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spk08: Good day, and thank you for standing by. Welcome to the Q2 2023 EPR Properties Conference Call. At this time, all participants 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 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your questions, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Moriarty, Vice President of Corporate Communications. Please go ahead.
spk01: Okay, great. Thanks for joining us today for our second quarter 2023 earnings call and webcast. Participants on today's call are Greg Silvers, Chairman of TEO, 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 by the Private Securities Litigation Act of 1995, identified by such words as will be, intends, continue, believe, may, expect, hope, anticipate, or other comparable terms. The company's actual financial condition and the results of operations may vary materially from those contemplated by such forward-looking statements. The discussion of these factors that could cause results to differ materially from those forward-looking statements are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q. Additionally, this call will continue 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 gap measures are included in today's earnings release and supplemental information furnished to the SEC under Form 8K. If you wish to follow along, today's earnings release, supplemental, and earnings call presentation are all available on the Investor Center page of the company's website, www.eprkc.com. Now I'll turn the call over to Greg Silvers.
spk11: Thank you, Brian. Good morning, everyone, and thank you for joining us on today's second quarter 2023 earnings call and webcast. During the quarter, our top line revenue grew approximately 8%, and our FFO as adjusted per share grew approximately 9% versus the same quarter prior year. These results were driven by both a continued strong recovery in our experiential properties and consistent deferral collections. As we announced on June 28, finalizing the Regal Restructuring Agreement was a significant step in strengthening our theater portfolio and enhancing our overall company profile. The agreement provides us with a significantly stronger tenant, a long-term master lease, and a percentage rent component, allowing us to participate in a recovering box office. This resolution, we also have more visibility into our earnings outlook, and we're pleased to provide earnings guidance for 2023. Also, as recently announced, Southern Theaters was acquired by Santicos Theaters. Southern was our fourth largest theater tenant, and as part of the acquisition, we were paid the remaining deferred rent. This transaction demonstrates renewed confidence in theatrical exhibition and strengthens our theater tenant base. Over the last few weeks, we've witnessed the power of theater exhibition and the validation of studios, Apple and Amazon, to commit to theatrical exhibition as the primary distribution platform for movie content. The combination of Barbie and Oppenheimer has become a societal event, which has transcended consumer demographics. Separately, the low budget sound of frequent blew away box office expectations generating over $150 million year to date. This type of outperformance is hard to predict for any single film, yet over time it has proven to be a consistent occurrence for select films. Through July 31st, Box Office is up 20% versus 2022 and is currently tracking towards $9 billion for 2023. The writer and actor strikes present a fluid dynamic and may impact Box Office depending on the length of time to resolution. In a bit of a positive sign, it has been reported that the Writers Guild and the studios have agreed to meet this Friday, which they have not done for three months. Regardless of this near-term dynamic, any impact is anticipated to be short-term as the participants understand that a robust theatrical business is a necessary part of the landscape, providing the primary path to economic viability for movies. Shifting to capital spending, we've completed approximately $100 million of investments to date and are selectively growing our experiential portfolio while being prudent in our capital allocation. Additionally, we've committed to approximately $224 million of additional experiential development and redevelopment projects over the next two years for which we already have the necessary capital. Now I'll turn it over to Greg Zimmerman for more details on the quarterly.
spk12: Thanks, Greg. At the end of the quarter, our total investments were approximately $6.7 billion, with 363 properties in service and 97% leased. During the quarter, our investment spending was $32.2 million, bringing our total investment spending for the first half of the year to $98.7 million. 