EPR Properties — Q3 2022 Form 10-Q
Business context and reporting period: EPR Properties is an experiential and education real estate investment trust operating in the U.S. and Canada. This unaudited filing covers the quarter and nine months ended September 30, 2022, compared with the same 2021 periods. At quarter-end, its owned portfolio comprised 21.5 million square feet and was 97% leased; owned experiential properties were 97% leased and owned education properties were 100% leased.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $161.4 million | $139.6 million | $479.3 million | $376.8 million |
| Net income | $50.8 million | $32.1 million | $133.9 million | $54.0 million |
| Net income available to common shareholders | $44.8 million | $26.1 million | $115.8 million | $35.9 million |
| Diluted GAAP EPS | $0.60 | $0.35 | $1.54 | $0.48 |
| Diluted FFOAA per share (non-GAAP) | $1.16 | $0.86 | $3.44 | $2.01 |
| Net cash from operating activities | Not stated by quarter | $349.7 million | $236.4 million |
- Q3 revenue increased 16%; nine-month revenue increased 27%. Growth chiefly reflected improved rent collections, including from tenants previously on cash-basis accounting, and acquisitions and development completions.
- For the nine months, rental revenue rose $81.4 million and other income rose $20.8 million. Net interest expense declined $14.8 million, while credit loss expense increased by $29.1 million versus the prior-period credit loss benefit.
- At September 30, total assets were $5.79 billion, debt was $2.81 billion, and equity was $2.56 billion. Cash and cash equivalents were $160.8 million, plus $5.3 million of restricted cash. Debt was reported as 99% unsecured.
- Management reported net debt to gross assets of 39% and net debt to Adjusted EBITDAre of 5.2x. It noted that the latter comparison is affected by pandemic-related disruption and accounting for rent deferrals.
- Common dividends declared were $0.825 per share in Q3 and $2.425 per share for the first nine months. Nine-month cash dividends paid to all shareholders were $197.8 million.
Material changes and notable items
- Regal’s parent, Cineworld Group, filed for Chapter 11 on September 7, 2022. Regal leases 57 theatres from EPR. Regal missed September rent and deferral payments but paid rent and deferrals for October and November. EPR reported $91.9 million due under a pandemic-related promissory note and approximately $7.2 million of September rent; these Regal receivables were not recorded as assets because EPR recognizes Regal revenue on a cash basis.
- During the nine months, EPR recorded $9.4 million of credit loss expense, including $6.8 million on a mortgage note and $3.1 million on two notes receivable. It also wrote off $1.5 million of accrued interest and fees. The borrowers were experiencing financial difficulty, though principal balances were not past due at quarter-end.
- EPR recognized a $4.4 million impairment on a vacant property that was sold during the period, and $0.6 million of impairment on theatre joint-venture investments in China.
- Investment spending was $321.3 million, versus $107.9 million in the prior-year period. It included attraction acquisitions, fitness and wellness properties, development spending, mortgage financing, and joint-venture investments. EPR sold two vacant theatres and a land parcel for net proceeds of $9.9 million.
- Operating cash flow increased, while investing activities used $271.7 million and financing activities used $201.7 million for the nine months. Cash and restricted cash together declined by $123.8 million from year-end 2021.
Outlook, liquidity, and risks
- Management expects near-term investment spending to be reduced and plans to be more selective amid elevated financing costs and economic uncertainty. It expects to fund investments primarily from operating cash flow and availability under its revolving credit facility, while maintaining its customary leverage levels.
- EPR had no borrowings outstanding on its $1.0 billion unsecured revolving credit facility, which matures in October 2025, with two six-month extension options. Management said cash, operating cash flow, revolver availability, and asset-sale proceeds are expected to provide adequate liquidity. No scheduled debt payments were due until 2024; refinancing or access to capital on acceptable terms is not assured.
- As of September 30, EPR had 17 development projects with approximately $161.6 million of funding commitments, of which approximately $14.6 million was expected to be funded in 2022. It also had $10.4 million of mortgage-note commitments, including $3.3 million expected in 2022, and $3.3 million of surety bonds.
- Revenue concentration is significant: AMC, Topgolf, and Regal generated 14.8%, 14.5%, and 13.2%, respectively, of nine-month 2022 revenue. Regal’s bankruptcy, its lease assumption or rejection decisions, and potential recovery of unsecured deferred rent are key uncertainties.
- Other risks include renewed COVID-19 effects, inflation and recessionary conditions, consumer discretionary spending, tenant and borrower defaults, higher interest rates and capital costs, debt covenants, and the ability to re-lease properties. EPR said it had no properties closed due to COVID-19 restrictions at quarter-end.
Important facts for investors to verify
- Developments in Regal’s Chapter 11 case, including which leases are assumed or rejected and collection prospects for the $91.9 million promissory note and unpaid rent.
- Subsequent rent collections, deferred-rent repayments, and changes in tenants recognized on a cash basis or amounts excluded from receivables.
- Performance and collateral values for borrowers with credit-loss allowances, and whether additional reserves or write-offs are needed.
- Funding pace and expected returns on development commitments and recent acquisitions, particularly given higher costs of capital.
- Liquidity, debt maturities, covenant compliance, and dividend coverage as operating conditions and financing markets evolve. FFOAA and related REIT measures are non-GAAP and are not substitutes for GAAP cash flow or earnings.