EPR Properties — Q3 2014 Form 10-Q
Business context and reporting period. EPR Properties is a specialty REIT that owns, develops, leases and finances properties primarily in entertainment, education and recreation. This filing covers the quarter and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013. At quarter-end, its owned portfolio was 99% leased and comprised 15.8 million square feet across 39 states, the District of Columbia and Ontario, Canada.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $98.7 million | $87.8 million | $280.4 million | $253.7 million |
| Net income available to common shareholders | $36.8 million | $37.6 million | $109.1 million | $99.3 million |
| Diluted EPS | $0.68 | $0.79 | $2.04 | $2.10 |
| Diluted FFOAA per share | $1.08 | $1.01 | $2.99 | $2.93 |
| Dividends per common share | $0.86 | $0.79 | $2.57 | $2.37 |
- Nine-month operating cash flow was $168.2 million, versus $158.4 million. Investing used $319.4 million, primarily reflecting development and investment activity; financing provided $151.8 million. Cash and cash equivalents were $8.4 million at quarter-end, with an additional $26.8 million restricted.
- Total assets were $3.68 billion and debt was $1.62 billion, up from $3.27 billion and $1.48 billion, respectively, at year-end 2013. Debt to gross assets was 39%, within management’s stated 35%–45% target range. Long-term debt was 33% of total market capitalization.
- The $535 million unsecured revolver had $34 million drawn and $501 million available. The company reported compliance with its debt covenants.
Material changes and notable items
- Revenue increased 12% in Q3 and 11% for the nine-month period, mainly from 2014 and 2013 property investments and, to a lesser extent, existing-property rent growth. Nine-month rental revenue rose to $210.8 million from $182.8 million.
- Q3 common-shareholder income and diluted EPS declined year over year, despite higher revenue. The 2013 quarter included a $3.2 million gain on sale of vineyard and winery properties; Q3 2014 included a $3.8 million provision for a fully reserved impaired note and $1.0 million of income-tax expense. Nine-month 2014 results included a $3.4 million reversal of a liability related to Toronto Dundas Square and $0.5 million of disposition gains; 2013 included debt-extinguishment and property-sale gains, partly offset by refinancing costs.
- Nine-month FFOAA per diluted share rose 2% to $2.99, while common-share dividends rose to $2.57 per share. FFOAA is a non-GAAP measure and is not equivalent to GAAP earnings or cash flow.
- Investment spending totaled $471.6 million for the nine months, versus $252.8 million a year earlier. It included $176.9 million in education, $154.0 million in entertainment, and $137.4 million in recreation investments.
- On September 23, EPR issued 3.68 million common shares for net proceeds of approximately $184.2 million, used to pay down its revolver. It also raised $79.5 million through its direct share purchase plan during the nine months.
Outlook, risks and contingencies
- Management said cash on hand, operating cash flow and revolver availability should provide adequate liquidity for operations, debt service, distributions and 2014 commitments. It expected funding sources to exceed commitments for the rest of 2014, while cautioning that future financing may not be available on acceptable terms. No specific earnings or FFO guidance is provided in the supplied filing text.
- At September 30, EPR had development funding commitments of approximately $278.4 million across entertainment, education and recreation projects; about $85.9 million was expected to be funded in 2014. It also had up to $190.3 million of commitments related to mortgage notes, of which $33.7 million was expected to be funded in 2014.
- The proposed Adelaar/Montreign casino resort depends significantly on Empire Resorts receiving a New York Class III gaming license and remains subject to litigation. The potential combined development could exceed $1 billion; EPR reported $200.2 million of land held for development at the site.
- Related Cappelli Group litigation includes claims seeking at least $800 million in state court and a separate antitrust claim seeking $500 million, potentially trebled to $1.5 billion. EPR cited favorable court rulings but noted appeals or further proceedings; it did not deem a loss probable and could not estimate a reasonably possible loss range.
- Tenant and portfolio concentration are material risks: AMC and its parent accounted for approximately 23% of nine-month revenue. EPR also identified exposure to charter-school funding and operator continuity, theatre-sector conditions, interest rates, Canadian currency movements and development execution.
Important facts for investors to verify
- Whether the Adelaar gaming license and project approvals proceed, and how the litigation develops.
- Performance and credit quality of major tenants, particularly AMC, and the concentration of revenue and investment exposure.
- Collection prospects for the impaired $3.8 million note and any further loan-loss provisions.
- Progress, funding needs and leasing outcomes for development projects, including the stated commitments and expected 2014 draws.
- Debt maturities, refinancing access, covenant headroom and the effect of additional equity issuance on per-share results.
- Whether cash generation supports distributions as investment spending and debt levels grow; reported FFOAA and AFFO are non-GAAP measures.