100% of the spending was in our experiential portfolio and included continued funding for experiential build-to-suit development projects and redevelopment projects, commenced in 2022. Our experiential portfolio comprises 290 properties with 51 operators and accounts for 92% of our total investments, or approximately $6.2 billion, and at the end of the quarter was 98% occupied. Our education portfolio comprises 73 properties with eight operators, and at the end of the quarter was 93% occupied. All of the vacancy in education is from the properties held for sale at the end of the quarter. Turning to coverage, the most recent data provided is based on a March trailing 12-month period. Overall portfolio coverage for the trailing 12 months continues to be strong at two times. Trailing 12-month coverage for theaters is 1.3 times, with box office for the 12 months ending March 31st at $7.7 billion. For reference, trailing 12-month box office through June 30th is $8.1 billion. Trailing 12-month coverage for the non-theater portion of our portfolio is 2.7 times. Now I'll update you on the operating status of our tenants. Regal completed its emergence from bankruptcy on July 31st, which is the effective date of the master lease and all ancillary documents. We received July rent and deferred rent from Regal. Mark will discuss amounts relating to our claims in conjunction with the completion of the bankruptcy case. We're pleased to report that the five surrendered Regal theaters operating through management agreements are open. Based on our experience with operating theaters and our strong relationships with Cinemark and Phoenix, we were able to open the theaters less than one week after Regal turned the keys back to us. Cinemark is operating theaters in Houston, Columbia, Maryland, Orange County, and suburban Chicago, and Phoenix is operating a theater in suburban Louisville. On July 17th, Santicos Theaters acquired VSS Southern Theaters through an asset purchase agreement. With 10 theaters, Southern was our fourth largest theater holding. Santicos is owned by the San Antonio Area Foundation, one of the nation's premier community foundations. The combined Santicos entity operates 27 highly amenitized theaters in eight southeastern states, making it the eighth largest theater circuit in North America. In anticipation of the Santicos transaction, we entered into a lease termination agreement on a ground lease theater property in New Iberia, Louisiana, in which we no longer have an interest. There was no change to our overall economics as a result of the termination. And in conjunction with the transaction, Southern paid its entire remaining deferred rent of $11.6 million which will be recognized as rental revenue in the third quarter of 2023. The second quarter was a continuation of box office recovery. Box office for the first two quarters was $4.4 billion, a 20% increase over the first half of 2022. Q2 total box office was $2.7 billion, a 15.5% increase over Q2 2022, led by the Super Mario Brothers movie Spider-Man Across the Spider-Verse, Guardians of the Galaxy Vol. 3, and The Little Mermaid. Seven films grossed over $60 million and three grossed over $100 million. Q3 is off to a robust start, led by the record-shattering performance of Barbie and Oppenheimer, both of which continue to defy all expectations, along with the unexpected hit Sound of Freedom, which has generated approximately $150 million to date. Fueled by Barbenheimer, July box office gross exceeded July 2019 box office gross. Through July 31st, 19 titles have grossed over $100 million in 2023, and year-to-date box office growth stands at $5.7 billion, a 20% increase over the same period in 2022. Our high-quality theater portfolio continues to outperform the industry. Barbie grossed $162 million in its opening three days, an additional $26 million on each of Monday and Tuesday, the highest grossing Monday and Tuesday ever for Warner Brothers, and $93 million on its second weekend, also a Warner Brothers record. To date, Barbie has grossed $366 million. Oppenheimer grossed over $82 million on its opening weekend, $46 million on its second weekend, and $181 million to date. This is the first time a three-day weekend had a film open to $100 million while another opened to $50 million. Barbenheimer weekend was the highest-grossing three-day weekend since the pandemic and the fourth-biggest weekend ever. Importantly, this box office outperformance was not fueled by franchises or comic book characters, but by two unique, universally well-reviewed, standalone movies, one about an iconic Mattel toy and a historically accurate R-rated three-hour movie about the development of the atom bomb. Barbie and Oppenheimer demonstrated that content can come from anywhere and be compelling in the hands of a good storyteller. Each reached broad demographics and together they created a cultural phenomenon reminding everyone of the power of good storytelling on the big screen. We are optimistic about the remainder of the year with Teenage Mutant Ninja Turtles, Mutant Mayhem On, which opened this week, Killers of the Flower Moon, Hunger Games, The Ballad of Songbirds and Snakes, Napoleon, and Aquaman and the Lost Kingdom rounding out the rest of the year. Finally, there is a lot of press coverage of the writers and screen actors' strikes. As Greg mentioned, it's been reported the studios and writers are scheduled to meet for the first time in three months tomorrow. Beyond that, we don't have any information on the timing for resolution of either strike, but for now, there's been limited movement of major titles into 2024. Turning now to an update on our other major customer groups, we continue to see good results and ongoing consumer demand across all segments of our Drive 2 value-oriented destinations. Across the board, operators are managing increased operating expenses, and while attendance remains strong, In some properties, we are seeing an anticipated pullback from peak post-pandemic performance. Despite these headwinds, many of our operators are continuing to grow revenue and EBIT arm. Our Eat and Play assets continued their strong post-pandemic performance with