EPR PROPERTIES annual report, FY2015

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EPR Properties — 2015 Form 10-K

Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2015; it is not a standalone fourth-quarter report. EPR is a specialty REIT investing primarily in entertainment, education and recreation properties, generally through long-term triple-net leases and mortgage financing. At year-end, total assets were $4.22 billion and total investments were approximately $4.61 billion. The owned portfolio comprised 18.3 million square feet and was 99% leased.

Financial and operating performance

  • Revenue: $421.0 million, up 9% from $385.1 million in 2014. Rental revenue rose to $330.9 million from $286.7 million; mortgage and other financing income declined to $70.2 million from $79.7 million.
  • Profit: Net income attributable to EPR was $194.5 million versus $179.6 million. Net income available to common shareholders was $170.7 million, up 10%, while diluted EPS increased to $2.93 from $2.86.
  • REIT operating measures: FFO available to common shareholders was $235.2 million versus $220.5 million, but diluted FFO per share decreased to $4.03 from $4.04. Adjusted FFO (FFOAA) per diluted share rose 8% to $4.44 from $4.13. These are non-GAAP measures and are not substitutes for GAAP results or cash flow.
  • Cash flow: Operating activities provided $278.5 million, compared with $250.3 million in 2014. Investing activities used $568.5 million and financing activities provided $292.0 million. Cash and cash equivalents at year-end were $4.3 million; restricted cash was $10.6 million.
  • Debt and liquidity: Debt was $1.98 billion, up from $1.63 billion; debt to gross assets was 42%, within management’s stated 35%–45% target range. The company had $454 million available on its $650 million unsecured revolving facility and was in compliance with debt covenants. Most debt is unsecured; $300 million of term-loan borrowings was fixed through interest-rate swaps at a blended 2.71% through April 2019.
  • Dividends: Common dividends declared were $3.63 per share, up from $3.42. The board determines future distributions, which depend on cash flow, financing needs, covenants and other factors.

Material changes versus 2014

  • Investment spending increased slightly to $632.0 million from $612.7 million. Education spending rose to $272.9 million from $225.0 million and recreation spending to $241.2 million from $212.2 million; entertainment spending fell to $106.1 million from $170.8 million, partly because 2014 included an 11-theatre acquisition.
  • Rental revenue growth was principally driven by acquisitions and completed build-to-suit projects. The stronger investment base was partly offset by lower mortgage income following 2014 loan payoffs and school sales, and by the weaker Canadian dollar.
  • GAAP earnings included a $23.8 million net property-sale gain, principally from selling a Los Angeles theatre, and $18.6 million of CEO retirement severance expense. Depreciation and amortization increased by $22.9 million to $89.6 million; transaction costs rose to $7.5 million from $2.5 million.
  • Common shares issued through the dividend reinvestment and direct purchase plan generated $190.3 million in net proceeds. After year-end, a January 2016 public offering generated approximately $125 million, used to repay the revolving facility.

Outlook, risks and unusual items

  • Management’s objective is predictable growth in FFO and dividends. It expected the shift toward build-to-suit projects to continue in 2016; such projects represented approximately 81% of 2015 investment spending, versus 73% in 2014. Education was the fastest-growing segment in 2015, and management expected demand to continue. The filing does not provide a clear numeric 2016 earnings or FFO forecast.
  • At December 31, 2015, EPR had approximately $272.4 million of development commitments, with approximately $249.1 million expected to be funded in 2016, plus mortgage-note commitments of $54.5 million. The Adelaar waterpark project carries a separate $120 million company commitment; common infrastructure was budgeted at approximately $90 million and expected to be financed primarily with tax-exempt bonds.
  • The Adelaar casino and resort project is exposed to financing, construction, licensing and litigation risks. A subsidiary of Empire Resorts received a New York gaming license in December 2015, but the initial project phase requires at least $854 million of investment. EPR’s common-infrastructure costs could exceed budget or fail to be reimbursed through the contemplated bond financing.
  • Litigation related to Adelaar remains unresolved. Plaintiffs seek at least $800 million in one case and $500 million (potentially trebled to $1.5 billion under antitrust law) in another. EPR says losses have not been determined probable and that it cannot estimate a reasonably possible loss range. Some claims were dismissed or rulings favored EPR, but appeals or other proceedings remained pending.
  • Tenant concentration remains material: AMC generated approximately 20% of 2015 total revenue. Other key risks include discretionary consumer spending, theatre lease renewals and space re-leasing, charter-school charter and funding issues, borrower defaults, interest rates, refinancing and balloon maturities, foreign exchange, and weather-sensitive recreation assets.
  • Imagine-related charter-school exposures warrant attention: six schools had charter revocations at year-end; four schools remained non-operational. Imagine was current on payments under the master lease, supported by a $9.0 million letter of credit and a $7.9 million escrow reserve.
  • The former CEO’s retirement generated $18.6 million in severance expense, including $11.8 million cash and accelerated equity compensation. The company reported effective disclosure controls and internal control over financial reporting; KPMG issued unqualified audit opinions on the financial statements and internal controls.

Most important facts for investors to verify

  • Whether AMC and other major tenants continue paying rent and whether upcoming theatre lease renewals or downsizings affect occupancy and rental terms.
  • Progress, financing and cost control for Adelaar, including the casino’s funding and licensing conditions, the waterpark commitment, infrastructure bonds and outstanding litigation.
  • Delivery, leasing and returns on the substantial 2016 development commitments, particularly in education and recreation.
  • Debt maturities, refinancing access, revolver availability, covenant headroom and sensitivity to higher interest rates.
  • Charter status, substitute operators and rent coverage for Imagine-operated schools, and any exercise of education-property purchase or loan-prepayment options.
  • Underlying operating performance and cash available for distributions, distinguishing GAAP earnings from FFO, FFOAA and other non-GAAP measures; dividend levels remain subject to board discretion.