EPR Properties — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. EPR is a specialty REIT focused on entertainment, recreation and education properties in the U.S. and Canada. Its owned portfolio totaled 23.3 million square feet and was 99% leased at quarter-end.
Key financial results
Amounts are in millions except per-share data.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $175.7 | $202.9 | $340.2 | $357.8 |
| Net income | $66.6 | $91.6 | $131.9 | $121.1 |
| Diluted EPS available to common shareholders | $0.79 | $1.15 | $1.59 | $1.47 |
| Diluted FFOAA per share | $1.36 | $1.87 | $2.72 | $3.12 |
| Net cash provided by operating activities | Not separately stated | Not separately stated | $209.8 | $249.7 |
Q2 rental revenue increased 15% to $157.3 million, supported by acquisitions and developments, percentage rents and the opening of the Kartrite Resort. However, total revenue and per-share earnings declined versus Q2 2018, principally because the prior-year period included $47.3 million of mortgage prepayment fees. For the six-month comparison, lower financing income from those prior-year fees and mortgage payoffs also weighed on revenue. Six-month net income and EPS increased year over year, partly reflecting higher real-estate sale gains and the absence of 2018 refinancing, impairment and litigation expenses.
Six-month cash used in investing was $461.2 million, compared with $39.0 million in 2018, reflecting materially higher investment spending. Financing provided $244.8 million, versus cash used of $255.3 million in the prior-year period. Cash and restricted cash totaled $11.9 million at June 30, 2019.
Balance sheet, debt and liquidity
- Total assets were $6.75 billion; total debt was $3.22 billion, up from $2.99 billion at December 31, 2018. Management reported 99% of debt as unsecured.
- Unrestricted cash was $6.9 million and restricted cash was $5.0 million. The $1.0 billion revolving credit facility had $240 million drawn and $760 million available.
- Net debt to adjusted EBITDA was 5.8x, above management’s stated 4.6x–5.6x target range. Management expected the ratio to return to its normal range by September 30 following receipt of a $189.7 million mortgage repayment on July 1.
- Net debt to gross assets was 42%; net debt was 34% of total market capitalization. Management stated there were no debt payments due until 2022 and that available liquidity was expected to cover operations, debt service, distributions and existing commitments. The company was in compliance with debt covenants at quarter-end.
- Common dividends were $1.125 per share for the quarter. The six-month dividend was $2.25 per share, compared with $2.16 in 2018.
Material developments and outlook
- Six-month investment spending was $566.5 million, including $377.8 million for 24 megaplex theatres. The company also invested in recreation and education properties and development projects.
- Six public charter schools were sold under tenant purchase options for $70.0 million net proceeds and a $13.6 million gain during the first half. Other property sales generated $25.9 million net proceeds and a $2.5 million gain.
- After quarter-end, the Schlitterbahn Group repaid $189.7 million of mortgage notes secured by three waterparks. EPR also received repayment of a $16.2 million school mortgage, including $1.8 million in prepayment fees, and sold another charter school for approximately $18.2 million.
- The Kartrite Resort opened during the first half. Its operating revenue and expenses contributed to higher other income and other expense, while pre-opening costs contributed to higher transaction costs.
- For the 21 operating properties formerly leased to Children’s Learning Adventure (CLA), EPR entered into new 20-year leases with Crème de la Crème, subject to transfer of possession and required licenses. Seven properties had transferred by July 2019. EPR warned that licensing delays, failure to transfer operating assets or loss of CLA’s cooperation could delay reopening and reduce near-term rents.
- Development funding commitments were approximately $72.6 million, of which about $41.2 million was expected to be funded in 2019. Separately, EPR had $50.7 million of surety bonds outstanding at quarter-end; one $20.3 million bond was released after quarter-end.
- EPR adopted lease accounting standard ASC 842 on January 1, 2019 without recasting prior periods. This added reported operating lease right-of-use assets of $220.8 million and lease liabilities of $245.4 million, and changed the presentation of certain tenant reimbursements and ground-lease costs.
- The company expected adoption of the credit-loss standard in 2020 to affect mortgage notes and direct financing leases, potentially producing higher and earlier loan-loss provisions. No loan-loss reserves were recorded at June 30, 2019.
Risks and items to monitor
- Revenue concentration: AMC generated approximately 18.0% of first-half revenue and Topgolf approximately 11.1%. EPR also cited tenant defaults, consumer discretionary spending, entertainment-industry risks and portfolio concentration as risks.
- Credit and refinancing exposure: debt levels, floating-rate borrowings, covenant limits and continued access to debt and equity capital could constrain growth or liquidity. Interest-rate and Canadian-dollar exposures are partly hedged with swaps.
- Mortgage-credit exposure: $193.9 million of recorded investments were in unconsolidated variable-interest entities at quarter-end; most of the waterpark-secured portion was repaid after quarter-end.
- Lease and property risks include the CLA transition, school licensing and operating performance, and the ability to renew leases or find replacement tenants on favorable terms.
- Management’s forward-looking expectations are subject to economic, tenant, financing, real-estate, regulatory and other risks; the filing provides no formal earnings guidance.
Important facts for investors to verify
- Confirm the post-quarter receipt and use of the $189.7 million Schlitterbahn repayment and its effect on leverage and liquidity.
- Track Crème’s licensing and transfer progress across the remaining CLA properties, including rent terms and any delays in reopening.
- Reconcile FFOAA trends with GAAP results, including adjustments for transaction costs, termination fees, depreciation and prior-year prepayment fees.
- Assess the sustainability of the dividend against operating cash flow, investment commitments and funding needs.
- Monitor customer concentration, mortgage-note collectibility, and the expected impact of the new credit-loss accounting standard.
- Review the impact of share issuance: EPR issued 3.1 million shares under its direct purchase plan during the first half for net proceeds of $236.6 million.