EPR Properties — 2017 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2017, EPR Properties reported as a specialty REIT focused on entertainment, recreation and education real estate, primarily through long-term triple-net leases and mortgage financing. Its $6.7 billion of total investments comprised 44% entertainment, 32% recreation, 21% education and 3% other. The filing was signed February 28, 2018.
Financial and operating results
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $576.0 million | $493.2 million |
| Net income attributable to EPR | $263.0 million | $225.0 million |
| Net income available to common shareholders | $234.2 million | $201.2 million |
| Diluted EPS | $3.29 | $3.17 |
| Diluted FFOAA per share | $5.02 | $4.82 |
| Operating cash flow | $391.1 million | $306.2 million |
| Cash dividends declared per common share | $4.08 | $3.84 |
At year-end, total assets were $6.19 billion, debt was $3.03 billion and equity was $2.93 billion. Cash and cash equivalents were $41.9 million, including $33.8 million held for a Section 1031 exchange; restricted cash was $17.1 million. EPR reported $790 million available under its $1.0 billion revolving credit facility. Approximately 99% of debt was unsecured. Net debt to adjusted EBITDA was 5.39x, within management’s stated target range of 4.6x–5.6x; net debt to gross assets was 44%.
Investing cash outflow was $702.2 million and financing cash inflow was $333.5 million. Total investment spending was $1.58 billion, versus $805.0 million in 2016. Owned properties were 98% leased overall: entertainment 99%, recreation 100% and education 92%. The filing does not provide a single comparable operating margin measure.
Material changes versus 2016
- Revenue grew 17%, primarily from acquisitions and development; diluted EPS rose 4% and diluted FFOAA per share rose 4%.
- Net interest expense increased to $133.1 million from $97.1 million, mainly because of higher average borrowings. Depreciation and amortization rose to $132.9 million from $107.6 million.
- 2017 included a $10.2 million impairment charge related to charter-school direct financing leases, $4.5 million in Series F preferred-share redemption costs and $41.9 million in real estate sale gains, versus $5.3 million in gains in 2016.
- The April 2017 CNL Lifestyle/OZRE transaction added Northstar California Resort and attraction properties and included $251 million of secured ski-property financing. Aggregate investment was valued at $730.8 million and was funded in large part with 8.85 million newly issued common shares.
- Common dividends declared increased to $4.08 per share from $3.84. EPR issued $450 million of 4.50% senior notes due 2027 and amended its credit facilities, increasing revolving capacity to $1.0 billion and extending maturities.
Outlook, risks and unusual items
Management’s stated objective is predictable growth in FFO and dividends, with continued investment in its core property sectors. It expected cash, operating cash flow and revolver availability to cover operations, debt service, dividends and 2018 commitments, while noting that future financing availability and terms are uncertain. The filing does not provide a specific 2018 earnings or FFO forecast.
- CLA tenant stress: Children’s Learning Adventure stopped paying rent; subsidiaries filed Chapter 11 petitions, nine leases had been terminated, and restructuring funding was not secured as of filing. EPR reserved approximately $6.0 million of receivables and wrote off $9.0 million of straight-line rent. Approximately $281.4 million associated with CLA remained in rental property, development and land balances. The outcome of restructuring, possession and re-leasing efforts was uncertain.
- Tenant concentration: AMC generated $114.4 million, or 19.9%, of 2017 revenue. EPR says its ability to service debt and maintain dividends is materially dependent on AMC and its parent guarantor.
- Resorts World Catskills: A remaining lawsuit sought at least $800 million in damages; EPR had not determined a loss was probable and could not estimate a reasonably possible loss range. The casino resort opened in February 2018, but regulatory, operating and construction risks remained. EPR had a $155 million commitment for an indoor waterpark hotel/adventure park, of which $40 million was funded, and responsibility for common infrastructure costs.
- Debt and capital needs: EPR relies on capital markets and debt to fund growth, faces floating-rate exposure and has balloon maturities. Subsequent to year-end, it prepaid an $11.7 million mortgage and redeemed $250 million of 7.75% notes, paying a $28.6 million premium. Management said no debt payments were then due until 2022.
- Other disclosed risks include consumer discretionary spending, theatre lease renewals and industry changes, education tenant funding and charter compliance, interest rates, weather exposure in recreation, REIT qualification, and foreign exchange. EPR reported compliance with debt covenants at year-end. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- CLA bankruptcy and restructuring progress, rent recovery, re-leasing prospects and the carrying value or impairment status of affected properties.
- AMC’s financial condition and lease performance, including the scope and enforceability of the parent guarantee and EPR’s exposure to its largest tenant.
- Resorts World Catskills project litigation status, actual operating performance, remaining project commitments and any infrastructure cost overruns.
- Debt maturities, the effect of the 2020-note redemption premium, covenant headroom, interest-rate hedges and leverage relative to management’s target.
- Whether operating cash flow and adjusted FFO sustainably support the $4.08 common dividend and planned development spending, accounting for acquisition-related share dilution and unusual gains or fees.