
Note that after backing out these favorable items, our <unk> as adjusted per share for the quarter was $1 four which is still well ahead of the high end of our guidance.
This better than expected performance across a number of areas and is testament to the strength, we are continuing to see in our customers' businesses.
Now moving to the key variances total revenue for the quarter was $1 $54 $9 million versus $93 4 million in the prior year. This increase was due primarily to improved collections and revenue from certain tenants, which continued to be recognized on a cash basis over previously receiving abatements.
As well as certain receivable write offs in the prior year.
Scheduled rent increases as well as acquisitions and developments completed over the past year also contributed to the increase.
This increase was partially offset by the impact of property dispositions.
Additionally, we had higher other income and other expense of $8 million and $6 9 million respectively.
Due to the reopening of the Cartwright resort indoor Waterpark after being closed in the prior period due to COVID-19 restrictions.
As well as from two theater properties that we are operating which benefited from strong fourth quarter box office results.
Percentage rents for the quarter were much higher than anticipated and totaled $6 9 million <unk> 3 million in the prior year the increase versus prior year related to higher percentage rents from our gaming tenant as well as from an early education tenant based on a restructured lease.
Additionally, higher percentage rent was recognized.
Higher percentage rent was recognized than anticipated due to strong performance at our golf entertainment complexes several attraction properties and one ski property. This was partially offset by the disposition of certain private schools in December of 2020.
As a reminder, we are defining percentage rent here as amounts due above base rent and not payments in lieu of base rent based on a percentage of revenue.
Property operating expense for the quarter decreased by $3 5 million compared to prior year, primarily due to fewer vacancies, resulting from disposition dispositions and re leasing.
And Additionally, we had about $1 million of nonrecurring benefit in the quarter as a result of the closeout of an accrual for certain prior period infrastructure costs.
G&A expense for the quarter decreased by <unk> 6 million compared to prior year and was below the low end of our guidance due primarily to a nonrecurring adjustment to reduce incentive compensation by about $1 1 million.
Costs associated with loan refinancing or payout for the quarter of $25 million related to the redemption of all of our $275 million, 5.25% senior notes due in 2023, including the make whole premium.
Interest expense net for the quarter decreased by $8 8 million compared to prior year due to reduced borrowings and lower borrowing costs due to the termination of our bank covenant waiver.
In addition to the repayment of the term loan during the third quarter, we had no balance on our revolving credit facility throughout the quarter.
During the quarter, we recognized a credit loss benefit of $2 3 million versus.
<unk> expense of $23 million in the prior year. The primary reason for the benefit this quarter was a partial repayment of $1 $5 million on a fully reserved note.
This benefit is excluded from <unk> as adjusted.
Shifting to full year results.
Both 2020, and 21, where of course negatively impacted by COVID-19, but as you can see we have experienced meaningful progress in 2021 with <unk> as adjusted of $3 nine per share versus $1 43 in the prior year and with fourth quarter nearly in getting back to a full run rate with revenue recognition at 99.
10% of the contractual cash amount.
Now, let's turn to our capital markets activities and balance sheet.
As I discussed on our last call, we had a very productive quarter of financing activities that resulted in lower cost of capital for EPR and further improving our liquidity to position us well as we reaccelerate our investment spending.
In early October , we amended and restated our $1 billion revolving credit facility to extend the maturity to October 2025 with extensions at our option for a total of 12 additional months subject to certain conditions. We are pleased that the new facility has the same pricing terms and financial covenants at the Pryor facility with improved values.
<unk> of certain asset types.
Additionally in January of 2022, we amended our private placement note agreement to capture the same improvements in the valuation of certain asset types.
In late October we closed on $400 million of new 10 year senior unsecured notes at a coupon of three 6% the lowest in the company's history. We are very pleased with the timing of that transaction given the increase in both interest rates and investment grade spreads since that time.
The proceeds from this offering were used in part to redeem all $275 million of our five and a quarter senior unsecured notes at the make whole amount on November 12.
Our net debt to adjusted EBITDA was five two times and our net debt to gross assets was 38% on a book basis at December 31.
At year end, we had total outstanding debt of $2 8 billion, all of which is either fixed rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately four 3%.
Additionally, our weighted average debt maturity is over six years with no scheduled debt maturities until 2024.
We had $288 8 million of cash on hand at quarter end and no balance drawn on our $1 billion revolver. As you can see our balance sheet is well positioned to fund our investment opportunities.
Cash collections from customers were at the high end of expectations at approximately 97% of contractual cash revenue for the fourth quarter or $133 8 million.
