EPR Properties — Q2 2022 Form 10-Q
Business context and period: EPR Properties is an experiential and education-focused net-lease REIT operating in the U.S. and Canada. This filing covers the quarter and six months ended June 30, 2022; financial statement amounts are unaudited. At quarter-end, the owned portfolio comprised 21.4 million square feet and was 97% leased. Experiential properties were 96% leased and education properties 100% leased.
Financial performance and position
- Revenue: Q2 total revenue was $160.4 million, up 28% from $125.4 million. Rental revenue rose to $142.9 million from $115.9 million. For the first six months, revenue was $317.9 million, up 34%.
- Profit: Q2 net income was $40.9 million versus $18.6 million; net income available to common shareholders was $34.9 million, or $0.46 diluted share, versus $12.5 million, or $0.17. Six-month common diluted EPS was $0.95 versus $0.13.
- REIT operating measures: Q2 diluted FFOAA was $1.17 per share versus $0.68; six-month diluted FFOAA was $2.27 versus $1.15. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Cash flow: Six-month operating cash flow was $217.1 million, investing cash outflow $203.7 million, and financing cash outflow $134.2 million. Financing outflows included $130.0 million of shareholder dividends. Cash and cash equivalents were $168.3 million at June 30, down from $288.8 million at year-end 2021.
- Debt and liquidity: Debt was $2.807 billion; 99% was unsecured. The $1.0 billion revolving facility had no borrowings outstanding. Management reported covenant compliance. Net debt to gross assets was 39%; net debt to Adjusted EBITDAre was reported at 5.1x.
- Dividends: Common dividends declared were $0.825 per share for Q2 and $1.60 per share for the first half.
Material changes versus the prior comparable period
- Revenue and earnings improved substantially, reflecting higher rental collections from existing properties, including cash-basis tenants and tenants previously receiving abatements, plus acquisitions and completed developments.
- Other income and other expense increased as the Kartrite Resort reopened and two theatre properties generated higher operating activity.
- Net interest expense declined: Q2 was $33.3 million versus $38.3 million, and the six-month amount was $66.5 million versus $77.5 million. Management attributed the decrease primarily to lower average borrowings and lower weighted-average borrowing costs.
- Credit loss expense shifted from a benefit in 2021 to expense in 2022: $9.5 million in Q2 and $9.2 million for the first half. The first-half period also included $4.4 million of real-estate impairment and $0.6 million of joint-venture impairment.
- Investment spending increased to $239.2 million for the first half from $68.7 million a year earlier, including two Canadian attraction-property acquisitions for approximately $142.8 million and investments in joint ventures.
Outlook, risks and contingencies
- Outlook: No quantified earnings or FFOAA guidance is provided in the supplied filing text. Management expects cash on hand, operating cash flow, revolver availability and potential asset-sale proceeds to provide adequate liquidity for operations, debt service, distributions and commitments. No scheduled debt payments were due before 2024, according to management.
- COVID-19 and collections: No properties were closed due to COVID-19 restrictions at June 30, 2022, but the pandemic’s continuing effects remained uncertain. EPR continued cash-basis revenue recognition for AMC and Regal. Approximately $12.1 million of deferred tenant amounts were recorded as receivables; other deferred amounts were not recorded because collection was not considered probable. The company reported collecting deferred rent and interest during the first half.
- Tenant concentration: AMC, Regal and Topgolf together accounted for 43.7% of first-half revenue: 15.0%, 14.4% and 14.3%, respectively. The filing identifies tenant performance and the experiential sector’s sensitivity to discretionary spending as risks.
- Credit exposure: First-half credit-loss allowances included $6.8 million on one mortgage note and $3.1 million on two notes receivable, associated with borrower financial difficulties and collateral values. Income from these borrowers was recognized on a cash basis.
- Commitments: EPR had 16 development projects with approximately $110.7 million of funding commitments, of which about $32.9 million was expected to be funded in 2022. Two mortgage notes carried an additional $11.8 million of commitments. Four surety bonds totaled $33.3 million. EPR also guaranteed approximately $14.2 million of renovation completion costs for a joint venture, with $11.2 million remaining to fund.
- Other risks and unusual items: The filing cites inflation, interest-rate and financing-market uncertainty, tenant defaults, refinancing and leverage risks, and potential pandemic resurgence. EPR paid $3.8 million to settle cross-currency swaps during the first half. Management reported no material change in previously disclosed risk factors; ordinary-course legal claims were not expected to have a material aggregate adverse effect.
Important facts for investors to verify
- Whether AMC, Regal and Topgolf sustain payments and operating performance, and how much deferred or unrecognized rent is ultimately collected.
- The status, collateral valuations and recoverability of the mortgage notes and notes receivable subject to credit-loss allowances.
- Whether the $110.7 million development commitments and other funding obligations are completed within budget and produce the contracted rents.
- Liquidity and refinancing capacity as debt maturities approach, including the implications of rising market rates and the reported 5.1x net debt-to-Adjusted EBITDAre ratio.
- Whether cash generation supports the current common dividend alongside investment spending and debt service; FFOAA is non-GAAP and does not equal cash available for distributions.