EPR Properties (Entertainment Properties Trust) — Q2 2012 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2012. EPR is a REIT investing in entertainment, education, recreation and other specialty properties through ownership, leases, development and mortgage financing. At quarter-end it reported 113 megaplex theatres and 39 public charter school properties, including properties under construction, across the U.S. and Canada. Entertainment represented 68% of total investments.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $78.9 million | $74.4 million | $156.8 million | $148.0 million |
| Net income attributable to EPR | $36.8 million | $0.002 million | $58.2 million | $41.7 million |
| Net income available to common shareholders | $30.8 million | $(7.5) million | $46.2 million | $26.6 million |
| Diluted EPS | $0.65 | $(0.16) | $0.98 | $0.57 |
| FFO per diluted share | $0.92 | $0.83 | $1.77 | $1.49 |
| AFFO | $43.2 million | $39.3 million | $84.4 million | $77.6 million |
Q2 revenue increased 6.1%; management attributed the $3.2 million increase in rental revenue mainly to acquisitions, with a smaller contribution from rent increases. Mortgage and financing income also rose with lending activity. Segment NOI before unallocated items was $73.3 million versus $67.2 million in Q2 2011. The prior-year comparison was affected by substantial winery and vineyard impairment charges.
For the six months, operating cash flow was $103.4 million, compared with $92.3 million. Investing activities used $136.3 million, while financing activities provided $30.9 million. Cash and equivalents were $12.7 million and restricted cash was $19.2 million at June 30.
Total assets were $2.83 billion and long-term debt was $1.27 billion, up from $1.15 billion at December 31, 2011. EPR reported $112 million drawn on its $400 million revolving facility, leaving $288 million available. Debt to gross assets was 40%; six-month interest, fixed-charge and debt-service coverage ratios were 3.7x, 2.8x and 2.7x, respectively. The common dividend was $0.75 per share for Q2, or $1.50 for the six-month period.
Material changes, outlook and risks
- Lease renewals and new leases on existing properties involved rental-rate decreases of approximately 10.0% on 386,000 square feet in Q2 and 9.1% on 444,000 square feet for the first half. Tenant improvements and leasing commissions were also committed.
- Investment activity included theatre, TopGolf and dining-entertainment acquisitions, new mortgage financing and development commitments. At June 30, EPR had $68.5 million of remaining entertainment-project funding and $25.3 million for education projects expected in 2012, plus $36.3 million of potential mortgage-note commitments.
- Management said cash, operating cash flow and available revolving credit were expected to cover operations, debt service, distributions and existing commitments. It cited approximately $65.3 million of debt maturities in 2012 and $98.5 million in 2013, while cautioning that future financing availability and terms were not assured. No specific full-year earnings or FFO guidance is provided in the filing text.
- AMC accounted for approximately 32% of first-half revenue and leased 35% of megaplex theatre rental properties at June 30. Four Canadian theatre leases were assumed by third-party operators after quarter-end, reducing AMC’s property share to 31%. AMC’s parent had agreed to be acquired by Wanda; completion remained subject to conditions.
- Nine Imagine-operated schools experienced closures or charter revocations. EPR reported Imagine was current on master-lease payments, assessed no impairment and expected no payment delay; it pursued property substitutions. Charter compliance, state funding and the availability of acceptable replacement operators remain risks.
- Concord-affiliated plaintiffs pursued multiple lawsuits tied to the planned Sullivan County casino and resort development, seeking $800 million in one case and $1.5 billion in another, plus interest and fees. EPR said it intended to defend the claims and that the outcome was too early to assess. The separate option to acquire all EPR’s former Concord Resort property expired unexercised; an affiliate exercised a ground-lease right over approximately 57 acres.
- EPR recorded $12.8 million of first-quarter impairments on vineyard and winery assets using Level 3 valuation inputs; the six-month income statement shows $8.2 million in continuing-operations impairment and additional discontinued-operations impairments. It sold 197 Buena Vista vineyard acres for $13.0 million and recognized a $0.4 million gain.
- Other risks include tenant concentration, real-estate and financing market conditions, interest and currency fluctuations, REIT qualification, development execution, and the ability to refinance debt. EPR reported compliance with debt covenants at June 30.
Important facts for investors to verify
- Track AMC’s financial condition, the Wanda transaction and the post-quarter transfer of the four Canadian leases.
- Confirm the resolution of Imagine school charter issues, substitutions and continued master-lease payments.
- Review the Concord litigation, potential exposure and any effect on the Sullivan County investment or development plans.
- Assess funding needs against development and mortgage commitments, debt maturities and revolving-credit availability.
- Reconcile recurring performance and dividend coverage using the company’s non-GAAP FFO/AFFO measures alongside GAAP results and operating cash flow.