Does some of this strong performance related to cash basis customers revenue recognition as a percentage of contractual cash revenue was also at the high end of guidance for the quarter at 99% as I mentioned earlier.
We are pleased with the recovery of our tenants are experience experiencing and anticipate both contractual cash collections and revenue recognition to remain near 100% for all of 2022.
As a result going forward, we will no longer be guiding to expected contractual cash collections and revenue recognition.
During the quarter, we also collected $10 2 million of deferred rent and interest from accrual basis tenants and borrowers.
And the deferred rent and interest receivable on our books at December 31 was $27 6 million.
We expect to collect about $24 million of this amount in 2022.
With the remaining amount to be collected through the end of 2024.
Additionally, as I mentioned at the beginning of my comments during the quarter, we collected $1 million and deferral repayments from cash basis customers that were recognized as revenue when received.
At December 31, we had $124 million of deferred rent and interest owed to us not on the books. This amount is due over the next five years.
Revenue from cash basis customers will continue to be recognized when the cash is received.
Finally, as I discussed previously we received a note repayment from a cash basis customer of $1 5 million.
Which resulted in credit loss recovery that is excluded from <unk> as adjusted.
Adding this all together and as you can see on the slide we collected 106% of contractual cash revenue for the quarter.
For the full year 2021, we have collected a total of nearly $71 million of deferred rent and interest, bringing the total of such deferred collections of nearly $80 million since the onset of the pandemic. We have also collected over $8 million of cash related to a previously reserved note receivable.
Due to the anticipated ongoing to FERC collections, we expect to continue to collect more than 100% of contractual cash revenue over the next several years, providing additional capital to fuel our fuel our growth.
We are introducing guidance for 2022 <unk> as adjusted per share of $4 30 to $4 50, representing an increase of 42% at the midpoint and investment spending guidance of $500 million to $700 million guidance for disposition proceeds of zero to $10 million is lower than the past few years give.
Our significant progress in selling vacant properties as Greg discussed.
Based on expected 2022 performance, we are pleased to announce a 10% increase in our monthly dividend beginning with the dividend payable April 18th to shareholders of record as of March 31.
We expect our 2022 dividend to be well covered with an <unk> as adjusted per share payout ratio of 74% at the midpoint of guidance and <unk> <unk> per share payout of around 71%.
Both of these payout ratios are before considering the benefit of any deferral of collections.
Before concluding I would like to give some additional details regarding 2022 guidance.
Consistent with past guidance, we are not including any collections of deferrals from cash basis customers that we book that will be booked as additional revenue. When received of course, we will continue to report each quarter on the amount of such collections as well as the collections from accrual basis customers.
Percentage rents are expected to be lower than the $14 million recorded in 2021 due to an agreed upon change in structure with one of our early education tenants whereby percentage rent paid of $8 3 million in 2021.
We will revert to becoming part of minimum rent.
However, this decrease is expected to be partially offset with improved performance at several other properties. Accordingly for 2022, we anticipate percentage rent to be in a range of $8 million to $12 million.
Also consistent with the historical timing of percentage rents, we expect such amounts to be weighted to the back half of the year with over 50% anticipated in the fourth quarter.
As I mentioned earlier in the fourth quarter of 2021, we had a benefit to property operating expense of about $1 million that we don't anticipate recurring in 'twenty two.
As a result for 2022, we expect this expense to return to a quarterly run rate of about $14 million.
G&A expense is expected to increase in 2022 to a range of $49 million to $52 million, primarily due to increased payroll costs increased noncash stock grant amortization as we have.
As we have hired new people to support our growth and to reflect salary increases and higher anticipated incentive compensation.
We also expect travel expense to increase as well as professional fees to support our ESG initiative I.
I would also like to note that the first quarter as anticipated slightly higher than the quarterly average for the year by approximately 400000.
We also expect that our convertible preferred shares outstanding will continue to be dilutive to per share results in each quarter in 2022 as they were in Q4 of 'twenty one.
Guidance details can be found on page 23 of our supplemental.
Lastly, I'd like to comment on our capital plan for 2022.
We are in the enviable position in this turbulent market of having nearly $300 million of cash on hand at year and nothing drawn on our $1 billion revolving line of credit and no scheduled debt maturities until 2020 for.
Furthermore, we expect to generate significant excess cash flow in 2022.
As a result, our plan has no new sources of debt and only a modest amount of new equity later in the year to continue to maintain low leverage. This means we can be opportunistic as to when and how we access additional capital.
Now with that I'll turn it over to Greg for his closing remarks, Thank you Mark.
