EPR Properties — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. EPR is an experiential net-lease REIT with Experiential and Education portfolios across the U.S. and Canada. COVID-19 closures and reduced consumer activity severely affected tenants, particularly theatres. Most theatre tenants had not reopened by the filing date.
Financial performance and position
Amounts below are in millions except per-share data.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $106.4 | $161.7 | $257.4 | $312.3 |
| Net income (loss) available to common shareholders | $(69.0) | $60.6 | $(37.9) | $119.9 |
| Diluted GAAP EPS | $(0.90) | $0.79 | $(0.49) | $1.59 |
| Diluted FFOAA per share | $0.41 | $1.36 | $1.39 | $2.73 |
| Cash provided by operating activities | Not separately stated for Q2 | $57.4 | $209.8 |
- Q2 revenue fell 34% year over year; six-month revenue fell 18%. Rental revenue for the first half declined $54.7 million. Reduced rent recognition, abatements, concessions, deferred payments and straight-line rent write-offs were major drivers.
- Q2 included $51.3 million of property and operating-lease asset impairments, $3.2 million of joint-venture impairments and $3.5 million of credit-loss expense. Interest expense was $38.3 million for the quarter, versus $36.5 million a year earlier.
- At June 30, cash and cash equivalents were $1,007.0 million; debt was $3,854.1 million, versus $3,102.8 million at year-end 2019. Approximately 99% of debt was unsecured. Net debt to gross assets was 41%. The company reported no scheduled debt maturities until 2022.
- Cash provided by operations was $57.4 million for the first half, down from $209.8 million. Investing used $53.0 million and financing provided $473.9 million, including $750 million of debt proceeds and $160.4 million of shareholder dividends paid.
- Management reported owned portfolios were 97.3% leased overall at June 30. Experiential was 97% leased and Education 100% leased.
Material changes and significant developments
- Tenants and borrowers paid approximately 21% of second-quarter pre-COVID contractual cash rent and interest. EPR deferred approximately $60 million of tenant amounts and $3.5 million of borrower amounts booked as receivables; a further $41 million of tenant amounts was not recorded as receivables because collection was not considered probable. Repayment terms varied, and some remained under negotiation.
- On June 29, EPR amended its credit and private-placement agreements, obtaining temporary covenant relief generally through the earlier of April 1, 2021 or an earlier qualifying termination. The amendments added a minimum-liquidity covenant, suspended certain financial covenants for specified periods, increased borrowing costs during relief, and imposed limits on investments, capital spending, distributions and repurchases. EPR said it was compliant with its debt covenants at June 30.
- EPR suspended its common-share dividend after the payment made May 15 and suspended its share-repurchase program on June 29. During the first half, it repurchased 4.1 million shares for approximately $106 million. Preferred dividends continued to be declared.
- After quarter-end, on July 31, EPR restructured leases covering 53 AMC theatres, effective July 1. Annual fixed cash rent was reduced by approximately $25.6 million, or 21%, to $95.9 million, including ground rent and repayment of prior deferred amounts. From July through December 2020, AMC was to pay 15% of gross receipts in lieu of fixed rent, subject to the agreement’s cap; shortfalls are deferred and added to future rent. EPR described the restructuring as improving its long-term position, but actual collections depend on AMC’s operations and ability to pay.
- First-half investment spending was $53.6 million versus $566.5 million a year earlier. EPR said it limited investment spending to preserve liquidity and expected limitations to continue during the covenant-relief period.
Outlook, risks and contingencies
- Management said cash on hand, operating cash and asset-sale proceeds were expected to provide adequate liquidity for the next 12 months, including debt service and preferred distributions. Near-term liquidity was expected to rely primarily on cash on hand, including revolver borrowings. EPR gave no clear numerical earnings or full-year operating guidance in the supplied filing text.
- Management said its long-term target net-debt-to-adjusted-EBITDA range was 4.6x–5.6x, but the ratio was not meaningful at June 30 because of COVID-related disruption and rent accounting. Management also cautioned that future financing availability and terms were uncertain.
- Key risks include the duration and severity of the pandemic, further tenant closures or defaults, discretionary-spending weakness, rent deferrals and collectibility, debt and covenant restrictions, refinancing and capital-market access, and concentration in a few tenants. Topgolf, Regal and AMC represented 15.6%, 15.2% and 8.6% of first-half total revenue, respectively.
- EPR had $81.7 million of commitments for 10 development projects, with about $43.1 million expected to be funded in 2020; $25.9 million of mortgage-note funding commitments; and $31.6 million of surety bonds. It also guaranteed approximately $24.3 million of renovation completion costs for a lodging joint venture.
- Six properties were impaired after revised cash-flow estimates and shorter expected holding periods; three China theatre joint-venture investments were also impaired. Ordinary-course legal claims were disclosed, but management did not expect aggregate resolution to materially affect financial position or results.
Most important facts for investors to verify
- Subsequent-quarter rent collections, reopening progress and tenant payment capacity, particularly for AMC and other major tenants.
- Terms, repayment schedules and eventual collectibility of tenant and borrower deferrals, including the unrecorded $41 million of tenant amounts.
- Compliance with the new minimum-liquidity covenant, the duration and cost of covenant relief, and the ability to refinance or repay debt when maturities begin in 2022.
- Whether and when common dividends or share repurchases may resume; the filing provides no assurance on timing.
- Cash flow, impairment assumptions and future funding needs for development projects, mortgage commitments and the lodging joint-venture guarantee.