EPR Properties (Entertainment Properties Trust) — Q3 2011 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2011; comparisons are with the three and nine months ended September 30, 2010. EPR is a REIT investing in megaplex theatres, entertainment retail, public charter schools, and destination recreational and specialty properties. At quarter-end, it reported 112 megaplex theatre properties and total assets of $2.73 billion.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $76.0 million | $74.5 million | $224.1 million | $215.2 million |
| Income from continuing operations | $35.4 million | $33.3 million | $65.9 million | $85.1 million |
| Net income | $35.6 million | $35.0 million | $77.3 million | $78.9 million |
| Net income available to common shareholders | $25.7 million | $27.5 million | $52.4 million | $58.0 million |
| Basic EPS | $0.55 | $0.59 | $1.12 | $1.30 |
| FFO available to common shareholders | $37.6 million | $40.7 million | $71.6 million | $96.2 million |
| AFFO available to common shareholders | $40.9 million | $38.7 million | $118.5 million | $110.4 million |
- Q3 revenue was nearly flat year over year; nine-month revenue rose 4.1%, primarily from acquisitions, rent increases, and higher mortgage and financing income, partly offset by weaker winery and vineyard rents.
- Operating cash flow for the first nine months was $135.5 million, up from $127.1 million. Investing activities provided $121.1 million, mainly reflecting $224.9 million of net proceeds from property sales; financing activities used $253.5 million. Ending cash was $14.3 million, with $28.3 million of restricted cash.
- Long-term debt was $1.139 billion at September 30, down from $1.191 billion at year-end 2010. Debt to gross assets was 37%; interest coverage was 3.6x, fixed-charge coverage 2.6x, and debt-service coverage 2.7x for the nine-month period.
- At quarter-end, $195.0 million was drawn on the $382.5 million revolver, with approximately $187.5 million available. The company reported covenant compliance. A subsequent October 13 amendment increased facility size to $400 million, priced at LIBOR plus 1.60% at closing, and extended maturity to October 2015, with a one-year extension option.
- Common dividends were $0.70 per share for Q3 and $2.10 per share for the first nine months, compared with $0.65 and $1.95, respectively, in 2010.
Material changes versus prior period
- Nine-month continuing income declined, including $27.1 million of impairment charges reported in continuing operations. The filing also reports $36.1 million of total impairment charges for the nine months, including charges classified in discontinued operations.
- Toronto Dundas Square was sold in March 2011; the sale generated a reported $18.3 million gain and proceeds were used to reduce the revolving credit facility. Vineyard and winery assets were also sold or placed on the market.
- EPR redeemed all 3.2 million Series B preferred shares on August 31, 2011 for approximately $80.0 million and recorded $2.8 million of redemption costs. Preferred dividend requirements declined, but the redemption charge reduced common earnings.
- Revenue and mortgage-financing income increased, while nine-month interest expense rose modestly. Refinancing costs fell to $6.2 million from $11.4 million in the prior-year period.
Outlook, commentary, risks and contingencies
- Management stated that cash, operating cash flow, and revolver availability were expected to meet operating needs, debt service, distributions, and existing commitments. It expected cash sources to exceed remaining 2011 commitments, while cautioning that future financing availability and terms were not assured. No quantitative earnings or FFO guidance is provided in the filing text.
- Management’s stated strategy is to pursue long-term investments in selected property categories and target predictable, growing FFO and dividends. It expects to maintain debt to gross assets generally between 35% and 45%.
- Tenant and asset concentration are material: AMC accounted for approximately 35% of nine-month revenue and leased 36% of megaplex theatre properties; Imagine affiliates leased 79% of public charter school properties. Peak Resorts was lessee or borrower across the ski-area portfolio.
- The $178.8 million SVVI mortgage investment is a significant single exposure; the company identified this recorded investment as its maximum exposure to loss. Wine-industry weakness had prompted rent concessions, property take-backs, sales plans, and impairment charges.
- Development and mortgage commitments included approximately $21.3 million for property development and $28.5 million under mortgage-note commitments, of which approximately $8.2 million was expected to be funded in 2011. A $3.2 million guarantee obligation related to Louisiana theatre bonds was recorded; management did not consider payment probable.
- After quarter-end, Concord entities sued over the Sullivan County casino-resort development agreement, alleging breach of contract and seeking specific performance and $800 million in damages. Management said the outcome could not be predicted, accrued no loss because a liability was not considered probable or reasonably estimable, and planned to defend the claims. The filing highlights the substantial investment in a planned casino and resort development that may not be completed.
Important facts for investors to verify
- Whether AMC and other concentrated tenants can sustain rent payments, and the current status of EPR’s material exposure to AMC.
- Performance, collateral value, and repayment prospects for the $178.8 million SVVI loan and other mortgage investments.
- Updated status and potential financial effect of the $800 million Concord litigation and the casino-resort project.
- Remaining winery and vineyard exposures, subsequent sales, and any further impairment or tenant concessions.
- Actual funding needs for development and mortgage commitments, revolver availability after the October amendment, and compliance with debt covenants.
- How recurring operating performance compares with reported FFO and AFFO, which are non-GAAP measures, and whether distributions remain supported by cash generation.