As you can see from both our results and guidance our focus has turned from recovery to growth.
I could not be prouder of our team and how they have met the many challenges of this pandemic and we are now positioned to execute on our investment plan and drive shareholder value for this coming year and beyond.
With that why don't I open it up for questions operator.
Yes.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session and as a reminder, if you wish to ask a question simply press Star then the number one on your telephone keypad once again that a star one on your telephone keypad.
Your first question is from the line of <unk>.
Donald from DB. Your line is now open.
Thanks, Good morning, everyone.
Thank you Amy.
Acquisition pipeline can you discuss the breakdown of new acquisition.
Thanks Ben.
Within the range.
What are you assuming as far as timing of closing the deal.
Yes.
Again, I'll, let Greg comment.
Historically I would say again, it's probably what we're looking at 50 50 now.
I think again, it's probably going to be.
We're getting some progress on some things now as Greg mentioned under LOI that we are progressing with but it will probably be.
A little lower at the beginning a little heavier at the end just as things kind of move through this way, but Greg I think the best way to think about it as we're ramping up as we go into 2022 and I agree with it will be a nice mix of development and acquisitions.
The good thing about that Kt has the development will not only contribute some this year, but will drive further growth into next year as it becomes online.
Hey, it's Michael Bilerman here with Katy I was just wondering as you think about funding all the transactions and clearly you have the cash that's on the balance sheet you talked about the free cash flow after paying the dividend can you talk about your overall leverage profile, which gives you.
Good runway.
As you mentioned not having to issue debt or equity.
I guess what are you thinking about once you spend all that capital.
How are you thinking about your cost of capital and where does your stock need to be.
Trading for you to think about that as a replenishment of your capital base.
Clearly the Bakken.
10% <unk> yield is not.
A level, where you could issue accretively and so I'm, just trying to understand a little bit how aggressive youre going to be spending the capital you have before thinking about replenishing, but well.
Yes, I think Theres, a couple of things, Michael and I'll, let mark comment on this I think.
Clearly we think that.
That does kind of report and us our ability.
To execute will hopefully help with.
Our share price.
When we start to look at things on a 60 40 basis as Greg said these are things that.
There.
In that seven to eight range that if we can get our cost of capital into <unk>.
Around seven that we think that we can accretively still deploy capital we still have the ability also to increase our dispositions and recycle capital. So I think there is a lot of different levers that we can pull.
Clearly as you mentioned our share price has been depressed, but as I said, we've been in this kind of recovery mode, We think that.
The proposition that we're offering will be a great value opportunity for people people will recognize that and hopefully the share price will recover that will allow us to get back into that.
Michael.
Driving forward.
The positive thing for US right now the opportunities are there.
We think they are attractively priced.
And on any sort of normalized basis, we think they are accretive to what should be our normalized valuation, but mark maybe you have something to add yes, I would agree with all of that.
We're in the fortunate position as you mentioned Michael that we have the cash on hand, that's basically earning nothing that can be redeployed. We also are are generating significant positive excess cash flow beyond our dividend. If you think about the deferral of collections, we expect plus ongoing cash flow and a relatively low payout ratio so that cash on.
Hand, plus cash will generate extra the dividend really gives us a lot of flexibility as to whether we have to raise equity or not we do have some equity in the plan just to maintain low leverage but frankly.
We can be pretty optimist up <unk> about that within the range of our leverage as we look at our capital plan for 2022.
Great. Thank you.
Thank you Michael <unk> Michael.
Your next question is from the line of Anthony <unk> from Jpmorgan. Your line is now open.
Great. Thank you.
First question is just want to understand in the supplemental your exposure to Regal bounce from about 8% to 13% in the quarter. So was wondering what happened there and whether that was just.
The change in collections and then just any thoughts on that portfolio given the issues with the parent company Center World.
Yes, and I'll, let mark answer the bounce up but generally was just collections, but I'll, let it go into more detail I.
I think Tony.
Again, yes, they do.
With the recent judgment with Cineplex I think everyone in the industry things that will get settled that there. There are two reasonable people that are reasonable companies that debt.
If anybody followed some of the news.
It doesn't make any sense for them to.
To drive that too.
Two of restructuring.
So we think those those those issues will get settled and as the industry recovers.
We'll both benefit from that settlement. So currently right now we think they are they are in discussions and making progress I would also add that we have a very good regal portfolio.
The strength of art will make that and both of those groups Cineplex and Regal are tenants of ours. So.
And just with respect to the percentage it went from a little over 8% to about 13, 7%.
