EPR PROPERTIES annual report, FY2012

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EPR Properties — 2012 Form 10-K Summary

Business context and reporting period

Fiscal year ended December 31, 2012; the filing also reports fourth-quarter results. 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. In November 2012, it changed its name from Entertainment Properties Trust to EPR Properties.

At year-end, the portfolio included 113 megaplex theatres, 38 public charter school properties and other specialty assets across 36 states, the District of Columbia and Ontario. The owned portfolio totaled 13.9 million square feet and was 98% leased. Management’s stated objective is to grow FFO and dividends per share through focused investment and disciplined leverage.

Financial results and key metrics

  • Revenue: $321.8 million in 2012, up 8% from $298.3 million in 2011. Rental revenue was $238.4 million; mortgage and other financing income was $64.0 million.
  • Profit: GAAP net income was $121.7 million; net income available to common shareholders was $93.2 million, or $1.99 basic and $1.98 diluted per share. Continuing-operations income available to common shareholders was $2.25 basic per share.
  • REIT operating measures: FFO available to common shareholders was $168.8 million; FFOAA was $173.8 million, or $3.69 per diluted share, up 8% year over year. AFFO was $170.5 million. These are non-GAAP measures and are not substitutes for GAAP results or cash flow.
  • Fourth quarter: Revenue was $83.4 million; net income was $29.3 million; net income available to common shareholders was $18.8 million, or $0.40 per basic and diluted share.
  • Cash flow: Operating cash flow was $207.3 million, versus $195.8 million in 2011. Investing activities used $255.8 million; financing activities provided $44.4 million. Year-end cash and cash equivalents were $10.7 million, with $24.0 million of restricted cash.
  • Debt and liquidity: Long-term debt was $1.369 billion, up from $1.154 billion. Debt to gross assets was 41%, within management’s target range of 35%–45%. The $400 million unsecured revolver had $39 million drawn and $361 million available. The company reported compliance with debt covenants and no consolidated debt balloon payments due in 2013.
  • Dividends: Common dividends declared totaled $3.00 per share, versus $2.80 in 2011. Preferred dividends and redemption costs reduced income available to common shareholders.

Material changes versus 2011

  • Revenue increased 8%, common-shareholder net income increased 11%, and FFOAA per diluted share rose from $3.43 to $3.69. Growth was attributed principally to investment spending in 2011–2012, lower financing rates and higher participating revenue from water-parks and golf entertainment complexes.
  • Investment spending more than doubled to $298.1 million from $137.9 million, including $121.5 million in entertainment, $81.4 million in education and $83.6 million in recreation.
  • Debt increased, while the company continued shifting toward unsecured financing: it issued $350 million of 5.75% senior notes due 2022 and entered a $240 million term loan, while paying off $171.6 million of mortgage debt.
  • The company issued $120.6 million net proceeds from Series F preferred shares and redeemed all Series D preferred shares. Net income in 2011 included a $19.5 million gain on the Toronto Dundas Square sale, a significant comparison item.
  • Wine and winery assets remained under exit: four investments were sold in 2011–2012, and year-end remaining carrying value was $55.3 million. 2012 included $23.9 million of impairment charges on six vineyard and winery properties; $8.0 million was recorded in fourth-quarter impairments on four such properties.
  • On significant lease renewals and new leases covering approximately 720,000 square feet, rental rates declined about 7.7% in 2012. Management also reported tenant-improvement funding averaging $12.24 per square foot.

Outlook, commentary, risks and contingencies

  • Management expected to keep leverage within the 35%–45% debt-to-gross-assets range, pursue additional investments, and rely on operating cash flow, revolver capacity and debt or equity markets to fund commitments and growth. It expected available liquidity to cover 2013 obligations, but financing availability and terms were not assured.
  • Management planned to begin monthly common dividends in the second quarter of 2013; dividend declarations remain at the board’s discretion and depend on cash flow, capital needs, debt covenants and REIT requirements. No specific earnings or FFO guidance is provided in the supplied filing text.
  • AMC generated approximately 30% of 2012 total revenue; four Ontario entertainment retail centers generated approximately 13%. Imagine represented approximately 9% of revenue, and Peak Resorts approximately 5%. Such tenant and sector concentration heightens exposure to tenant performance.
  • Imagine-operated schools experienced nine charter revocations or closures through year-end; two additional Indiana schools received non-renewal notices in early 2013 and were appealing. EPR said Imagine was current on master-lease payments and it did not expect the events to disrupt collections, citing lease cross-defaults, substitution rights and a $16.4 million letter of credit. Outcomes and replacement collateral remain uncertain.
  • The planned Sullivan County, New York casino and resort is subject to litigation and approvals, and depends in part on the partner’s financing. The company reported claims seeking $800 million and $1.5 billion in separate cases, said it intended to defend vigorously, and stated that outcomes could not be assessed. Town comprehensive-plan approval was received in early 2013; construction timing remained contingent on further approvals and financing.
  • Other material risks include theatre obsolescence and lease renewals, charter-school funding and compliance, ski-area weather exposure, interest-rate and refinancing risk, Canadian currency exposure, REIT qualification, and potential impairment or tenant defaults. The company reported $61.3 million of entertainment, $7.3 million of education and $13.9 million of recreation development commitments expected to be funded in 2013, plus $38.8 million of mortgage-funding commitments.
  • KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control were effective at year-end.

Important facts for investors to verify

  • Whether AMC and its guarantor continue meeting lease obligations, given the concentration of revenue and AMC’s reported losses in prior periods.
  • Progress on Imagine charter appeals, school substitutions, and continued payment performance under the master lease.
  • Developments and potential financial exposure in the Sullivan County litigation, and whether the resort secures financing and remaining approvals.
  • Execution of planned vineyard and winery sales and the risk of further impairments or losses.
  • Debt maturities, refinancing access, covenant headroom and the ability to fund development and mortgage commitments while sustaining dividends.
  • The quality and comparability of FFO, FFOAA and AFFO trends, including the effects of acquisitions, impairments, discontinued operations and the prior-year property-sale gain.