portfolio revenue for Q2 up 9% and EBIT arm up 2% over Q2 2022. Our well-located Topgolf in King of Prussia, Pennsylvania opened with strong numbers at the end of June. All our theme parks and water parks are now open for the summer season. Our operator at Vaucardier and Calypso Water Park is producing strong operating results as they complete one year of operating both properties. Attendance at City Museum in St. Louis is up 8% year-over-year, driving increased revenue in EBITARM. Construction of the indoor water park at the Bavarian Inn in Frankenmuth, Michigan, is about 20% complete and on schedule for a summer 2024 opening. Construction is underway on our Titanic Custard and Chocolate Shop in Pigeon Forge, with openings scheduled by the end of this year. Across our fitness offerings, we're seeing continued growth in membership revenue as the post-pandemic emphasis on fitness continues. Construction is underway for both the expansion of the Springs Resort in Pagosa Springs and and the development of our Murrieta California Conference Center into a new natural hot springs resort. Murrieta Springs is scheduled to open in early 2024. Construction on improvements to Gravity House, Steamboat Springs, and Aspen locations is scheduled to commence this month. Except for North Star, where heavy late season snow kept the mountain open for skiing until the end of April, our ski resorts were closed for most of Q2. Year-over-year skier visits were up 27% across our portfolio, driven by strong season pass sales. Alyeska Resort will join the Icon Pass program for the coming ski season, which should drive increased skier visits. Our Margaritaville Hotel Nashville, proximate to all of Nashville's famous downtown destinations, continues its upward trajectory in revenue, EBITD, and occupancy. This weekend, Nashville will host the Big Machine Music City Grand Prix with the IndyCar Series racing on the streets of downtown Nashville. At both the Beachcomber and Bellwether Resorts in St. Petersburg, we continue to see increases in occupancy and operating revenue, while ADR is normalizing from post-pandemic highs. Revenue in EBITDARM increased year-over-year in Q2 for all our overall RV park portfolio. Our education portfolio continues to perform well with year-over-year increases through March 31st across the portfolio of 17% in revenue and 25% in EBITDARM. Attendance is holding steady at very high levels. At the end of the quarter, we entered into a lease termination for a private school in Columbus, Ohio as part of a larger settlement arising from a partial casualty. We received a lease termination fee of $900,000 and are marketing the property for sale. Turning to a quick update on capital recycling. During the quarter, we sold one of the five KinderCare locations for which the lease was terminated for net proceeds of $4.3 million and recorded a loss of $575,000. After the close of the quarter, we sold another two KinderCare locations for combined net proceeds of $13.8 million and a gain of $1.5 million. All of these will be operated as schools. We are continuing to market the remaining two Also, after the end of the quarter, we sold a former Cinemix theater in Hialeah, Florida for a non-theater use for net proceeds of $9 million and a gain of $747,000. Year-to-date, we have generated approximately $31 million in proceeds from dispositions. In mid-July, we began publicly marketing the 11 surrendered Regal theaters we plan to sell. It's early days, but we're pleased with the interest and we'll update you on our progress on future calls. In Q2, our investment spending was $32.2 million, bringing our total investment spending for the first six months of 2023 to $98.7 million. In addition to the continued funding of experiential development and redevelopment projects commenced in 2022, we made our first investment in the surf space, with mortgage financing for the development of Good Surf's first location in Dallas. Good Surf is the first standalone standing wave concept developed in an urban U.S. market. It combines surfing, food and beverage, and outdoor entertainment into a unique experience. We have spent a lot of time understanding the surf space, and we're excited to be part of Good Surf's first project. We're maintaining our investment spending guidance for funds to be deployed in 2023 in a range of 200 to 300 million. As of the end of Q2, we have committed an additional approximately 224 million in experiential development and redevelopment projects, which we expect to fund over the next two years without the need to raise additional capital. We anticipate approximately 105 million of that 224 million will be deployed over the remainder of 2023 and that is the amount included at the midpoint of our 2023 guidance range. Cap rates continue to be in the 8% range. In most of our experiential categories, we are seeing high-quality opportunities for both acquisition and build-to-suit redevelopment and expansion. We continue to have a good pipeline with new and existing customers and concepts. Likewise, we continue to exercise discipline, reducing our near-term investment spending and funding the investments primarily from cash on hand, cash from operations, disposition proceeds, and borrowings under our unsecured revolving credit facility. As we have said for the past several quarters, we are limited by the recovery of our costs of capital, not by opportunity. I now turn it over to Mark for a discussion of the financials. Thank you, Greg.