With respect to rig a member Regal is on a cash basis.
This is based on revenue recognized and they were receiving some deferrals through third quarter and fourth quarter paid a 100% of current contractual cash. So that was really the increase is a full quarter of.
Normal payments, whereas in Q3 they are under.
Some deferral agreements.
Okay, and then mark on that major tenant roster.
I mean, given where the questions were in the quarter is that pretty reflective of the rent that's due at this point.
Yes, I mean, you get a little bit of impact of percentage rents. Because this includes kind of all revenue in this in this calculation and so for example resorts World, which is our casino is probably not that high and ongoing basis, just because it had percentage rents. So there's a little bit of fluctuation remember too.
We're going to have revenue recognition will increase from around 99% to closer to 100% was really 98 point something percent to <unk> 99 to a 100%. So we're going to have some little bit of change there, but I think for.
For the most part it reflects sort of normalcy with I said with the exception of sort of some percentage rents that kind of influence, particularly attractions and as I mentioned casinos.
Casino investment.
Okay and then last question just in terms of the <unk>.
Cap rates on the deals that Youre looking at you talked about 7% to 8% can you talk a little bit more give some examples of.
Where you need to go to get something closer to an eight what those contractual bumps may look like what the underlying credit or product is just to get a sense because it seems like a lot of your peers and net lease are kind of trending more into things that are yielding 5% and 6%. So.
Just wanted to understand a little bit more about what what the product looks like up at that cap rate range.
Yes, I think and I'll, let Greg Greg Zimmerman comment on this I think there is some of that is is it the difference between an acquisition the lower end of that versus the development or redevelopment I think the other thing.
That people don't appreciate is and I give credit to Greg and his team has a lot of these tenants we work with through this pandemic and we've built up a substantial amount of goodwill.
With with how we dealt with them and how we help them in their business.
And that's paying off now and the opportunities that we're seeing.
That people are know, who we are how we work with them as tenants and.
Benefiting from that we're getting paid back and we're getting access and an opportunity to do deals, but Greg, yes, and I would add that we have.
Several folks who come with with different verticals that they invest in for us to help them. So I do believe that the relationships are important and we're certainly seeing the lower cap rate deals, but we feel like we have the opportunity to do the cap rate deals that we mentioned.
Thats.
Filling our pipeline.
Okay. Thank you.
Thank you Tony.
Your next question is from the line of the Darlington from Bank of America. Your line is now open.
Hi, good morning.
I know you guys mentioned that.
The expectations for gene editing and I'm, just wondering if thats fair to assume that growth will decelerate.
In 2023.
If you can talk about.
Well.
We expect it to be more recurring going forward.
Yes so.
We have hired quite a few employees. This year, we've increased our head count as we kind of ramp up for growth and if you.
If we look at our guidance.
This year at the midpoint of $55 million versus 2021 at.
<unk> $44 4 million, an increase of about $6 million.
About a million and half of that is stock grant amortization, just due to higher awards and we then we have about $3 4 million, it's really salaries and benefits. We did have to we did have raises this year like I said, new people higher incentive comp is expected based on performance.
We do have higher professional fees for ESG and our plan and we also have kind of travel and so forth other G&A items returning to normalcy, So I think.
Frankly, I think we've added or have planned to add most of the people and so I think we will.
Leveraging G&A relative to total revenue this year as a percentage lower than 'twenty, one, but youll continue to see that leverage a bit as we move into 'twenty three as revenue grow and you won't see G&A grow as much but I think that number.
New number is fairly sticky in terms of.
Given the fact that it's people in salaries and stock grant amortization, I don't necessarily see that going down going forward, but I think the percentage of revenue will go down as we further leverage our G&A.
Okay, great. Thank you.
And I'm also wondering if you could go over.
The intended portfolio allocation.
Im talking about page 20.
Right.
And looking at it.
Performing a lot better in <unk>.
What about the.
And early childhood education.
So it does not appeal to you.
Business.
<unk> and plain differential.
And we see it.
Sure.
Yes, I would say we've been consistent in the fact that we.
We're not really growing our education, we're focusing on experiential so.
That business is performing well again I think what we've seen is.
The market has taken out a lot of capacity in early childhood education and so as people are returning to work we're seeing.
Abstention recovery in those end demand, but as we've said prepaid.
Pre pandemic and throughout the pandemic our focus is on experiential and those are the categories saved four theaters that were going to be growing and that will be reflective of our investment spending guidance are in experiential categories not in education and not in theaters.
Okay, Great. That's helpful. Thank you.
Thank you.
Your next question is from the lineup.
