EPR Properties — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless stated otherwise. EPR is an experiential net-lease REIT, with experiential and education property portfolios in the U.S. and Canada. COVID-19 materially disrupted tenant operations and rent collections.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $63.9 million | $169.4 million | $321.2 million | $481.6 million |
| Net income (loss) | $(85.9) million | $34.0 million | $(111.8) million | $165.9 million |
| Net income (loss) per diluted common share | $(1.23) | $0.36 | $(1.70) | $1.94 |
| FFOAA per diluted share | $(0.16) | $1.46 | $1.25 | $4.19 |
| Operating cash flow | Not separately provided for quarter | $59.5 million | $337.3 million |
Q3 revenue fell 62%; nine-month revenue fell 33%. Q3 property-segment net operating income before unallocated items was $47.4 million, down from $143.5 million. Nine-month operating cash flow declined substantially, while financing activities provided $467.9 million, including $750 million borrowed under the revolver. Nine-month investing cash use was $70.9 million.
Q3 rental revenue was $55.6 million versus $151.0 million. For the nine months, rental revenue was $288.2 million versus $438.3 million. The company recorded $62.8 million of property and lease-asset impairments, $3.2 million of joint-venture impairments, and $10.4 million of credit-loss expense during the nine months. It also recognized an $18.0 million valuation allowance on certain deferred tax assets.
Balance sheet, debt and liquidity
- At September 30, 2020, cash and cash equivalents were $985.4 million; total assets were $6.91 billion and equity was $2.65 billion.
- Debt was $3.85 billion, up from $3.10 billion at December 31, 2019; 99% was unsecured. This included $750 million outstanding on the $1.0 billion revolving facility, a $400 million term loan, $340 million of private-placement notes and approximately $2.4 billion of other unsecured senior notes.
- Net debt to gross assets was 42%. Management said net debt to adjusted EBITDA was not meaningful amid pandemic-related disruption. No scheduled debt payments were due until 2022, according to management.
- Management expected cash on hand, operating cash flow and asset-sale proceeds to cover commitments for the next 12 months, while noting uncertainty around financing availability and terms.
- Nine-month dividends paid were $166.4 million. Common dividends were suspended after the May 15 payment; preferred dividends continued. The share-repurchase program was suspended June 29 after $106.0 million of repurchases.
Material changes and management commentary
- Tenants and borrowers paid approximately 41% of third-quarter pre-COVID contractual cash rent and interest. EPR said it had reached resolution with customers representing approximately 90% of annualized pre-COVID contractual cash rent and interest; certain theatre deferrals remained under negotiation.
- EPR wrote off $62.6 million of tenant and straight-line rent receivables and reduced revenue by $6.8 million for contractual abatements during the nine months. It deferred approximately $75.4 million of tenant amounts and $3.6 million of borrower amounts booked as receivables; other amounts were not recognized as receivables because collection was not considered probable.
- AMC restructuring: effective July 1, 53 properties were placed under a master lease covering 46 theatres and seven amended transitional leases. Annual fixed rent was reduced by approximately $25.6 million to $95.9 million, with prior-period deferrals incorporated into rent. Through December 2020, AMC was to pay 15% of gross receipts instead of fixed rent, subject to the agreement’s terms; shortfalls add to deferred rent. EPR described the restructuring as improving its long-term position but remains exposed to AMC’s ability to perform.
- Investment spending fell to $62.3 million from $684.7 million in the first nine months of 2019 as EPR prioritized liquidity. At quarter-end, its owned portfolio was 96.7% leased overall; experiential was 96.4% leased and education 100% leased.
- On November 3, 2020, after quarter-end, EPR extended bank-facility covenant relief through December 31, 2021 and increased required minimum liquidity to $500 million. It was negotiating a similar extension for its $340 million private-placement notes. Credit-rating downgrades after quarter-end increased borrowing costs and prompted subsidiary guarantees to be arranged.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management said investment spending would remain limited during covenant relief and that common dividends would remain suspended during that period, except as needed to preserve REIT status and avoid income tax. The duration and severity of COVID-19, reopening conditions, discretionary spending, delayed movie releases, tenant solvency and future rent collections remain uncertain. Additional risks include leverage, higher financing costs, covenant restrictions, tenant concentration—particularly Topgolf, AMC and Regal—and the possibility that deferred rent is not ultimately collected.
At September 30, EPR had 18 development projects with approximately $125.9 million of funding commitments, three mortgage or note commitments totaling approximately $23.7 million, and $31.6 million of surety bonds. It also had a renovation-completion guarantee for a lodging joint venture, with approximately $23.3 million remaining to fund. Management said ordinary-course legal claims were not expected to have a material adverse effect.
Most important facts for investors to verify
- Actual cash rent and interest collections, deferred balances, repayment terms and cash-basis tenant revenue recognition—especially for AMC and Regal.
- Compliance with minimum-liquidity requirements and the status and terms of covenant waivers for both bank debt and private-placement notes.
- Credit ratings, resulting borrowing costs, subsidiary guarantees and any further collateral or covenant requirements.
- Cash runway and debt refinancing plans, including whether asset sales or operating cash flow can support commitments through the recovery period.
- Whether impaired properties, development commitments and the lodging joint-venture guarantee require further charges or cash funding.