spk02: Today I will discuss our financial performance for the second quarter, provide an update on our balance sheet, and close with providing 2023 earnings guidance. We had another strong quarter of results, with FFOs adjusted of $1.28 per share versus $1.17 in the prior year, up 9%, and AFF of $1.31 per share compared to $1.23 in the prior year, up 7%. Now moving to the key variances by line item. Total revenue for the quarter was $172.9 million versus $160.4 million in the prior year. This increase was due to improved collections from cash basis customers the effective acquisitions and developments completed over the past year, as well as scheduled rent increases. During the quarter, we collected a total of 7.8 million of deferral payments from customers, of which 7.3 million was from those on cash basis accounting that was recognized as additional revenue. Per court order, we also received an additional stub payment from Regal related to September 2022 minimum rent of approximately .7 million that was recognized as additional revenue this quarter. I will discuss how we expect cash basis deferrals and Regal's bankruptcy settlement on July 31st to impact the remainder of this year in 2024 when I go over guidance. Percentage rents for the quarter increased to $2.1 million versus $0.5 million in the prior year, primarily due to improved performance at one ski property. On the expense side, G&A expense for the quarter increased to $15.2 million versus $12.7 million in the prior year, due primarily to higher professional fees, including those related to the Regal Resolution, as well as higher payroll costs, including non-cash share-based compensation expense. During the quarter, we recognized an impairment charge of $43.8 million primarily related to eight of the properties surrendered by Regal based on third-party appraisals. This charge is excluded from FFO as adjusted. Interest expense net for the quarter decreased by $1.7 million compared to prior year due to an increase in interest income on short-term investments and an increase in capitalized interest on projects under development. Lastly, FFOs adjusted from joint ventures for the quarter was $1.5 million versus $3.4 million in the prior year. The decrease was due primarily to a non-recurring government incentive received in the prior year at our experiential lodging properties in St. Petersburg, Florida, as well as higher interest expense resulting from the refinancing of these properties last year. Turning to the next slide, I will review some of the company's key credit ratios. As you can see, our coverage ratios continue to be strong with fixed charge coverage at 3.5 times and both interest and debt service coverage ratios at 4.1 times. Our net debt to adjusted EBITDA RE was 5 times and our net debt to gross assets was 39% on a book basis at June 30th. Lastly, our common dividend continues to be very well covered with an FFO payout ratio for the second quarter of only 63%. Now let's move to our balance sheet, which is in great shape. At quarter end, we had consolidated 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 4.3%. Additionally, our weighted average consolidated debt maturity is under five years, with no scheduled debt maturities in 2023 and only $136.6 million due in 2024. We had nearly $100 million of cash on hand at quarter end and no balance drawn on our $1 billion revolver. With the Regal resolution behind us, we are pleased to provide 2023 FFOs adjusted per share guidance of 505 to 515, representing an increase of approximately 9% at the midpoint versus 2022. As we have discussed previously, given our cost of capital in the current inflationary environment, we have consciously decided to limit our near-term investment spending and fund these investments primarily with cash on hand and operating cash flow, as well as disposition proceeds and borrowings under our unsecured revolving credit facility. Accordingly, we are confirming our 2023 investment spending guidance range of $200 to $300 million, and we do not anticipate the need to raise additional capital to fund these amounts. Disposition proceeds guidance for 2023 is $31 million to $41 million, and we have increased guidance for percentage rent by $1.5 million at the midpoint, primarily due to better performance of the ski property I discussed previously. Note that as in prior years, percentage rent is heavily weighted to the fourth quarter. Also note, as discussed in our recent call, that none of the percentage rent expected for 2023 is relates to the new Regal Master Lease, which is based on lease year and is expected to be recognized in 2024. Additionally, we are raising G&A expense guidance by $1.5 million at the midpoint due to higher professional fees, including those related to the Regal resolution, and to a lesser extent, higher payroll costs, primarily due to incentive compensation. I also thought it would be helpful to summarize our expectations for deferral collections and certain other amounts to be recognized as revenue in 2023 and included in our guidance, as well as our expectations for these amounts for 2024. As you can see on the slide, we expect to recognize a total of approximately $35.7 million in 2023 for cash basis deferral collections, regal stub rent, Regal pre-petition rent related to the mass-release properties for the period from September 1 to September 6, 2022, and the lease termination fee for an education tenant that Greg described. Most of the $19.3 million estimated for the second half of 2023 is expected to be recognized as revenue in the third quarter due primarily to the collection of the entire remaining deferred rent from Southern Theaters of $11.6 million in connection with the sale to Santicos, as well as those amounts related to Regal's bankruptcy resolution. While additional amounts may be received not shown on this slide related to our rejection damages with Regal that are treated as an unsecured claim, we expect any such amounts will be nominal. With Regal's bankruptcy resolution and the full deferral repayment by Southern, the deferred rent receivable not on our books, excluding the amount held in abeyance related to Regal, is reduced to approximately $12.9 million. Of this amount, $11.5 million relates to one cash basis attraction tenant whose repayment timing is based on an earnings threshold, which is not expected to be achieved in 2023. The remaining amount of approximately $1.4 million relates to two cash basis tenants that are paying according to agreed upon schedules through 2024. And thus, the amounts to be recognized in the fourth quarter and next year for these tenants are expected to be nominal, as shown on the slide. Finally, I want to remind everyone, given that Regal's master lease was effective on July 31st, this tenant was moved to accrual basis at that time. As discussed in our previous call, we expect the five theaters surrendered by Regal that we will operate will break even over the remainder of 2023, and this is what is included in the midpoint of guidance. Furthermore, we have also included in guidance the anticipated carrying costs for the 11 surrendered theaters that we intend to sell over time, which will be reflected in property operating expense. Guidance details can be found on page 24 of our supplemental. Now with that, I'll turn it back over to Greg for his closing remarks.
