EPR Properties — 2013 Form 10-K
Business context and reporting period. EPR Properties is a specialty REIT focused on entertainment, education and recreation real estate, principally financed through long-term triple-net leases and mortgage loans. This filing covers the fiscal year ended December 31, 2013; the company’s quarterly information includes the three months ended that date. At year-end, its owned portfolio was 99% leased and included 121 megaplex theatres, education properties and recreation assets across 37 states, Washington, D.C. and Ontario, Canada.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $343.1 million | $317.8 million | +8% |
| Net income attributable to EPR | $180.2 million | $121.6 million | +48% |
| Net income available to common shareholders | $156.4 million | $93.2 million | +68% |
| Diluted EPS available to common shareholders | $3.24 | $1.98 | +64% |
| Diluted FFOAA per share | $3.90 | $3.69 | +6% |
| Common dividends declared per share | $3.16 | $3.00 | +5% |
| Cash from operating activities | $234.1 million | $207.4 million | +13% |
Revenue mix and operating trends. Rental revenue was $248.7 million and mortgage and other financing income was $74.3 million. Management attributed growth primarily to investment spending in 2012–2013, increased lending activity, lower financing rates and favorable percentage revenue from golf entertainment properties. Existing-property rental revenue declined by a net $3.7 million; five renewals and two new leases covering about 692,000 square feet had rental rates approximately 30% lower on average, with tenant-improvement funding averaging $28.60 per square foot.
Cash flow, liquidity and debt. Investing activities used $336.5 million and financing activities provided $100.2 million. Year-end cash was $8.0 million, with $9.7 million of restricted cash. Total debt was $1.475 billion, up from $1.369 billion; debt was 40% of gross assets, within management’s stated target range of 35%–45%. The company had no borrowings on its $475 million unsecured revolver and reported compliance with debt covenants. It reported total assets of $3.272 billion and equity of $1.688 billion.
Operating income and cash generation should be assessed alongside REIT-specific measures: FFOAA is a non-GAAP measure and is not equivalent to cash flow. The filing does not provide a single GAAP operating-margin measure that management uses as a key performance indicator.
Material changes and unusual items
- Investment spending increased 35% to $403.7 million. Education spending rose to $155.5 million from $81.4 million; recreation spending rose to $127.3 million from $83.6 million.
- The company issued $275 million of 5.25% senior notes due 2023 and repaid secured debt, while amending and expanding its revolving credit and term-loan facilities. It also raised approximately $220 million net through common-share offerings and its direct purchase plan during 2013.
- Reported earnings benefited from a $14.2 million income-tax benefit, a $4.5 million gain on early debt extinguishment, approximately $7.9 million of gains associated with acquiring and consolidating two joint ventures, and a $4.3 million gain on vineyard and winery sales. FFOAA per diluted share increased less than GAAP EPS.
- The company sold five vineyard and winery investments for $49.8 million and expects to continue exiting that business. It acquired Camelback Mountain Ski Resort and agreed to finance a further $110.7 million for a water-park hotel there.
- Common dividends shifted from quarterly to monthly payments beginning in May 2013. Future declarations remain at the board’s discretion.
Outlook, risks and contingencies
Management expects to maintain debt to gross assets between 35% and 45%, continue investment in its specialty property sectors, and increase build-to-suit activity; it anticipated that trend continuing in 2014. The company stated that cash, operating cash flow and revolver availability were expected to cover 2014 needs. It had approximately $223.7 million of development commitments expected to be funded in 2014 and $84.0 million of mortgage-loan commitments expected to be funded in 2014. These commitments, construction execution and access to capital remain important to monitor.
- Tenant concentration: AMC generated approximately 25% of 2013 total revenue. Imagine generated about 8%, and Peak Resorts about 5%. A tenant or guarantor failure could pressure rent collections, debt service and dividends.
- Charter-school exposure: As of year-end, 12 Imagine-operated properties had experienced charter revocations. Imagine remained current on master-lease payments and provided a $16.4 million letter of credit, but three properties remained non-operational; acceptable substitutions and continued funding are not assured.
- Sullivan County casino development and litigation: The planned project depends on regulatory licensing, financing and development approvals. Litigation includes a contract claim seeking $800 million and antitrust-related claims seeking $1.5 billion. Federal antitrust claims were dismissed, but appeal and potential state-law proceedings remained. Management did not consider losses probable and could not estimate a reasonably possible loss range.
- Other risks: Theatre obsolescence and competition, lease renewals, school funding and charter compliance, ski-area weather, interest rates, refinancing and balloon maturities, Canadian currency exposure, development risks and REIT qualification could affect results, liquidity or dividends.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2013.
Important facts for investors to verify
- Whether AMC and other concentrated tenants remain financially sound and current on rent, and how lease renewals and theatre reconfigurations affect rental rates.
- Progress resolving Imagine charter revocations, operational vacancies and collateral substitutions, including the status of the three non-operational schools.
- Casino licensing, financing, litigation and development milestones in Sullivan County, together with any change in management’s assessment of potential losses or impairment.
- Execution and funding of 2014 development and mortgage commitments, including the Camelback hotel financing and subsequent Irving, Texas development commitment.
- Debt maturities, refinancing access, covenant headroom, leverage and the sustainability of common and preferred dividends relative to recurring cash generation.
- The composition of 2013 earnings and the reconciliation of GAAP results to FFOAA, particularly the tax benefit and transaction-related gains.