EPR Properties (Entertainment Properties Trust) — Q1 2012 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2012. EPR is a U.S. and Canadian REIT that owns, leases, develops and finances entertainment, education, recreation and specialty properties. At quarter-end, it reported 112 megaplex theatre properties and 37 public charter school properties, among other investments. Total assets were $2.79 billion; stated total investments were $3.03 billion.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $77.9 million | $73.6 million |
| Income from continuing operations | $21.9 million | $24.1 million |
| Net income attributable to EPR | $21.4 million | $41.7 million |
| Net income available to common shareholders | $15.4 million; $0.33 per diluted share | $34.2 million; $0.73 per diluted share |
| FFO available to common shareholders | $40.3 million; $0.86 per diluted share | $31.4 million; $0.67 per diluted share |
| AFFO available to common shareholders | $41.2 million | $38.4 million |
| Cash from operating activities | $42.0 million | $35.0 million |
| Cash and cash equivalents | $11.5 million | $14.6 million at Dec. 31, 2011 |
| Long-term debt | $1.225 billion | $1.154 billion at Dec. 31, 2011 |
Rental revenue rose 5.2%, to $58.3 million, and mortgage and other financing income increased to $14.7 million from $13.6 million. Net interest expense declined to $18.1 million from $18.8 million. General and administrative expense rose to $6.5 million from $5.5 million. Continuing-operations impairment charges were $12.0 million; an additional $0.8 million impairment was recorded in discontinued operations.
GAAP net income and EPS fell sharply mainly because Q1 2011 included an $18.3 million real-estate sale gain. Q1 2012 FFO also included an impairment add-back; FFO and AFFO are non-GAAP measures and are not substitutes for cash flow. The common dividend was $0.75 per share, versus $0.70 in Q1 2011.
Cash used in investing activities was $69.8 million, compared with cash provided of $157.4 million in Q1 2011, which included substantial property-sale proceeds. Financing activities provided $24.5 million, versus $189.2 million used in Q1 2011. Restricted cash was $24.9 million. The company reported $342.0 million available under its $400 million revolver. Debt to gross assets was 39%; interest, fixed-charge and debt-service coverage ratios were 3.6x, 2.7x and 2.7x, respectively.
Material changes versus the prior comparable period
- Revenue growth reflected acquisitions and rent increases, alongside higher mortgage lending income.
- Common-shareholder net income decreased largely because the prior-year quarter included a large property-sale gain; Q1 2012 also included substantial winery and vineyard impairments.
- Q1 2011 included $6.2 million of refinancing/payoff costs; none were reported in Q1 2012. Transaction costs also declined, while G&A increased.
- The company entered a $240 million unsecured term loan maturing in 2017, primarily using proceeds to reduce its revolving-credit balance. Swaps fixed the effective rate at 2.66% for four years.
- Investments included two TopGolf facilities acquired for $20 million, two dining/entertainment facilities for $13.7 million, school-related investments and additional lending to Peak Resorts. EPR converted $14.9 million of joint-venture equity into a secured mortgage loan.
Outlook, risks, contingencies and unusual items
Management’s stated objective is predictable and increasing FFO and dividends per share. It said cash on hand, operating cash flow and revolver availability should cover operations, debt service, distributions and expected 2012 commitments. The filing gives no specific full-year earnings, FFO or revenue guidance. Management noted that future financing availability and terms are uncertain.
- Reported commitments included $50.7 million for entertainment development, $14.1 million for education-property improvements and $40.5 million under mortgage-note commitments; about $10.1 million of the latter was expected to be funded in 2012. Debt maturities were approximately $65.3 million in 2012 and $98.5 million in 2013.
- AMC generated approximately 33% of Q1 revenue ($25.7 million), creating significant tenant concentration. Imagine affiliates leased 82% of EPR’s public charter school properties. Five Imagine-operated schools in St. Louis were subsequently ordered closed, with additional closures anticipated; management said Imagine was current on rent and did not expect impaired collections.
- EPR reported litigation relating to its planned Sullivan County casino/resort development. Plaintiffs sought $800 million in one action and $1.5 billion in another, plus interest and legal fees. EPR said it intended to defend the claims and believed it had meritorious defenses.
- The company had $180 million of land held for development in Sullivan County and $137.8 million invested in vineyards and wineries. Proposed winery/vineyard sales and shorter expected holding periods led to impairment charges. The impairment discussion in the filing contains inconsistent period references; investors should verify the correct period and amounts against the financial statements and notes.
- Other key risks include borrower and tenant defaults, charter-school funding and operator risks, theatre-market conditions, interest and foreign-exchange exposure, refinancing needs, REIT qualification and the ability to sustain distributions. EPR reported compliance with financial covenants at March 31, 2012.
Important facts for investors to verify
- Reconcile the winery/vineyard impairment disclosures, including the $12.0 million continuing-operations charge and $0.8 million discontinued-operations charge.
- Assess AMC and Imagine tenant concentration, school closures and the stated protections supporting Imagine lease payments.
- Track the Sullivan County litigation, the status and carrying value of the development land, and any change in project plans.
- Review debt maturities, revolver availability, committed development and mortgage funding, and the availability and cost of refinancing or new capital.
- Evaluate dividend coverage using operating cash flow and AFFO alongside GAAP results; note that FFO and AFFO are non-GAAP measures.