spk11: Thank you, Mark. As I stated in my opening comments, we are pleased to have delivered a favorable Regal outcome, which combined with the Santicos acquisition means that the three of our top four cinema tenants now have very high quality balance sheets with minimal risk. Given these improvements in credit, the continued success of our non-cinema portfolio, and the demonstrated consumer preference for out-of-home entertainment, we continue to believe that EPR offers a very attractive value for investors with a well-covered dividend and an opportunity for multiple expansion. With that, why don't I open it up for questions. Therese?
spk08: Thank you. We will now conduct the question and answer session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
spk09: Please stand by while we compile the Q&A roster.
spk08: Our first question comes from Joshua Dennerly of B of A. Your line is open.
spk04: Yeah. Hey, everyone. Good morning. I just wanted to ask about the writer's strike. At what point would the strike start to impact your portfolio or the movies being released? I'm just kind of curious if there's any risk to 2023 box office within the strike and certain restrictions around the actor's ability to market during the strike.
spk11: Josh, what we know right now is there's been limited title movements yet. Again, it could be a potential if we see – I mean, the product that we've seen for the balance is generally done for 23, but it really begins with studios, if they're going to move product, either, one, to be supported promotionally by the actors – Or two, if they have any last minute kind of reshoots. So it's really in the purview of the studios. So we don't know right now. I think the only what we would call bigger title, we've had one move that we're aware of. Everything else right now is standing pat. Hopefully, as we've talked about, as as there is beginning to be some discussions, that that will prove very fruitful and we can quickly move to kind of resolution of this and have little to no impact. But Greg, I don't know if you have- No, I think you've covered it, Greg.
spk04: Thanks for that. And for 2023 guides, sorry if I missed this, is there any percentage rent included in your guidance range? For the back half of the year? Yeah.
spk02: Yeah, yeah. Oh, yeah, for the back half of the year. Yeah, we said that the percentage rents for the year are going to be $12 million. And as I said, percentage rent, as it has been historically, is kind of heavily weighted to the fourth quarter. So we expect about 50% of it in the fourth quarter and the remainder of what wasn't recognized in the first six months to be in the third quarter. So, yes, there's definitely percentage rents in the back half. None related to Regal. if that was your question. That percentage rents based on lease year, and we expect that to hit next year depending on box office.
spk04: Okay, perfect. Yeah, that was what I was trying to get at. Appreciate it.
spk09: Thanks, Josh. Thanks, Josh. Thank you.
spk08: Next question comes from Todd Thomas with KeyBank Capital Markets. Your line is open. Mr. Thomas, your line is open.
spk07: Yeah, sorry about that. First question, so appreciate the detail in the earnings slide around the deferred rent payments and other revenue collections in the third quarter and really through 2024. So just to be clear, so after the incremental $11 million you expect to see in 3Q or 14 cents. The decrease in 4Q versus 3Q that you're anticipating, that gets us to a relatively clean run rate in the fourth quarter as we think about 2024. Is that the right way to think about it in terms of, you know, all the non-recurring items? It'll just leave us with a pretty clean run rate beginning in the fourth quarter of this year.
spk02: Correct. We only expect about $300,000 to impact as far as deferral and these kind of out-of-period stuff to impact the fourth quarter. I think the fourth quarter will give you a clean run rate, but remember we have some seasonal businesses and so forth and percentage rents heavily weighted to fourth quarter, so there's other adjustments rather than just taking it times four to do, but it is a clean number as far as deferrals and stub payments and so forth. Like I said, only a very small number expected to be recognized in Q4.
spk07: Got it. Okay. And then can you comment a little bit more on the theater sales? You know, it sounds like there is interest from other existing theater operators. I'm just curious if you can discuss the potential timing and how we should think about those carry costs sort of coming offline.
spk12: Sure, Todd. It's Greg. So historically, over the last two and a half years, we've sold 10 theaters in Six of those were for non-theater use, four for theater use. So that kind of gives you the goalposts. We needed to wait to market these because Regal hadn't notified the individual theaters that they were closing and we wanted to be mindful of their employees, et cetera. So we really only started hard marketing last week, but we were out soft marketing before. I'd say of the 11, we've had interest of some sort in about eight. You know, we're already approaching Labor Day, so the idea of being able to get something closed this year might be difficult given the timing of real estate transactions, but I would expect we'll start to see a cadence toward the end of this year and into next year for selling those. And again, if you look at the run rate over the last two and a half years, we saw about three or four a year.
spk07: Okay. Do the discussions that you're having, negotiations at all, are they impacted at all by the strikes that are ongoing right now, or is that not really a consideration? And then separately on the strikes, Greg, I'm just curious, to the extent that there is a resolution here, you know, if the strikes are extended a little bit further here, but, you know, you get a resolution, I mean, how quickly does production re-ramp and, you know, the release schedule, you know, get back on track to the extent that there are some delays here? Any sense there?
