EPR Properties — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 28, 2019. EPR is a specialty REIT focused on entertainment, recreation and education real estate, generally using long-term triple-net leases and mortgage financing.
Business context and portfolio
- Total assets were $6.13 billion; management-reported total investments were $6.86 billion. The portfolio was approximately 43% entertainment, 33% recreation, 21% education and 3% other.
- Owned properties totaled 22.2 million square feet and were 98.6% leased. Entertainment represented 54.2% of owned-property rental revenue; recreation 25.7%; education 18.4%.
- AMC generated $115.8 million, or 16.5%, of 2018 total revenue. AMC leased 34% of EPR’s megaplex theatre properties.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 | Change or context |
|---|---|---|---|
| Total revenue | $700.7 million | $576.0 million | Up 22% |
| Net income attributable to EPR | $267.0 million | $263.0 million | Up 2% |
| Net income available to common shareholders | $242.8 million | $234.2 million | Up 4% |
| Diluted GAAP EPS | $3.27 | $3.29 | Down 1% |
| Diluted FFOAA per share | $6.10 | $5.02 | Up 22%; non-GAAP |
| Operating cash flow | $484.3 million | $398.3 million | Up 22% |
| Cash dividends declared per common share | $4.32 | $4.08 | Up 6% |
Fourth-quarter 2018 revenue was $166.5 million and net income was $54.0 million. The filing does not provide a clear quarterly FFOAA-per-share value in the supplied text.
- Revenue growth reflected acquisitions, development and mortgage-note conversions, plus $74.7 million of mortgage prepayment fees. Rental revenue was $556.4 million; mortgage and other financing income was $142.3 million.
- Net cash used in investing activities was $96.8 million, versus $702.1 million in 2017; net cash used in financing was $427.6 million. Year-end cash and cash equivalents were $5.9 million, with $12.6 million restricted cash.
- Debt was $3.0 billion, 99% unsecured. Net debt to adjusted EBITDA was 5.5x, within management’s stated 4.6x–5.6x target range. The $1.0 billion revolver had $970 million available; management reported compliance with debt covenants.
- No debt principal maturities were scheduled before 2022. Common dividends are paid monthly; preferred shares carry stated annual rates of 5.75% (Series C), 9.00% (Series E) and 5.75% (Series G).
Material changes and unusual items
- Investment spending fell to $572.0 million from $1.58 billion in 2017, which included a large CNL Lifestyle/OZRE transaction. Dispositions and mortgage payoffs rose to $471.1 million from $197.6 million. Management said it became more selective as its cost of capital rose.
- GAAP results included $27.3 million of impairment charges, $32.0 million of loan refinancing/payoff costs (primarily the redemption of 7.75% notes), $5.9 million severance expense and $2.1 million litigation settlement expense. 2017 included $41.9 million of real estate sale gains, compared with $3.0 million in 2018.
- Mortgage prepayment fees were unusually high, including $65.9 million from an OZRE ski-property loan payoff and $5.4 million from a Chicago observation-deck loan payoff. These fees materially supported revenue and FFOAA.
- In 2018 EPR issued $400 million of 4.95% senior notes due 2028 and redeemed $250 million of 7.75% notes due 2020, paying a $28.6 million redemption premium. It also repaid a $250.3 million OZRE mortgage note.
Outlook, risks and contingencies
- Management expected investment spending to increase in 2019 as market conditions improved and cited opportunities across its segments. It anticipated operating cash flow, revolver capacity and asset-sale proceeds would cover operations, debt service, dividends and near-term commitments; this is forward-looking and not assured.
- Development commitments included $98.7 million expected to be funded in 2019, plus $206.9 million remaining for a Sullivan County indoor waterpark hotel and adventure park; approximately $49 million of the latter was expected in 2019. The project was expected to enter service in spring 2019.
- CLA’s bankruptcy and lease restructuring remain a key education-portfolio risk. EPR arranged contingent 20-year leases for all 21 operating schools with Crème de la Crème, dependent on possession, asset transfers and required approvals; delays or failed transfers could reduce near-term rent.
- A $179.8 million mortgage exposure to Schlitterbahn-related borrowers depends partly on future STAR Bond issuances and repayment capacity. Criminal indictments were dismissed in February 2019, but further proceedings remained possible; borrower cash shortages and adverse publicity were additional risks.
- EPR recorded a $10.7 million impairment related to guarantees on $24.7 million of Louisiana theatre bonds. Other major risks include AMC concentration, consumer discretionary spending, tenant defaults, interest rates, refinancing, development execution, weather-sensitive recreation assets and REIT qualification.
- Adoption of the lease accounting standard in 2019 was expected to recognize approximately $210–$220 million of right-of-use assets and $235–$245 million of operating lease liabilities; management expected no material net income or cash-flow impact from gross presentation changes.
Investor facts to verify
- How much of recurring earnings and distributions is supported by contractual rent versus nonrecurring prepayment fees?
- Whether Crème de la Crème takes over and operates all 21 CLA properties on schedule, and the resulting rent and capital requirements.
- Repayment prospects and collateral coverage for the $179.8 million Schlitterbahn-related loan, including STAR Bond approvals and any renewed legal proceedings.
- AMC’s financial condition and rent coverage, given its 16.5% contribution to total revenue.
- Debt leverage, refinancing access and ability to maintain dividends while meeting development commitments and the 2022–2023 maturities.