EPR Properties (Entertainment Properties Trust) — Q3 2012 Form 10-Q
Business context and period. The REIT owns, leases, develops and finances entertainment, education, recreation and specialty properties in the U.S. and Canada. This filing covers the quarter and nine months ended September 30, 2012; amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $82.8m | $76.0m | $239.6m | $224.0m |
| Income from continuing operations | $34.2m | $35.6m | $96.6m | $70.2m |
| Net income available to common shareholders | $28.1m | $25.7m | $74.3m | $52.4m |
| Diluted EPS | $0.60 | $0.55 | $1.58 | $1.12 |
| FFO per diluted share | $0.94 | $0.80 | $2.72 | $2.30 |
| AFFO | $43.8m | $40.9m | $127.5m | $118.5m |
For the nine months, operating cash flow was $145.4m, investing cash outflow was $186.6m, and financing cash inflow was $51.4m. Cash and cash equivalents were $25.0m at quarter-end, plus $26.1m of restricted cash. Common dividends were $0.75 per share for Q3 and $2.25 year to date.
Long-term debt was $1.339bn, up from $1.154bn at December 31, 2011. The company reported a 41% debt-to-gross-assets ratio, a 3.6x interest coverage ratio and a 2.7x fixed-charge coverage ratio for the nine months. Its $400m revolving credit facility was undrawn at quarter-end. Debt covenants were met.
Material changes versus comparable periods
- Q3 revenue rose 9%, supported by acquisitions and higher mortgage and financing income. Q3 common earnings increased, although income from continuing operations declined year over year.
- Nine-month common earnings and FFO increased. Comparisons include lower impairment charges ($11.3m versus $24.3m) and lower gains from property sales than in 2011; 2011 included an $18.3m discontinued-operations property-sale gain.
- Q3 rental revenue increased $4.2m year over year, including $3.4m from acquisitions and $0.8m from rent increases. For the nine months, significant renewals and new leases involved a reported 5.2% decrease in rental rates on approximately 645,000 square feet.
- Debt financing included a $240m term loan and $350m of 5.75% senior notes due 2022; the company also repaid $167.6m of mortgage debt during Q3.
Outlook, commentary and risks
Management said cash on hand, operating cash flow and available revolver capacity were expected to meet operating needs, debt service, distributions and remaining commitments. The filing does not provide a clear numerical earnings or FFO forecast. Management’s stated strategy is to grow investments while targeting a 35%–45% debt-to-gross-assets range.
- At quarter-end, approximately 31% of nine-month revenue came from AMC or its parent guarantor. Wanda completed its acquisition of AMC’s parent on August 30, 2012. AMC-related concentration and tenant credit remain important risks.
- Imagine-operated charter schools had closures and charter revocations. Management reported no impairment, said Imagine was current on lease payments, and described substitution arrangements for affected properties.
- Litigation tied to the proposed Sullivan County, New York casino development includes claims seeking $800m and a separate amended complaint seeking $1.5bn, plus interest and fees. EPR said it would vigorously defend the claims; outcome was too early to assess. The project had $187.0m of land investment and $7.0m of approval-related spending year to date.
- Vineyard and winery asset sales led to impairment charges, including $3.1m in Q3 and $12.8m in Q1. A property with a $3.9m carrying value was held for sale at quarter-end.
- Development, mortgage and other funding commitments remained significant: approximately $71.4m for entertainment projects, $1.8m for education, $4.7m for recreation, and $35.5m on mortgage notes. A Louisiana theatre-bond guarantee had $4.5m recorded as both deferred asset and liability; no loss accrual was recorded because payment was not considered probable.
After quarter-end, EPR raised approximately $120.7m net by issuing Series F preferred shares at 6.625% and announced redemption of Series D preferred shares for approximately $115.8m. Management expected an approximately $3.9m charge related to the redemption.
Key facts for investors to verify
- AMC’s financial condition and the portion of EPR revenue dependent on AMC and its guarantor.
- Developments and potential financial exposure in the Concord casino-related litigation, and the status and economics of the Sullivan County project.
- Imagine’s ability to maintain charter-school funding and lease payments, including completion of agreed property substitutions.
- Execution, funding needs and expected returns for development projects and mortgage commitments, and compliance with debt covenants.
- Effects of the Series F issuance and Series D redemption on preferred dividends, common-shareholder earnings and liquidity.