spk12: So, Todd, I'll take the first part, and then I'll let Greg answer the second part. Actually, I would say the answer is there's zero impact from the strike. As Greg mentioned earlier, In his remarks, the fact that Santicos was willing to buy Southern clearly shows that people are seeing the continued recovery of theatrical exhibition, and obviously that's amplified by the just unbelievable success of Barbie and Oppenheimer, which just, as I said before, record-shattering. So we actually have quite a bit of interest from theatrical exhibitors for some of these theaters.
spk11: Yeah, I'll echo Greg's comments. I don't think it's actually... I think most people in the industry are seeing this as a short-term issue. I mean, if you think about... These have occurred periodically. I think they're more encouraged by all the studio's commitment to theatrical and how it has bounced back. And I would say there's probably more rather than less optimism... right now in the theater space. As far as turning it on and ramping up, new production is really about probably right now in the latter half of 24 and 25. Most everything through the first half of 24 is in post-production, and so there's just kind of small minor reshoots or voiceover or promotional aspects of it. So I would think we believe that really right now, if we solved it sooner rather than later, we'd have minimal impact on 24.
spk07: Okay, great. Thank you.
spk09: Thanks, Doug. Thank you.
spk08: Our next question comes from Eric Wolf with Citi. Mr. Wolf, your line is open.
spk06: Hey, thanks for taking my questions. So understand your comment about the restructured agreement not providing any sort of extra percentage rent from Regal this year. But just to confirm, the $12 million that's in your number, that doesn't include any sort of Regal contribution whatsoever. And then if I were to think about, you know, let's just say the box office next year is $9.4 billion, you know, in line with that presentation you put out. is all of the legal percentage rent and all of that extra operating income sort of incremental to 2024 or some of that being included in the 2022 guidance?
spk02: So none of the percentage rents or operating theater profit is in 23 guidance because the percentage rents are lease year driven and it really will hit sort of second and third quarter next year. And as far as operating theaters, while there could be some profitability, we're, we're, We're budgeting that or including in our guidance sort of a break-even amount this year, and then as Regal transitions to both Cinemark and Phoenix. And then as we go into next year, though, we definitely expect those to be profitable. And I think in our presentation we said to the tune of about $6 million. So none of that's in this year and should hit next year.
spk06: Okay. All right. So, yeah, right. I mean, I don't exactly mean it's incremental to it, but... So if I think about the $9.4 billion box office, I'm just curious. You outlined in your presentation like $14 million in percentage rent and operating income that would come from that. I'm talking about the restructuring agreement presentation that you put out before. How much variability could there be around that number, assuming there's a $9.4 billion box office? Could that be $10 million or $18 million? Just curious if you assume a certain box office level, how much variability there would be around some of those numbers. Thanks.
spk02: Yeah, I think you mentioned a $14 million number. That's the deferral and stub payments for 23 in our presentation for Regal. The number we put at that box office of around 94 was 8.7.
spk11: Yeah, he's combining the two, 8 and the 6.
spk02: Oh, the 6.
spk11: Okay, gotcha.
spk02: So, first of all, I think one of the... benefits as we set that number basically at trailing 12 months, I think, 2022. Yeah. I mean, again, it should be as far as variability.
spk11: The percentage rent was really based upon Regal maintaining their current market share. So again, there was no, so could it go up or down? But historically, if you look over years, they've had that market share. Now, they've closed some theaters, so there could be, you know, that traffic's going to move to other places. So we could see a little bit of up in that. I would say the variability is going to be in the operating theaters. I mean, again, these are new theaters for these guys to operate. Now, the good thing is they're getting their hands on them now, and we didn't budget anything, so they've got four or five months to get their hands on. But we worked with them. to kind of come up with those numbers. So I think if the box office delivers it, I think we're in good shape there.
spk02: You know, we put together a schedule in our regal presentation that kind of showed that variability. So if box office, for example, wasn't 9.4, it was 9 billion. Percentage rents instead of 8.7 is 7.1 million. And and profitability of the operating theaters, you can see that variability on the chart that we showed in our Regal presentation. It kind of varied based on box office. Now, as Greg said, there's other things that could impact at the individual performance of theaters versus box office, but the primary indicator of performance for both the percentage rents and operating theater profit is box office.
spk06: Got it. That's very helpful. Thank you.
spk09: Thank you for your question.
spk08: Our next question comes from RJ Milligan with Raymond James. Your line is open.