Thomas from Keybanc capital. Your line is now open.
Hi, Thanks, good morning.
First question I just wanted to go back to Regal. So what is <unk> normalized exposure within the portfolio. It sounds like 14% is not the right number or is it I was a little confused by the comment.
I think thats in the range.
Normally if you go back to pre pandemic.
I think a similar type number.
I think one of the things I should add that could impact that schedule is deferral collections from cash based customers, we're not budgeting those but that can move the number.
Should we collect more than kind of the current contractual which is all we're contemplating but I think that number kind of overall.
Representative given that we were close to 100% revenue record.
Close to 100% revenue recognition as a whole.
And had full payment from real during the quarter.
Okay, and then I think.
There was a comment that the regal.
Assets the Regal locations are strong above average.
We're a regal rents or sales relative to market.
Across the portfolio or is there another way to provide some additional context around that comment.
Again, what we said.
Yes.
We think they are above average regal assets.
We <unk> when we did a.
Revision with AMC, we did that because those mark those rents were more out of market rents given the fact that they were long lived in and most of those assets had been in existence for more than 20 years are on our books and we felt we didn't need to do that with with Regal or cinemark.
Cinemark so.
I think while we don't talk about specific tenant I think and I'll, let Greg add color with the fact that we feel like we are.
Our Regal portfolio is is as I said, a better than average portfolio relative to to the market and.
It's reflective of the fact that.
Fourth quarter, we're back to a 100%.
Payment on that but Greg.
That covers it.
Okay are there any are there any restrictions or.
Obviously, it's sort of fluid and the outcomes uncertain, but are there any restrictions or anything that would maybe.
That would prevent <unk> from maybe transferring obligations.
To another.
Another operator in the way of sort of assuming leases or pursuing a spin or.
An IPO of the Regal entity or anything like that or are there any restrictions or impediments to something like that happening as it pertains to <unk>.
<unk>.
Again, I am not aware that there are I think other.
Other than the fact that we have a full cineworld guarantee.
I think it would be.
Very hard for them to execute that without.
Yeah.
Without <unk>.
Continuing with that obligation.
Okay, and then if I could just in terms of the acquisitions.
Yes.
I was just curious mark if you could help us understand what sort of the range of <unk> contribution looks like in 'twenty two.
The guidance from from investments it sounds like there is.
Some developments and Redevelopments that will have a bigger impact perhaps in 'twenty three relative to 'twenty two as they come online.
Just curious if you can talk about the <unk> impact that's embedded in the 'twenty two guidance from from investments.
Yes.
The good news is the way we've got this kind of laid in with 50 50, a bit back weighted we have equity in the plan and a pretty conservative way, that's somewhat opportunistic and somewhat optional it's not as big as you might think I think it's probably in the order of.
10, a share or something like that.
Terms of the impact of acquisitions and development development has some impact in that were obviously youre going to be capitalizing interest. So theres. Some cap rates, that's not the full cap rate and we'll get the benefit of a full benefit of that in 'twenty three obviously, but.
So it's partial.
I mean, it's not as significant as you might think in terms of our of our plan and I would add Todd that that's.
Always impacted by timing.
Yes.
Do deals close early or later.
That always drives a lot of that discussion.
Sure. Okay, that's helpful and I guess the cash.
On the balance sheet, almost $290 million should we assume that cash is used first to fund investments and then the revolver is used later in the year.
Sure, Yes exactly.
Kind of run through it $300 million of cash $600 million of acquisitions Hunter.
$140 million of positive cash flow have some equity issuance and very little draws on the lines. So no new debt very little draws on the line.
Really gets us to our capital plan for the year and I also should mention that at <unk>. There is some annualized <unk> two in that from projects, we don't have significant expanding.
<unk> spending in.
<unk> 'twenty, one, but some of that does annualize in that 10 cents as well so it's kind of a combination of.
Of the new investments plus of annualized <unk>, but no. The capital plan is really pretty straightforward. When we have this much cash on hand, and this much positive cash flow being generated and like I said really gives us a lot of a lot of flexibility as to how we do that but it's primarily off the cash and excess cash in a little bit of draws on the line and then we do have some equity.
But like I said very opportunistic in terms of how we will do that.
Okay, Great alright, thank you.
Your next question is from the line of key bin Kim from <unk>. Your line is now open.
Thanks, maybe just an accounting question first you mentioned in your opening remarks that.
Oh, a would be $1 four if you took out one time items.
Are you also excluding the higher than normalized percentage rent.
And that one in Florida, or if you took out the percentage ramp would it would actually be closer to one dollar or maybe a little less.
