EPR Properties (Entertainment Properties Trust) — Q2 2010 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2010; comparisons are with the quarter and six months ended June 30, 2009. EPR is a REIT that owns, leases and finances theatre, entertainment-retail, recreation and specialty properties in the U.S. and Canada. At quarter-end, it reported 107 megaplex theatre properties, total assets of $2.91 billion and total investments of approximately $3.07 billion.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $77.6m | $63.7m | $150.4m | $127.2m |
| Net income attributable to EPR | $15.6m | $27.7m | $45.7m | $53.0m |
| Net income available to common shareholders | $8.0m | $20.2m | $30.6m | $37.9m |
| Diluted earnings per common share | $0.18 | $0.58 | $0.69 | $1.09 |
| FFO available to common shareholders | $21.7m | $30.1m | $55.5m | $59.1m |
| Diluted FFO per common share | $0.48 | $0.86 | $1.26 | $1.70 |
Q2 adjusted funds from operations (AFFO) was $38.2m, versus $29.3m; six-month AFFO was $71.7m, versus $57.5m. Common dividends were $0.65 per share for the quarter and $1.30 for the six months, unchanged from 2009.
- Six-month operating cash flow was $74.6m, compared with $77.0m; investing cash outflow was $304.3m, compared with $42.7m; financing cash inflow was $228.8m, versus a $68.4m outflow. Cash and equivalents were $20.1m at June 30; restricted cash was another $16.4m.
- Total liabilities were $1.29b, including $1.21b of long-term debt. EPR reported a 38% leverage ratio, six-month interest coverage of 3.2x, fixed-charge coverage of 2.3x and debt-service coverage of 2.4x.
- The new $320m unsecured revolver had $153.5m drawn and $166.5m available at quarter-end. EPR reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue increased, driven mainly by acquisitions and rent increases. Q2 rental revenue rose to $58.0m from $48.2m; mortgage and other financing income rose to $13.0m from $11.2m. Toronto Dundas Square contributed to higher tenant reimbursements and property operating costs.
- Common earnings fell materially despite revenue growth. Q2 net income available to common shareholders declined to $8.0m from $20.2m; six-month diluted EPS fell to $0.69 from $1.09. The main unusual drag was $15.2m of Q2 refinancing costs, including costs to terminate debt and related interest-rate swaps. Net interest expense and depreciation also increased.
- Q2 2010 results included an $8.5m six-month gain on acquiring Toronto Dundas Square and a $7.6m six-month transaction-cost charge, primarily acquisition costs. Six-month results also included a $0.7m loan-loss provision and a $0.9m loss on sale of a vineyard property.
- EPR issued 3.6m common shares in May at $41 per share, generating approximately $141m net proceeds. It acquired five charter-school properties for $44.1m and 12 theatre properties for $124.4m; acquired Toronto Dundas Square; and sold a Napa Valley vineyard and winery for $6.5m.
- A settlement with Louis Cappelli and affiliates resolved pending litigation and restructured investments. EPR received the Concord resort property, subject to a two-year purchase option and other restrictions, and obtained full ownership of New Roc while surrendering its interest in City Center. The settlement produced a reported net gain of $4,000 and involved deconsolidating $118.2m of City Center debt.
Outlook, commentary and risks
Management stated that cash on hand, operating cash flow and available revolver capacity were expected to cover operations, debt service, distributions and anticipated 2010 commitments; it expected sources of cash to exceed expected uses for the rest of 2010. EPR targeted long-term debt at 35%–45% of gross assets and reported 38% at quarter-end. The filing provides no numerical earnings or FFO guidance.
- Commitments included $10.9m for charter-school expansions, approximately $27m of potential mortgage-note funding (about $4.7m expected in 2010), and a binding commitment to acquire a $30m participation in a proposed Concord casino-project loan, conditional in part on a $100m gaming-operator equity investment by December 31, 2010.
- Concord resort and casino development delays or cancellation could impair the resort investment. EPR also highlighted tenant credit and lease risks, financing availability and covenant constraints, interest-rate and Canadian-dollar exposure, and its ability to maintain dividends.
- AMC accounted for approximately 37% of six-month revenue and leased 39% of EPR’s megaplex theatre properties, including joint-venture properties. A winery tenant entered receivership; its $2.1m receivables were fully reserved. EPR reported no additional impairment provision for that property.
Important facts for investors to verify
- Review the refinancing-cost composition and the ongoing interest expense and debt maturities after the June 2010 refinancing.
- Assess tenant and borrower concentration, especially AMC, the impaired notes, the $168.5m SVVI mortgage exposure and winery tenant credit conditions.
- Confirm the status and terms of the Concord resort purchase option, proposed casino financing, and the $30m participation commitment.
- Reconcile reported earnings with FFO and AFFO, noting that both are non-GAAP measures and AFFO adds back substantial refinancing and transaction costs.
- Monitor revolver availability, covenant compliance, potential funding commitments and the sustainability of the $0.65 quarterly common dividend.