EPR Properties — Q1 2017 Form 10-Q
Business context and reporting period. EPR Properties is a specialty REIT investing in entertainment, education and recreation real estate and related loans. This unaudited report covers the three months ended March 31, 2017; balance-sheet figures are as of March 31, 2017, unless otherwise noted. Its owned portfolio was 99.2% leased and spanned 41 states, the District of Columbia and Ontario, Canada.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $129.1 million | $118.8 million; up 9% |
| Net income | $53.9 million | $54.2 million |
| Net income available to common shareholders | $48.0 million; diluted EPS $0.75 | $48.2 million; diluted EPS $0.77 |
| FFO available to common shareholders | $73.9 million; diluted FFO per share $1.15 | $73.8 million; diluted FFO per share $1.17 |
| FFOAA available to common shareholders | $76.5 million; diluted FFOAA per share $1.19 | $73.7 million; diluted FFOAA per share $1.17; per-share amount up 2% |
| Operating cash flow | $74.8 million | $69.1 million |
| Cash and cash equivalents | $14.4 million | $19.3 million at December 31, 2016 |
| Debt | $2.616 billion | $2.486 billion at December 31, 2016 |
| Net debt / adjusted EBITDA | 5.89x | 4.83x at March 31, 2016 |
Net cash used in investing was $200.7 million, mainly reflecting property and loan investments and development spending; net cash provided by financing was $121.1 million. Restricted cash was $28.5 million, much of it held for borrower debt-service reserves or tenant off-season rent reserves. Common dividends per share were $1.02 for the quarter, versus $0.96 a year earlier.
Material changes and notable transactions
- Rental revenue rose $13.3 million, primarily from acquisitions and completed developments, with an increase on existing properties also contributing. Mortgage and other financing income declined $2.3 million, in part because Q1 2016 included a $3.6 million prepayment fee and because of 2016 loan payoffs and property sales.
- Net interest expense increased $7.4 million to $30.7 million, mainly due to higher average borrowings. General and administrative expense increased $1.9 million to $11.1 million.
- Investment spending totaled $227.2 million, compared with $145.1 million a year earlier. Q1 spending included $99.1 million for new development, $41.5 million for acquisitions and $67.6 million for mortgage or other notes receivable.
- The company sold two charter schools and a retail space, recognizing a net gain on real estate of approximately $2.0 million. A $1.9 million tenant purchase-option termination fee was included in FFOAA.
- During Q1, EPR issued 928,219 common shares for $67.9 million net proceeds, used to reduce its revolving credit facility.
- Post-quarter CNL/OZRE transaction: On April 6, 2017, EPR completed a transaction involving Northstar California Resort, 15 attractions and financing for 14 ski properties. Its initial investment was $706.5 million, funded with $647.4 million of newly issued shares and $59.1 million of cash, before purchase-price adjustments. The cash portion was funded with revolving-credit borrowings. EPR also sold five family entertainment centers acquired in the transaction for about $6.8 million.
Outlook, liquidity, risks and contingencies
- Management expects cash on hand, operating cash flow, available revolving-credit capacity and asset-sale proceeds to meet operating needs, debt service, distributions and commitments. It said it expects sources of cash to exceed remaining 2017 commitments, while cautioning that future financing availability and terms are not assured.
- Management’s stated target for net debt to adjusted EBITDA is 4.6x–5.6x. The 5.89x quarter-end ratio was above that range; management expected it to return to the usual range by June 30, 2017, following the anticipated post-quarter equity issuance in the CNL/OZRE transaction.
- At March 31, debt included $150 million outstanding on the revolving facility, with $500 million of availability, and a $350 million term loan. EPR reported compliance with all financial covenants. It subsequently prepaid $117.2 million of theatre mortgage debt and expected a $1.0 million early-extinguishment gain in Q2 2017.
- Commitments included approximately $262.1 million for development projects, with about $196.6 million expected to be funded in 2017, and a further $155 million over three years for the Adelaar waterpark hotel and adventure park. EPR is also responsible for Adelaar common infrastructure; completion was then expected in 2018.
- Tenant concentration is notable: AMC generated about 22.7% of Q1 revenue and leased 35% of EPR’s megaplex theatre properties. Risks include tenant defaults, consumer discretionary spending, entertainment-sector exposure, leverage and financing access, development execution, interest and currency movements, and the CNL transaction.
- Litigation relating to the Adelaar project remains ongoing. The Cappelli Group seeks at least $800 million in damages; discovery is ongoing. EPR said losses were not determined probable and that it could not estimate a reasonably possible loss range.
- EPR’s forward-looking statements are subject to significant uncertainties. The filing provides no numerical full-year revenue, earnings or FFO guidance.
Most important facts for investors to verify
- Whether the post-quarter CNL/OZRE investment delivers expected returns, and how the share issuance, revolving-credit borrowings and final purchase-price adjustments affect leverage and per-share results.
- AMC’s financial condition and its ability to meet lease obligations, given its share of revenue and theatre exposure.
- Progress, funding, reimbursement timing and cost exposure for Adelaar and the other development commitments.
- Debt maturities, available borrowing capacity, covenant headroom and whether leverage returns to management’s stated range.
- Developments in the Cappelli litigation, including any change in the company’s assessment of probability or potential loss.
- Underlying recurring performance versus items affecting comparisons, including prior-year prepayment income, property dispositions, the Q1 2017 real-estate gain and tenant termination fee. FFO and FFOAA are non-GAAP measures and may not be comparable across REITs.