EPR Properties — Q3 2015 Form 10-Q
Business context and period. Specialty REIT investing in entertainment, education and recreation properties in the U.S. and Canada. This unaudited report covers the three and nine months ended September 30, 2015; comparisons are with the same 2014 periods unless noted.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $108.3m | $98.7m | $309.0m | $280.4m |
| Net income available to common shareholders | $44.2m | $36.8m | $123.9m | $109.1m |
| Diluted GAAP EPS | $0.76 | $0.68 | $2.15 | $2.04 |
| Diluted FFOAA per share (non-GAAP) | $1.17 | $1.08 | $3.27 | $2.99 |
| Operating cash flow | — | $184.8m | $168.2m |
- Q3 revenue rose 10% and common net income rose 20%; nine-month revenue rose 10% and common net income rose 14%. FFOAA per diluted share increased 8% for Q3 and 9% year to date.
- Nine-month net income included a $23.8m real-estate sale gain and was reduced by $18.6m of former CEO retirement severance. The reported FFOAA measure adjusts for these and specified other items.
- At September 30, total assets were $4.20bn, rental properties net were $2.94bn, and debt was $2.04bn, versus $3.70bn and $1.65bn respectively at December 31, 2014. Cash was $14.6m; restricted cash was $21.9m.
- Cash used in investing activities was $472.1m, primarily reflecting property investment and development; financing activities provided $299.3m. Dividends paid were $172.9m. Declared dividends per common share were $0.908 for Q3 and $2.723 for the first nine months.
- Debt included $1.2bn of unsecured senior notes, $289.6m of fixed-rate mortgage debt, $196.0m drawn on the $650m revolver, and a $350m term loan. Revolver availability was $454m. Management reported a 43% debt-to-gross-assets ratio and compliance with debt covenants.
Material changes and operating developments
- Revenue growth primarily reflected $13.6m of Q3 and $33.4m of nine-month rental revenue from acquisitions and completed developments; existing-property revenue was partly offset by a weaker Canadian dollar. Education and recreation segment revenues expanded year over year, while entertainment rental revenue was broadly flat.
- The owned portfolio was 99% leased at quarter-end: entertainment 98%, education 100%, and recreation 100%. EPR reported 18.0m square feet across its owned portfolio.
- Nine-month investment spending was $509.5m, including $219.8m in education, $198.1m in recreation, and $82.9m in entertainment. Property-under-development balances rose to $374.5m.
- The company issued $300m of 4.50% senior notes due 2025, amended and enlarged its revolving and term loan facilities, and prepaid mortgage debt. Common-share issuance under the direct stock purchase plan generated $99.4m during Q3.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow and available revolver capacity should cover operations, debt service, distributions and remaining 2015 commitments. It expects its debt-to-gross-assets ratio generally to remain between 35% and 45%; no specific earnings guidance was provided.
- Development commitments were approximately $259.7m, with about $49.2m expected to be funded in 2015; separate mortgage-note funding commitments totaled $43.8m. Management stated it could discontinue development funding if construction terms were not met.
- Adelaar casino/resort development remains contingent on licensing, financing and project execution. EPR had $222.8m invested in related land and development at quarter-end, and the potential combined project investment could exceed $1bn. A September non-binding term sheet proposed revised project responsibilities and lease structures.
- Litigation involving the Cappelli Group includes a separate damages claim of at least $800m and an antitrust matter seeking up to $1.5bn after trebling. EPR cited favorable rulings but said loss was not considered probable and a reasonably possible loss range could not be determined.
- Tenant and sector concentration are relevant: AMC-related leases or guarantees generated about 21% of nine-month revenue. Other risks include charter-school tenant funding and operating continuity, leverage and refinancing, interest-rate and Canadian currency exposure, and the Adelaar project. Canadian currency translation reduced reported comprehensive income.
- Other notable items: the CRA examination of the Canadian subsidiary concluded without adjustment and a previously recorded $7.9m uncertain-tax-position liability was reversed. The company reported no material change in risk factors and effective disclosure controls.
Important facts for investors to verify
- Track whether the development pipeline, especially education projects and Adelaar, is completed on schedule and within committed funding.
- Review AMC tenant exposure, lease coverage and tenant credit quality, alongside charter-school operator and funding risks.
- Confirm debt maturities, covenant headroom, floating-rate exposure, and continued access to revolver and capital markets as investment spending proceeds.
- Assess recurring cash generation and dividend coverage using GAAP cash flow and the company’s non-GAAP FFOAA/AFFO reconciliations; reported FFOAA is not GAAP cash flow.
- Monitor litigation appeals, casino licensing and financing milestones, and any resulting changes to project structure or potential loss exposure.