spk03: Hey, good morning, guys. So I'm going to take a different stab at the box office projection questions. But on slide seven, you guys showed the projections for the median, I guess, for multiple analysts for the box office projections for 23 and 24 of 9 billion and 9.8 billion. I'm curious if you've seen any movement in sort of that mean estimate for 23 to 24, just given what's going on with the writer's strike. And I'm curious, you know, and I think Josh asked this question, but how long before you adjust your own internal projections of, I think it was 9.4 billion for the lease year and 9.8 billion for 2024 to sort of get to your numbers. how long does the strike need to last before you re-look at those estimates and say, you know, maybe we need to take those down?
spk11: Yeah, I think, again, I think right now, I'll take the second part of that first, is the 9.4 is really about, you know, that runs from kind of July 31st to next year. as long as we don't see a lot of titles move, that number feels pretty good because if you think about it, that's the last half of this year and the first half of next year. So I would say the risk is, if it is prolonged, is to the 9-8, meaning the second half of next year. But I still think that we feel that the good thing, RJ, is this trajectory is probably at risk of just balancing out, meaning that if we thought it was going to be 9 and 9.8, that it balances to 9.2 on both. If you look at currently what's going on, we're not making any changes because I said we really had one film that we're aware of of any meaningful expectation that's moved. And we've had such outperformance to date that we've overcome that. So this year's numbers, we haven't seen really a lot of people move. But if anything, people probably would be moving their number up this year but they're kind of holding it right now. But Greg, do you have any... No, I agree.
spk12: I mean, I think, RJ, the critical point is that whatever movie might have moved has been more than offset by the outperformance of Barbie Oppenheimer and... Sound of Freedom. Sound of Freedom. Thank you. Sorry. Yeah.
spk03: Got it. But the Barbie Oppenheimer duo would not be in your this year for real when you're calculating... Yeah, well, actually...
spk11: Yeah, some of it will be. I mean, right now, we're in the – last week, we're in the Barbenheimer period. And as, you know, Greg noted, second highest weekend ever. So there's still – we're still benefiting. Again, any time if you talk to somebody in the industry when you're in August and you have a – even this weekend where we're going to have – probably between those two approaching $100 million or over $100 million out of those two films this weekend is a really strong August. Plus Teenage Mutant Ninja Turtles. We're probably easily going to have above $150 million top 10 film weekend would be great in any August.
spk03: Thanks. That's helpful. I think it was Todd that commented on the clarity on the deferral and other revenue collections. So that's very helpful. Thank you. But Marcus, I'm thinking about sort of the 2023 guidance and bridging to 2024. I think that you're going to see, at least according to this, is about $35 million of lower stub and deferral payments expected, 23 versus 24. And then there's, I think, a $17.8 million reduction in regal rent. So that's about 52 million that's going to be coming out of 23 as we look into 24. And then what you need to add back is the operating theater profit and then the percentage rents. What else am I missing?
spk02: Yeah, let me take that a little differently because I think maybe the regal part of that might have been a bit overstated. So if you take the 510 guidance this year, as you mentioned, we have 35.7 million, most of which is non-recurring. That's worth about 47 cents, gets you the 463. As far as Regal, if you think about it, we had, once you get rid of all those deferrals, which I just did, and stub payments and so forth, you end up with, really, we had seven months of full income in 22 that we don't expect in 23, because the last five months will be the same for both periods. So you have seven months. So if you take Those seven months, it was around $7.3 million a month is what the old rent used to be, and you take about 22% of that because that was the base rent cut. That's worth about $11 million year over year. So base rent going down $11 million. And then you have to add to that what you said, the percentage rents. Let's call that $8.7 million. We'll take a look at that as we give guidance in February, but that's what we put out, and it seems to be tracking. Okay. and operating theater profits of another 6.3. That's $15 million going the other way. So it's actually, once you back out deferrals and all this noise for Regal, Regal's actually going up next year, again, subject to box office, up about $3.7 million. And then, as we mentioned, we're also putting Regal on accrual basis accounting, which is worth about another $2.5 million. So kind of a $6.2 million increase for Regal, So, again, you take the 510, subtract the 47, you're at 463, add in about 8 cents for the regal impact, you're kind of sitting at 471-ish before any growth from this year and next year and all the other puts and takes, you know, G&A and so forth. But that kind of gives you sort of a starting point. That's very helpful.
spk03: That's it from me, guys. Thank you. Thanks, Roger.
spk09: Thank you.
spk08: Our next question comes from Michael Carroll with RBC Capital Markets. Your line is open.
spk05: Yep, thanks. I guess not to belabor the writer's strike, but Greg Silvers, I believe on the June call that you highlighted that if the writer's strike was resolved in 40 to 50 days post that end of June call, that there would be minimal to no impact. I guess that would put us into mid-August. So, I mean, if we get in through mid-August and this is not resolved, is that when we should start thinking about this could be having an impact on some of these movie delays?