I am not taken out the percentage rent in that calculation because that bet.
We will recur effectively next year as well so in fact percentage rents on an apples to apples basis will go up you got to pull out the early childhood that moves to minimum rent if it would be to kind of do the math. So no. It does not back out percentage rents it backs out the three items I mentioned cash basis deferral collections of $1 million.
About $1 million in property operating expenses, and then about $1 million in G&A.
That's what the <unk>.
Okay, and just given some of those onetime item type of noise.
Would you be able to provide some brackets around what we should expect in earnings for <unk> without acquisition.
The first one run rate.
Yes, yes. So if you look at look at first quarter, we really have some offsetting things going on.
The <unk>.
But that won't repeat itself. So that dollar rate is more like a $1 four but then on the flip side, we have some <unk> going on.
With respect to some of our revenues and some.
And some.
<unk> of our projects from this year, plus some bumps and so forth. So.
Probably.
Yes.
I'll probably be in the neighborhood of of this year's adjusted this quarter's adjusted number which was $1 four.
We expect Q1 to be fairly similar to that as you have those kind of offsetting offsetting things going on for Q1 of the things that could take it up.
It could be a deferral of collections from cash basis customers, which we don't we don't budget.
Okay. That's helpful. Thank you and.
Your comments, you mentioned $140 million of cash flow I was just curious did you mean.
Cash flow after dividends.
Yes.
It's truly retained.
Correct.
Okay.
Just last question for me on Regal.
Can you just talk about what the you said you got full rent payment and <unk>.
What does that coverage ratio look like for that tenant.
Understand.
The downside case here is that the coverage ratio is good then obviously you're talking it sounds like it's kind of safe safer.
Again, I think again, a coverage ratio on a year over year basis, it's hard to project given the fact that fourth quarter was really I think what's important is both regal and all of the major exhibitors have indicated that in the fourth quarter. They were cash flow positive.
Which which means they're above one O.
For the for the quarter.
I think as we move forward through this year and we have a better kind of metric where we don't have total months that were totally lift off we'll begin to start kind of getting back to some of the traditional coverage metrics.
I just don't think it's it's really any way to apples to apples kind of compare those two right now because the only quarter that we really started turning the corner was in the fourth quarter.
And the box office will continue to get them.
Got it thank you.
Thank you.
Yes.
Your next question is from the line of Rob Stevenson from Janney. Your line is now open.
Guys. I know you are not generally in the market to buy but have you been seeing any good performing theaters leased to one of the top operators trade in the market, yet and if so where is pricing versus pre pandemic, because obviously it hasnt been a lot most of this stuff's been vacant Thats sold.
So it's been tough I think for a lot of NAV calculations to figure out what the 45% of your portfolio. The theaters is worth these days. So any has there been any decent price discovery on recent transactions out there in the marketplace.
I think all we've really seen is other theater companies acquiring.
Acquiring theaters.
Haven't seen a lot most as you said most.
Transactions are for alternative use.
But Greg.
I think youre right I think the only thing we've really seen is AMC, taking on new leases.
Okay and then how are you guys thinking about casino acquisitions at this point and where are the returns youre looking at on deals in that space today versus the seven 8% cap rates that youre talking about on acquisitions in general.
Yes, it's good question I think clearly.
There's been a lot of activity and a lot of pricing compression in that area.
I think most.
Deals I think.
Most deals, especially of the larger size or sub debt target for us. So it may not make sense for us right now.
I think.
And candidly as we move forward, we will be looking and were still being contacted and looking at deals.
But they will probably be smaller deals.
Rob There is just not that many big assets out there remaining so there may be an opportunity for us to participate in some smaller deals on a regional basis, but we'll just have to see as that develops.
No right now with the guidance that.
Greg provided and Marc elaborated on Theres, no gaming asset as part of that.
Yes, because I was wondering especially now that you now have realty income playing in that space, what's happening with cap rates. There. How are you guys also thinking about the experiential lodging at this point I mean is it is it an opportunity now given.
The hotel rates, although they have been performing better of late have been sort of a setback and.
Hotels haven't been as you know.
Front and center as stuff like apartments, industrial and things like that out there to make a play acquisition wise in that space. How are you guys thinking about that at this point in the cycle.
Again, it's interesting as Greg said, we've had some really good kind of performance out of hours, but we look at that a little differently.
We've seen really good response in the in the RV space, you've seen us make investments there so that whole recreational lodging is a little bit more expansive for us meaning.
Where we are we opened up our RV facility.
