EPR Properties (Entertainment Properties Trust) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise noted. EPR is a REIT that owns, leases and finances theatre, entertainment retail, charter school, recreational and specialty properties in the U.S. and Canada. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Total revenue | $73.6 million | $71.0 million |
| Income from continuing operations | $21.7 million | $30.5 million |
| Net income | $41.7 million | $29.1 million |
| Net income available to common shareholders | $34.2 million; $0.73 per share | $22.5 million; $0.53 per share |
| FFO available to common shareholders | $29.6 million; $0.64 basic per share | $33.8 million; $0.79 basic per share |
| AFFO available to common shareholders | $38.4 million | $33.5 million |
| Net cash from operating activities | $35.0 million | $33.5 million |
| Cash and cash equivalents at March 31 | $15.2 million | $11.8 million at Dec. 31, 2010 |
| Long-term debt at March 31 | $1.051 billion | $1.191 billion at Dec. 31, 2010 |
Revenue grew about 3.7%, led by acquisitions, rent escalations and higher mortgage and financing income. Income from continuing operations was about 29% of revenue, versus about 43% in Q1 2010; the filing’s results were affected by refinancing and other unusual items. The reported net-income increase principally reflects the $18.3 million gain on sale of Toronto Dundas Square, rather than stronger continuing operations. The company reported a $0.70 common dividend per share, versus $0.65 a year earlier.
Material changes and significant transactions
- Sold Toronto Dundas Square on March 29 for net proceeds of C$222.7 million before escrow adjustments; reported net sale proceeds in the cash-flow statement were $205.2 million. EPR used proceeds to pay down its revolving credit line and recorded an $18.3 million gain. The property’s results were classified as discontinued operations.
- Paid off $86.2 million of vineyard and winery term loans in February and terminated associated swaps. Refinancing costs were $6.4 million, including a $4.6 million swap termination cost and $1.8 million of written-off financing costs.
- Acquired four New Hampshire and Maine theatre properties for $36.8 million and a Baton Rouge charter school property for $4.3 million. The theatre leases are triple-net leases.
- Expanded the unsecured revolver’s capacity from $320.0 million to $382.5 million. At quarter-end, $87.0 million was outstanding and availability was $295.5 million.
- Recorded a $1.8 million impairment on a vineyard and winery property. Management also reported rent concessions and reduced rents for certain wine-related tenants; a lease at one property was terminated.
Cash flow, debt and liquidity
- Operating cash flow was $35.0 million. Investing activities provided $157.4 million, mainly reflecting Toronto Dundas Square sale proceeds, while financing activities used $189.2 million, including $310.3 million of debt principal payments and $37.8 million of dividends.
- Restricted cash was $31.5 million at March 31, including $16.5 million related to sale escrows. It is not equivalent to unrestricted liquidity.
- Total debt was approximately $1.1 billion. EPR reported $703.0 million of fixed-rate mortgage debt at an approximate 6.1% weighted average rate, $250.0 million of senior notes bearing 7.75% and due in 2020, and $87.0 million outstanding under the floating-rate revolver. The filing also identifies a $10.7 million floating-rate bond.
- Management said it expected cash on hand, operating cash flow and revolver availability to cover operations, debt service, distributions and anticipated commitments. It cited approximately $65.3 million of debt maturities in 2012 and no significant consolidated debt maturities before then. EPR reported compliance with debt covenants.
- Reported leverage and coverage measures: debt to gross assets of 34%; interest coverage of 3.5x, fixed-charge coverage of 2.5x and debt-service coverage of 2.6x. These are company-defined supplemental measures, not GAAP measures.
Outlook, risks and contingencies
Management’s stated objective was to increase FFO and dividends per share, while pursuing long-term investments in selected property categories. The filing does not provide a specific numerical earnings or FFO forecast. Management cautioned that results for the quarter are not necessarily indicative of full-year results and that financing and capital availability could constrain investment plans.
- Tenant and asset concentration is material: AMC leased 37% of megaplex theatre properties and generated approximately 36% of Q1 revenue. Affiliates of Imagine Schools leased 96% of charter school properties; Peak Resorts was the ski-area tenant and borrower.
- Wine-industry weakness had affected tenant performance. Rent reductions, property repossession and lease termination may pressure rental income; EPR said it would pursue sales of vineyard and winery assets as appropriate.
- At March 31, commitments included approximately $18.3 million for theatre and retail improvements and $2.3 million for charter-school redevelopment, expected to be funded in 2011. Mortgage-note commitments totaled approximately $35.0 million, with about $18.1 million expected to be funded in 2011.
- EPR’s $170.5 million mortgage investment in SVVI had a stated maximum exposure of $178.1 million. The filing says EPR did not control the VIE’s significant activities.
- EPR guaranteed certain economic development bonds for four Louisiana theatres. The recorded related deferred asset and liability were each $3.2 million; no loss contingency was accrued because payment was not considered probable.
- Foreign-currency and interest-rate movements, tenant defaults, refinancing access, property values, and the company’s concentrated portfolio remain risks. The filing reported no material change to previously disclosed risk factors and no litigation expected to have a material adverse effect.
- Subsequent to quarter-end, EPR sold vineyard and winery assets to the buyer of the Gary Farrell brand and inventory, receiving $2.0 million of receivables, a $1.0 million lease termination fee and $6.5 million for the assets. It also closed two charter-school transactions with a combined commitment of $13.5 million.
Important facts for investors to verify
- How much of reported net income and EPS growth is attributable to the Toronto sale gain, and how continuing earnings and FFO trends compare after adjusting for unusual items.
- Whether the decline in FFO per share, despite higher revenue and AFFO, reflects recurring operating pressures or primarily the quarter’s unusual expenses and adjustments.
- AMC, Imagine Schools, Peak Resorts and wine-tenant credit quality, lease status, rent concessions and exposure to further defaults or reductions.
- Use of Toronto sale proceeds, current revolver availability, upcoming debt maturities, covenant headroom and the funding of stated development and mortgage commitments.
- Collection and collateral risks on the $170.5 million SVVI mortgage investment and the status, sale timing and valuation of remaining vineyard and winery assets.
- The calculation and sustainability of dividends relative to recurring cash flow; FFO and AFFO are non-GAAP measures and do not equal cash available for distributions.