EPR Properties — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. EPR is a specialty REIT investing in entertainment, education and recreation properties in the United States and Canada. Its owned portfolio comprised 14.2 million square feet and was 99% leased at quarter-end.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $87.8 million | $81.5 million | $253.7 million | $235.4 million |
| Net income available to common shareholders | $37.6 million | $28.1 million | $99.3 million | $74.3 million |
| Diluted GAAP EPS | $0.79 | $0.60 | $2.10 | $1.58 |
| Diluted FFOAA per share | $1.01 | $0.96 | $2.93 | $2.74 |
| Dividends per common share | $0.79 | $0.75 | $2.37 | $2.25 |
- Revenue increased 8% and common net income increased 34% in both the quarter and nine-month comparison. Management attributed improvement principally to investment spending and lower financing rates. FFOAA per diluted share rose 6% for the quarter and 7% year to date.
- Segment net operating income before unallocated items was $81.1 million in Q3 2013 versus $75.1 million, and $233.6 million for nine months versus $216.3 million. As a share of revenue, this measure was approximately 92.3% and 92.2% for the quarters, and 92.1% and 91.9% for the nine-month periods; it is a company-presented segment measure, not a GAAP operating margin.
- At September 30, total assets were $3.14 billion, long-term debt $1.55 billion, cash and cash equivalents $24.1 million, and restricted cash $18.1 million. Debt rose from $1.37 billion at December 31, 2012. Management reported debt to gross assets of 44%, within its stated 35%–45% target range, and compliance with debt covenants.
- Nine-month operating cash flow was $158.4 million, investing cash outflow $184.0 million and financing cash inflow $39.4 million. Operating cash flow was up from $145.4 million in the prior-year period. Cash increased by $13.5 million from year-end.
Changes, financing and unusual items
- Investment spending totaled $252.8 million in the first nine months, versus $202.3 million a year earlier, led by education ($116.0 million), entertainment ($90.4 million) and recreation ($42.2 million).
- EPR issued $275 million of 5.25% unsecured senior notes due 2023 and amended its revolving and term loan facilities, extending their maturities to 2017 and 2018 and lowering pricing. The revolver had $68 million drawn against $475 million of initial availability at quarter-end. The term loan was $265 million, with $240 million effectively fixed by swaps through July 2017.
- Nine-month common net income included a $4.5 million gain from a discounted debt payoff, $6.2 million of refinancing/payoff costs, and $3.7 million of gains on winery and vineyard sales. Q3 included $3.2 million of such property-sale gains and $1.2 million of option-payment income tied to the planned Sullivan County casino/resort project. These items affect comparability.
- After quarter-end, EPR acquired Camelback Mountain Ski Resort for $69.3 million and agreed to fund up to $110.7 million for a water-park hotel; it also bought its partner’s interests in two joint ventures for $18.6 million. On October 23, it issued 3.6 million common shares for approximately $174 million net proceeds.
Outlook, risks and contingencies
- No specific earnings or FFO guidance is provided in the filing. Management expects cash on hand, operating cash flow and revolver availability to meet operating needs, debt service, distributions and existing commitments. It reported no consolidated debt balloon payments due for the remainder of 2013 or 2014, while noting future financing availability and terms are not assured.
- At quarter-end, committed development funding was approximately $144.6 million: $52.5 million entertainment, $49.0 million education and $43.1 million recreation. Mortgage-note commitments added approximately $16.4 million. Management expected about $26.2 million of development commitments and $15.4 million of mortgage commitments to be funded in 2013.
- Tenant concentration is material: AMC and its guarantor accounted for approximately 25% of nine-month revenue, and AMC leased 30% of EPR’s megaplex theatre properties. Imagine remained current on its 27-property master lease, but some schools were non-operational or subleased; EPR held a $16.4 million letter of credit.
- A lawsuit concerning the proposed Sullivan County resort seeks $500 million in damages, potentially trebled to $1.5 billion, plus other relief. The federal antitrust claims were dismissed with prejudice, but plaintiffs sought reconsideration and appealed; some state-law claims could be pursued separately. EPR said losses were not considered probable and it could not estimate a possible loss range.
- Other risks include tenant or borrower defaults, real-estate and development execution, leverage and refinancing, interest-rate and Canadian currency exposure, and dependence on a limited set of property categories. EPR disclosed a $184.3 million recorded exposure to unconsolidated VIE SVVI, limited to its mortgage note and accrued interest.
Key facts for investors to verify
- Assess the sustainability of earnings and FFOAA after separating recurring operations from property-sale gains, debt-extinguishment gains, refinancing costs and Sullivan County option income.
- Review AMC’s credit and lease-guarantee support, and the operating, charter and funding status of Imagine’s schools.
- Track leverage, facility availability, covenant headroom, debt maturities and the funding needs for development projects and the Camelback hotel.
- Evaluate the status and potential financial exposure of the Sullivan County litigation and planned resort project; the filing provides no clear loss estimate.
- Consider dilution from common-share issuance and confirm the post-quarter use of the approximately $174 million offering proceeds.