In Pigeon Forge and we've had outstanding performance with what we did at Jelly stone in Wisconsin. So.
We continue to see in and around major attractions I E National parks things of that nature that there is some real opportunity to come in to buy those assets into a minute ties those to a higher level and really see performance jump in terms of.
Both occupancy and daily rental rates. So I think youll see us continue to look in that space and play in that space and.
Find some unique opportunities.
Whether it's experiential and the RV or logic, it's still it still needs to have an experiential component for us just traditional lodging, we're not going to be a player in it's got to have an experiential Todd.
Okay, and then one last one for Mark for me Mark how much of the revenue in 2022, essentially stays cash basis for whatever reason either COVID-19 or.
Whether or not youre, keeping regal there because of the some combination of the past COVID-19 stuff and the ongoing litigation et cetera. When we're thinking about 2022, how much of that is still going to be cash basis versus referring back to sort of normal.
It's a pretty high percentage in gist.
I'll tell you why we're not going to revert back to accrual accounting.
Until we are comfortable with a number of things number one we want to be conservative and assessment and kind of be data driven and want to see continued performance. According to agreements and payment of deferred rent and assess their ability to pay all rents and with theaters want to see continued box office performance. So frankly, we're not in a hurry and theres quite a bit of a high accounting threshold to.
Get back to accrual. So if you think about AMC Regal will continue to be on cash basis, and some others, it's probably around $35, 40% frankly, but again, we're getting we expect to get paid 100% of FERC quarters cash amounts.
And frankly, when we returned to accrual the impact is really a one time benefit to record.
And straight line and then we'll have some straight line going forward, but frankly <unk> is really unaffected because as you know straight line doesn't affect <unk>. So.
We're monitoring it as I said, we need to see certain of these factors that I went through happen, but we're pretty we're going to be pretty conservative in that in that assessment given that it's really kind of a non economic event and more of a.
You know kind of <unk> neutral decision.
Okay. Thanks, guys I appreciate the time this morning. Thank.
Thanks, Rob.
Okay.
Your next question is from the line of Michael Carroll from RBC Capital markets. Your line is now open.
Yeah. Thanks, Greg Congrats on the pending chairman appointment, maybe can you talk about the pros of you being named chair given your knowledge and expertise in this space versus the potential governance concerns of having a dual chairman and CEO , how did the board kind of way that debate.
I think it's a great. Thank you Michael.
I think what is occurring is if you've seen.
We have several new board members.
Again, we've announced two we have another retirement based upon our requirements next year and we had a couple of new appointees. A couple of years ago. So I think the decision was more on continuity and somebody who has kind of been here. So I think the other thing that we did.
Good with.
Virginia, Shanks, Ginny shanks as our lead independent director.
We appointed a very strong.
Lead independent director that I think the board has tremendous confidence in so I think they feel comfortable with this approach.
And.
I think thats the direction that we're going but we feel we're well represented from representing the shareholders from a.
Our lead independent director with Ginnie and the continuity with myself.
Okay, and then is that and then maybe it's too early to say is that the longer term plan or is the plan to kind of separate those roles again in the future as kind of more people on the board kind of season had been there for a while.
Again.
That's something that I'm sure our board will take up I don't know again, we'll have just have to see how this progresses in the comfortably with everyone with with the situation.
But I think the board feels comfortable with it now.
Okay, Great and then I guess, Mark can you talk a little bit about the assets currently in the Trs.
How much they kind of generated in the fourth quarter and kind of whats the expectations of those assets recovering as you move through 2022.
I mean in guidance can you highlight what you've included in terms of how much of an uptick those assets are going to have next year.
We're really not guiding to that level, Michael but I will say that given the fact that certain of those assets were closed for part of 'twenty. One we definitely expect an uptick and if you think about.
Cartwright being closed reopening we did some renovations at our JV in St. Petersburg on those hotels, we expect to have and that were closed due to COVID-19 , we expect quite a bit of uptick.
If you compare.
'twenty, one to 'twenty, two and the performance of our Trs It was like I say Cartwright, you've got the <unk>.
The hotels in St. Petersburg also have jelly stone, which was purchased kind of in the off season and it will get a full full run rate next year. So we're not we're not giving specific guidance, but I can tell you where that was if you look at all of that that was a pretty big net negative in 2021, we expect that to be a.
A positive in 2022.
That is.
Part of the increase year over year as better performance of those those Trs properties.
Okay, Great and then on that percentage rents I know you did a good job kind of highlighting what's moving in and out of those.
What are you including in guidance in terms of how many of those leases actually start paying percentage rents and what's the likelihood of.
