EPR Properties — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. EPR is a specialty REIT investing in entertainment, education and recreation properties in the U.S. and Canada.
Business context and operating performance
At quarter-end, EPR reported 19.6 million square feet of owned properties, 99.5% leased overall. Entertainment and education properties were 99% and 100% leased, respectively; recreation properties were 100% leased. Total investments, a company-defined non-GAAP measure, were $5.1 billion.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $125.6 million | $108.3 million | $362.4 million | $309.0 million |
| Net income attributable to EPR | $57.5 million | $50.2 million | $166.8 million | $141.8 million |
| Net income available to common shareholders | $51.6 million | $44.2 million | $149.0 million | $123.9 million |
| Diluted EPS | $0.81 | $0.76 | $2.35 | $2.15 |
| Diluted FFOAA per share | $1.23 | $1.17 | $3.56 | $3.27 |
Revenue increased 16% for the quarter and 17% year to date; diluted EPS rose 7% and 9%, respectively. Growth primarily reflected acquisitions and development completions. Segment net operating income before unallocated items was $120.0 million in Q3, versus $102.6 million a year earlier. Common dividends were $0.96 per share for Q3 and $2.88 year to date.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $215.8 million, compared with $184.8 million in 2015. Investing used $415.3 million; financing provided $202.6 million. Cash and cash equivalents ended at $7.3 million, with a further $20.5 million restricted.
- Total debt was $2.249 billion at September 30, up from $1.982 billion at December 31, 2015. The company issued $340 million of senior unsecured notes at 4.35% and 4.56%, due in 2024 and 2026, and repaid several secured notes. A $650 million revolving facility had $200 million drawn and $450 million available; the $350 million term loan had $300 million hedged through 2019.
- Net debt to adjusted EBITDA was 5.18x. Management’s stated target range is 4.6x–5.6x, and it expected to remain within the range after the proposed CNL transaction. Net debt was 43% of gross assets and 30% of market capitalization. EPR reported compliance with debt covenants.
- Management stated that cash on hand, operating cash flow, revolver availability and asset-sale proceeds should meet operating needs, debt service, distributions and existing commitments. No debt balloon payments were due for the remainder of 2016. Future refinancing and capital access are not assured.
Material changes and unusual items
- Q3 rental revenue rose to $102.3 million from $85.7 million, mainly from acquisitions and development completions. Nine-month rental revenue increased to $292.1 million from $240.3 million.
- Interest expense increased to $24.3 million for Q3 from $20.5 million and to $70.3 million year to date from $59.1 million, reflecting higher average borrowings and less capitalized interest, partly offset by lower financing rates on some investments.
- Q3 other income included $1.8 million of insurance-recovery gains; nine-month other income included $3.8 million. Year-to-date income also included a $3.6 million mortgage prepayment fee. Nine-month real-estate sale gains were $3.9 million, compared with $23.8 million in 2015; the prior period included a $23.7 million theatre-sale gain.
- Q3 transaction costs increased to $2.9 million from $0.8 million. Nine-month general and administrative expense rose to $27.3 million from $22.9 million. The 2015 comparative included $18.6 million in former CEO retirement severance expense, with none in 2016.
- Nine-month investment spending was $526.9 million. EPR had $284.4 million in development funding commitments at quarter-end, with approximately $82.8 million expected to be funded in 2016. It also had a separate $120 million commitment over three years for the Adelaar waterpark hotel and adventure park.
Outlook, transactions and risks
No specific earnings or per-share guidance was provided. Management described continued portfolio investment as its strategy and said it expected its identified liquidity sources to cover existing needs. The filing cautions that interim results are not necessarily indicative of full-year results.
- CNL/OZRE transaction, subsequent event: On November 2, 2016, EPR agreed to acquire Northstar California Ski Resort, 15 attraction properties and five family entertainment centers, and to provide approximately $244 million of five-year secured financing to OZRE. The projected investment is about $700 million, expected to be funded with approximately $647 million of EPR shares and $53 million cash; EPR also agreed to fund up to $52 million of specified improvements. The OZRE financing bears 8.5% interest. Closing was anticipated in early Q2 2017, subject to approvals and other conditions. The share consideration collar could result in approximately 7.8–9.5 million shares being issued. If EPR and OZRE fail to close after conditions are satisfied or waived, they may owe a $60 million reverse termination fee plus up to $10 million of specified expenses.
- Adelaar project: EPR is responsible for common infrastructure construction and has development and financing exposure. Revenue bonds are expected to reimburse a substantial portion of infrastructure costs; completion was expected in 2017. Project delay or cancellation, third-party execution and financing remain risks.
- Litigation: The remaining Cappelli Group Westchester Action seeks at least $800 million. EPR said loss was not considered probable and it could not estimate a reasonably possible loss range; a motion to dismiss was pending. Two related cases were closed.
- Concentration and operating risks: AMC generated approximately 18% of nine-month revenue and leased 24% of EPR’s megaplex theatre properties. Risks include tenant defaults, consumer discretionary spending, interest rates, refinancing and capital-market access, development execution, foreign exchange, and maintaining REIT status.
Most important facts for investors to verify
- Whether the CNL/OZRE transaction received required approvals, closed on expected terms and produced the anticipated benefits; verify dilution, financing exposure and any termination-fee obligation.
- Progress, remaining funding requirements and reimbursement timing for Adelaar and the broader development commitments.
- AMC’s credit and lease performance, tenant concentration, and the health of other major tenants and borrowers.
- Debt maturities, covenant headroom, borrowing costs and whether EPR can sustain its leverage target and dividends while funding growth.
- The durability of earnings and FFOAA growth after separating recurring operations from insurance gains, prepayment fees, sale gains and other unusual items.
- Developments in the Cappelli litigation and any change to management’s assessment of potential loss.