spk11: Yeah. I mean, I think we're still consistent with that. And I think what I said was that we thought it's really still believed that it's later in 2024. Now they could move titles. And remember, we're just moving titles from 23 to 24. And as we see outperformance in 23, if studios want to de-risk some of that, they can move that kind of into 24. But I think as we move into the August and September timeframe is when we will start to see if titles are moving or if there's progress in the discussions and they are don't feel or they feel that they're good on track. But, Greg, I don't know if that's consistent with what you think. So I think that logic still holds, Michael.
spk05: Okay. That sounds good. And then the way that we should think about it, too, is – I mean, obviously you have leases with a lot of these theaters, so that's not going to impact it. But like the regal percentage rents, your operating theaters, that's going to be impacted. How much percentage rents do you have outside of that regal restructuring that could be impacted by some of this movement?
spk02: It's very minimal. It's really nothing. Our percentage rent, for example, this year is non-theater related.
spk05: Okay, great. And then going back to the investment market, and I know you talked a little bit about the 11 assets held for sale, but what about the value for, like, the high-quality theaters? I mean, is there a market forming where you could potentially sell some of your higher-end type assets, theater assets? Is there starting to be interest out there?
spk11: I think there's always, and I think as Greg talked about, some of these 11 that we take will probably be sold as theaters. But it's always about highest and best use. And if you look at what the theater that we sold this year that Greg just reported on, even though it's going to a non-theater use, this was, based on previous rents, a low single-digit cap rate that we achieved on that. So I think it's truly about, and Greg and his team and our asset management team, trying to just determine what is the highest and best use. It's always nice as we're starting to see now theater operators come in and starting to bid these properties. But it's the juxtaposition of, okay, does it have a higher and better use? And we can put non-theater use versus theater use as competing bids.
spk12: Yeah, and Michael, to the extent you're talking about selling theaters as theaters for cash flow, we're starting to see some green shoots there. And again, I think the fact that Santicos was willing to buy Southern shows that the theatrical exhibition business is recovering nicely.
spk09: Okay, great. Thank you. Thank you.
spk08: Our next question comes from Yodi Yadav from JMP Securities. Your line is open.
spk10: Hey guys, it's Mitch here. I think a lot of the Regal and other topics have been covered. I was curious a little bit about some of the dispositions. Greg, I think you said that they were the vacant assets, but I'm curious about potentially considering maybe some non-core or even core dispositions here in this environment on top of, you know, kind of what you're doing with KinderCare and Regal?
spk11: Again, like I said, you know, we'll always consider those things. I think, you know, we had a lot going on with resolving Regal and getting this and think about we had our fourth largest tenant just changed hands. So, Over the quarter, we've had a lot going on. I think we've got quite a few dispositions that we're managing right now, but we're going to look at all those things, Mitch, as we kind of remove the overhang that was apparent for the first half of the year. But kind of as we go forward, you start to look at some of the things we're talking about And as I said, three of our four largest theater tenants now, if you look at Regal Better, we've been talking about that they're going to come out on a sub-three balance sheet kind of debt to EBITDA. But if you look at the performance that they presented in their balance, they're actually going to come out sub-two. And we're talking about a Santicos that now may have little to no debt in their entire structure. So I think overall we have spent a lot of time getting that theater portfolio and Greg and his team and Mark and his team of getting these things into a position that we have fantastic theater tenants into a rising and recovering box office. So I think that was our focus in getting those things right. And now as we move forward, we've got an opportunity to create additional capital. As Greg has talked about many times, we have good opportunities. And we'll start kind of balancing all of those things out to whether it's some of our operating education, which Greg relied is performing very well, and some of these other assets. We have a stated intent and continued belief to lower our theater exposure And as that market comes back, and as we're starting to see capital flow into exhibition, we're going to see more and more opportunities. So we're very encouraged about not only our ability to raise capital, but the ability for the market to recognize the improvements that have been made, not only in terms of the exhibition world, but in the terms of the quality of the tenants, that we have now relative to that recovery, and I think it'll create opportunity. But Greg? No, I think that's right.
spk10: Great. Last one for me. I know that you guys went over some of the puts and takes from 23 to 24. I'm curious how much GNA in 23 was allocated to
spk02: regal that you know kind of doesn't recur heading into 24. yeah it's probably around a couple million dollars actually uh it was kind of prolonged and a lot of work went into that so we do expect gna to come down next year thank you thank you mitch thank you i'm showing no further questions at this time
spk08: So I would now like to turn the conference back to Greg Silvers for closing remarks.
spk11: Thank you, Teresa. And thank you all for joining us. Again, we look forward to talking to you in the coming months. And as always, if you have any questions, be sure to reach out. So thanks, everyone, and have a great day. Bye-bye.
spk08: This concludes today's conference call. Thank you for participating. You may now disconnect.
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