Some of those assets outperforming expectations, especially given the inflationary type of environment, you could see those trend even higher than where our guidance is currently implying.
Yes, we think the midpoint of $10 million, we really have have seen performance kind of getting back to 2019 levels. So if you look at percentage rents in 19 strip out the stuff that sold private schools. We had some schlitterbahn. So if you can kind of get rid of those.
Look at it what we're budgeting this year, we're kind of getting back to those levels with a bit of an uptick in a couple of the assets that we feel confident in particularly the casino.
That where it's performing much better than it was even in 2019 in terms of percentage rent. So.
I think there could be upside beyond what we have that's why we give a range, but that $10 million at the midpoint really does reflect kind of 19 levels.
With a little bit of an uptick like I said in the casino asset.
Okay, great. Thank you.
Thanks, Michael.
Your next question is from the line of John Muscle car from Ladenburg Thalmann. Your line is now open.
Good morning.
Good morning, John Hey, John .
Given if I heard correctly, youre, assuming 100% collection of ongoing rate on cash basis tenants.
General hypothetical credit loss, if any assumed.
In guidance.
We generally put about 1% just as a reserve and so when I say, 100% there is still a little bit of ongoing deferrals with respect to small shop retail and we do expect certain.
That debt issues, but its minor it's kind of back to normal if you will and that's why we're not guiding to it 100%.
It's a near 100%, but thats, probably like more like 99% when you think about how we how we budget that.
Okay.
That's helpful. And then I know you talked about the runway quite a bit for investment volume, but maybe just kind of longer term an outlet in a more normalized collection environment. How are you thinking about leverage.
Our target range, and where you're comfortable taking leverage has that changed at all.
Maybe versus when we were talking in early 2020.
And any thoughts there.
No. It really we really operate are consistent with investment grade metrics at about 5% to 56, so we're comfortably within that range.
We expect for 2022, and that's the way kind of look back at the company is currently we've always run the company about that kind of mid to low fives and we expect that to continue to continue to maintain that type of leverage which is like I said consistent with our investment grade kind of a.
Investment grade ratings that we get.
Okay. That's it for me. Thank you very much thanks, John Thanks, John .
Your last question is from the line of Kathy Macdonald from Citi. Your line is now open.
Hey, it's Michael Bilerman again, Greg in your opening comments, you talked about sort of box office in 2019 and that there'll be no assurance that we will ever achieve those again.
And you talked the difference about highly productive locations versus I guess, the average I guess, how do you sort of see the industry evolving from a sort of total box office perspective, and how granular is the difference that you're going to be between theater locations or geography relative to that 2019 base.
I mean, how disparate do you think results are going to emerge as we come out of this.
Yes, I think I think what we're trying to get too Michael is let's say.
Again, if that was 11, if we'd get back.
When a couple of years, there were nine or 10.
How many theater locations have actually closed throughout this pandemic and what number of screens are we talking about I mean, we could find a scenario where the existing the theatres that remain are actually more productive on a lower box office, so I think <unk>.
<unk> made improvements in terms of expense expense margins and things of that nature, new ways to grow business.
We continue to see F&B continued to creep up and drive up so I think what I've tried to say is I think we will see some theater closures of underperforming we've seen that.
Already with with theaters being repurposed or taken out of commission. So I think that what I was trying to say is we believe that the business is going to stabilize and still be a very productive business. It just needs to kind of play out and see how those dynamics work with Greg maybe you have more.
I think thats an.
Increasing ramp up of product from Hollywood well.
And how about just alternative uses within the theaters.
And recall pre pandemic, we talked about corporate activity and live events.
A range of different things that those screens can be used for.
Any initiatives.
Going on that would be able to increase sort of the revenue production out of each box.
Yes, I think theres a lot of things going on especially if you look what things like cinemark did with private events and things of that nature that you're seeing already kind of ramp up and you can see what their performance was I think youre seeing a lot of of new and exciting kind of things we've talked to people about.
<unk>.
Some of these things, where youre seeing kind of the pop up virtual museum type thing and how can they be incorporated into these spaces. So I think youre seeing that youre going to continue to see a lot of innovation and people trying to incorporate those ideas.
Okay. Thanks.
Thank you Michael.
There are no further questions presenters. Please continue.
Just want to say, thank you everyone and I. Appreciate your time, we look forward to.
Getting back to normal and.
I look forward to spending time in talking to with you as we continue to grow thanks, everyone. Thank you.
And with that this concludes today's conference call. Thank you for attending you may now disconnect.
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