EPR Properties — FY2014 Form 10-K
Business context and reporting period. EPR Properties is a specialty REIT investing primarily in entertainment, education and recreation real estate, generally through long-term triple-net leases and mortgage financing. This summary covers the fiscal year ended December 31, 2014; it is an annual report, not a standalone Q4 filing. The company reported four operating segments and properties in 37 states, the District of Columbia and Ontario, Canada.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $385.1 million | $343.1 million |
| Net income attributable to EPR | $179.6 million | $180.2 million |
| Net income available to common shareholders | $155.8 million | $156.4 million |
| Diluted EPS | $2.86 | $3.24 |
| Diluted FFOAA per share | $4.13 | $3.90 |
| Cash provided by operating activities | $250.3 million | $234.1 million |
| Cash used by investing activities | $376.2 million | $336.5 million |
| Cash provided by financing activities | $121.6 million | $100.2 million |
| Total assets | $3.70 billion | $3.27 billion |
| Total debt | $1.65 billion | $1.48 billion |
Rental revenue rose 15% to $286.7 million; mortgage and other financing income increased to $79.7 million. The company reported a $3.8 million provision for loan losses and $81.3 million of net interest expense. Reported net income was broadly flat, while diluted EPS declined, reflecting a larger weighted-average share count and lower income available per share. FFOAA is a non-GAAP measure; management reported 2014 FFOAA of $225.1 million.
At year-end, cash and cash equivalents were $3.3 million and restricted cash was $13.1 million. The $535 million unsecured revolving credit facility had $62 million drawn and $473 million available. Debt to gross assets was 39%; management’s stated target range is 35%–45%. The company reported compliance with debt covenants. Its common dividend was $3.42 per share for 2014, versus $3.16 in 2013.
Portfolio occupancy was 99% overall: entertainment was 99% leased, while owned education and recreation properties were 100% leased. Entertainment represented about 60% of total investments, education 18%, recreation 17%, and other 5%; the latter consisted primarily of the Adelaar project.
Material changes versus the prior comparable period
- Investment spending increased 52% to $612.7 million, including $225.0 million in education and $212.2 million in recreation. Build-to-suit projects represented about 73% of investment spending, up from 60% in 2013.
- Revenue growth was primarily acquisition- and development-driven: $39.6 million of rental revenue growth came from acquisitions and completed build-to-suit projects, partly offset by a $1.6 million decline on existing properties.
- FFOAA per diluted share rose 6% to $4.13, supported by investment growth, a $5.0 million mortgage prepayment fee, lower financing rates and lower bad-debt expense. GAAP net income available to common shareholders and diluted EPS declined slightly.
- Debt increased by approximately $170 million, while equity increased to $1.93 billion. The company issued common shares for net proceeds of approximately $263.7 million in 2014 and used proceeds from its public offering to reduce revolver borrowings.
- The $14.2 million income-tax benefit recorded in 2013 became $4.2 million of tax expense in 2014, primarily related to Canadian operations and other foreign/state taxes.
Outlook, risks and unusual items
- Management expected to maintain debt to gross assets between 35% and 45%, pursue further acquisitions and development, and continue regular monthly common dividends; future dividends remain subject to Board discretion, cash flow, financing needs and covenants. No specific earnings or FFO guidance is provided in the filing text.
- About $215 million of development commitments were expected to be funded in 2015, plus $45.7 million of expected 2015 funding under mortgage-note commitments. Management identified $95.5 million in 2015 debt balloon payments and said available liquidity was expected to cover 2015 commitments, while noting refinancing and financing are not assured.
- Adelaar: EPR had $201.5 million invested in land for the planned casino and resort. The state gaming-location board recommended Montreign for a license, but the official license, project financing and completion remained uncertain. Litigation relating to the project remained pending; claims include demands of at least $800 million in one case and $500 million, potentially trebled under antitrust law, in another. EPR said losses were not determined probable and it could not estimate a reasonably possible loss range.
- Imagine Schools: six schools operated by Imagine had experienced charter revocations. At year-end, 23 properties remained under its master lease, including three non-operational schools; Imagine was current on rent. EPR held a $9.0 million letter of credit and required a $7.4 million escrow reserve.
- Peak Resorts prepaid or partially prepaid mortgage notes, generating a $5.0 million fee; remaining Peak notes were extended to 2034. Separately, EPR recorded a $3.8 million full reserve against a note receivable because future payments were no longer considered likely.
- After year-end, EPR sold a theatre for $42.7 million net proceeds and recorded a $23.7 million gain. CEO David Brain’s announced retirement led to an estimated $18.5 million first-quarter 2015 charge. The company also anticipated a $6 million–$12 million liability related to a Canadian tax examination, expected to be reflected in Q1 2015.
- Principal risks include reliance on AMC, which generated 23% of 2014 total revenue; concentration in specialty real estate and theatres; tenant, charter-funding and borrower credit risks; refinancing and interest-rate exposure; development execution; Canadian currency exposure; and litigation and regulatory risks.
Important facts for investors to verify
- Reconcile FFOAA growth with the decline in diluted EPS, and assess the effects of share issuance, the $5.0 million prepayment fee and other nonrecurring items.
- Review AMC’s lease guarantees and tenant concentration, and monitor Imagine’s charter status, rent payments and substitute-operator plans.
- Track the official gaming-license decision, project financing, litigation appeals and potential impairment exposure for Adelaar.
- Assess the funding schedule for development and mortgage commitments, upcoming debt maturities, revolver availability and refinancing terms.
- Confirm the outcome and financial-statement treatment of the Canadian tax examination, and monitor the 2015 CEO-transition charge.