EPR Properties — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016; the filing also provides fourth-quarter results. Amounts are U.S. dollars unless stated otherwise.
Business context
EPR Properties is a specialty REIT focused on entertainment, education and recreation real estate, generally leased on a long-term triple-net basis or financed through mortgages. At year-end, total assets were $4.87 billion and total investments, a non-GAAP measure, were $5.31 billion. The portfolio was approximately 50% entertainment, 25% education, 22% recreation and 3% other, primarily the Adelaar casino and resort project.
Financial and operating results
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $493.2 million | $421.0 million | +17% |
| Net income attributable to EPR | $225.0 million | $194.5 million | +16% |
| Net income available to common shareholders | $201.2 million | $170.7 million | +18% |
| Diluted GAAP EPS | $3.17 | $2.93 | +8% |
| Diluted FFO as adjusted (FFOAA) per share | $4.82 | $4.44 | +9% |
| Cash dividends declared per common share | $3.84 | $3.63 | +6% |
Fourth-quarter 2016 revenue was $130.8 million, versus $112.0 million in fourth-quarter 2015. Net income available to common shareholders was $52.2 million, or diluted EPS of $0.82, compared with $46.8 million, or $0.78 per diluted share.
Revenue growth primarily reflected acquisitions and development projects completed in 2015 and 2016. Other favorable items included $4.7 million of insurance recoveries and a $3.6 million mortgage prepayment fee. FFOAA also included $2.8 million of education-property termination fees. Conversely, 2016 net income benefited from the absence of the $18.6 million CEO retirement expense recorded in 2015; 2015 also had substantially higher real-estate sale gains ($23.8 million versus $5.3 million in 2016).
Rental revenue was $399.6 million, mortgage and other financing income was $69.0 million, and interest expense, net, rose to $97.1 million from $79.9 million. General and administrative expense increased to $37.5 million from $31.0 million, while depreciation and amortization increased to $107.6 million from $89.6 million. In 17 lease renewals covering approximately 1.3 million square feet, rental rates decreased approximately 0.5% on average.
Net cash provided by operating activities was $306.2 million, compared with $278.5 million in 2015. Investing activities used $662.1 million, principally reflecting development and acquisitions; financing activities provided $371.1 million. Cash and cash equivalents were $19.3 million at year-end, with an additional $9.7 million restricted.
Debt, liquidity and portfolio
Total debt was $2.49 billion, up from $1.98 billion a year earlier. Net debt to adjusted EBITDA, a non-GAAP measure, was 5.48x versus 5.09x; management’s stated target range is 4.6x to 5.6x. The company reported compliance with debt covenants. It had no borrowings outstanding on its $650 million revolving credit facility at year-end and reported $650 million of availability. Net debt was 45% of gross assets and 34% of total market capitalization.
2016 debt issuance included $340 million of private-placement notes and $450 million of public senior notes; proceeds were used for revolving-credit repayment, mortgage investments and general purposes. The filing identifies $163.3 million of scheduled long-term debt obligations in 2017 and a $600 million maturity in 2020. Management expected operating cash, cash on hand and revolving-credit availability to support operations, debt service, dividends and near-term commitments.
Investment spending was $805.0 million, up from $632.0 million. Year-end occupancy was 99% for owned entertainment properties, 100% for education and 100% for recreation; the combined owned portfolio was approximately 99.5% leased. AMC and Carmike together accounted for 22.6% of 2016 total revenue, following AMC’s acquisition of Carmike.
Outlook, material developments and risks
- CNL transaction: At year-end, EPR had a pending agreement to acquire Northstar California Ski Resort, 15 attractions and five family entertainment centers, and to provide $244 million of secured financing to an affiliated buyer for 14 ski properties. The projected aggregate investment was approximately $700 million, expected to be funded mainly with about $647 million of EPR common shares and $53 million cash. EPR cited an expected 9.35% initial cash yield on the acquired resort and attractions. Closing was anticipated in second-quarter 2017, subject to approvals and other conditions; it was not completed as of December 31, 2016. If EPR and its partner fail to close after conditions are satisfied or waived, a $60 million reverse termination fee plus specified expenses of up to $10 million may apply.
- Development commitments: EPR had approximately $313.7 million of development commitments, about $263.2 million expected to be funded in 2017. It also committed approximately $155 million over three years for an indoor waterpark hotel and adventure park at Adelaar, and was responsible for Adelaar common infrastructure. Cost overruns could exceed bond proceeds or amounts recoverable from project users.
- Adelaar litigation and project exposure: A remaining lawsuit seeks at least $800 million in damages. The court denied EPR’s motion to dismiss in January 2017; discovery was ongoing. EPR said losses were not considered probable and that it could not estimate a reasonably possible loss range. The Adelaar project also depends on the third-party casino developer satisfying gaming-license and financing requirements; cancellation or delay could impair EPR’s investment.
- Concentration and operating risks: AMC represented 18.2% of 2016 revenue and Carmike 4.4%; the acquisition increased tenant concentration. Tenant defaults, theatre lease renewals or downsizing, consumer discretionary spending, charter-school funding and authorizations, and weather-sensitive recreation operations could affect rents and loan performance.
- Capital and dividend outlook: Management’s long-term objective is predictable growth in FFO and dividends. No specific 2017 earnings or dividend-growth guidance is provided in the supplied filing text. The board retains discretion over common dividends, and rising rates, refinancing needs, leverage, equity issuance and transaction execution could affect financial flexibility and distributions.
- Unusual items: 2016 included $4.7 million of insurance gains following fire damage at an Ohio ski area, a $3.6 million mortgage prepayment fee, $2.8 million in education lease termination fees, and a $1.6 million fee for extending a tenant purchase option. 2015 included $18.6 million in CEO retirement severance expense.
Most important facts for investors to verify
- Whether the CNL transaction closed on the anticipated terms and timing, including final share issuance, financing, integration costs and achieved returns.
- AMC/Carmike tenant credit, lease performance and concentration after their combination, alongside upcoming theatre lease expirations and renewal economics.
- Funding and completion progress for the $313.7 million of development commitments and the Adelaar hotel, infrastructure and casino components; monitor cost overruns and project financing.
- Developments in the $800 million Adelaar-related lawsuit, including any change in management’s probability assessment or ability to estimate potential loss.
- Debt maturities, interest costs, covenant headroom and leverage relative to management’s 4.6x–5.6x target; confirm the capacity to refinance and fund commitments.
- Recurring operating performance and dividend coverage apart from one-time insurance recoveries, prepayment and termination fees, gains on sales, and non-GAAP FFOAA adjustments.
The financial statements received an unqualified audit opinion, and management and KPMG reported effective internal control over financial reporting as of December 31, 2016.