EPR Properties (Entertainment Properties Trust) — Q3 2010 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2010. EPR owns, leases, develops, and finances entertainment, recreational, and specialty real estate in the United States and Canada. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and position
- Q3 revenue: $81.0 million, up 23.9% from $65.4 million in Q3 2009. Rental revenue was $61.0 million; mortgage and other financing income was $13.3 million.
- Q3 earnings: Net income was $35.0 million versus a $75.4 million net loss a year earlier. Net income available to common shareholders was $27.5 million, or $0.59 per diluted share, versus a $66.8 million loss, or $1.89 per diluted share.
- Nine-month results: Revenue was $231.4 million versus $192.5 million. Net income was $78.9 million versus a $25.3 million loss; common-shareholder income was $58.0 million, or $1.30 per diluted share, versus a $28.9 million loss, or $0.83 per share.
- REIT supplemental measures: Q3 FFO was $40.7 million ($0.87 per diluted share), compared with negative $71.2 million ($2.01 per share) in 2009. Nine-month FFO was $96.2 million ($2.14 per diluted share), versus negative $12.1 million ($0.35 per share). AFFO was $38.7 million for Q3 and $110.4 million for nine months, compared with $30.1 million and $87.6 million, respectively. These are non-GAAP measures.
- Cash flow and liquidity: Nine-month operating cash flow was $127.1 million, investing cash outflow was $315.5 million, and financing cash inflow was $179.7 million. Cash and cash equivalents were $14.9 million at quarter-end, plus $21.3 million of restricted cash. Management said cash, operating cash flow, and available revolver capacity should cover expected uses through year-end.
- Debt: Long-term debt was $1.202 billion at September 30, up from $1.141 billion at year-end 2009. The company had $150 million drawn on its $320 million unsecured revolver, with $170 million reported available, and $250 million of 7.75% senior notes due in 2020. The company reported compliance with debt covenants. Debt-to-gross-assets was 37%; nine-month interest, fixed-charge, and debt-service coverage ratios were 3.3x, 2.4x, and 2.5x, respectively.
- Dividends and margins: Common dividends were $0.65 per share for Q3 and $1.95 for nine months, unchanged from the comparable 2009 periods. The filing does not provide a conventional operating-margin measure.
Material changes versus prior periods
- Revenue growth reflected acquisitions and rent increases, partly offset by weaker vineyard and winery tenant revenue. Increased property expenses also reflected the Toronto acquisition and higher bad-debt costs.
- Key investments included Toronto Dundas Square, acquired in March; 12 Cinemark-leased theatres acquired for $124.4 million in June; and charter-school properties and expansions. Rental properties, net, increased to $2.020 billion from $1.855 billion at December 31, 2009.
- In June, EPR issued $250 million of senior notes, established a new $320 million revolver, and refinanced or repaid prior facilities and Toronto-related debt. Nine-month refinancing costs were $15.2 million, versus $0.1 million in 2009. A May common-share offering raised approximately $141 million net from 3.6 million shares.
- The Cappelli settlement resolved pending litigation and restructured investments: EPR acquired the Concord resort property, subject to a two-year purchase option and related restrictions; took full ownership of New Roc; and relinquished City Center. The settlement gain was only $4,000. EPR also recorded an $8.5 million gain on the Toronto acquisition.
- Prior-year comparisons included a $65.8 million loan-loss provision and $35.8 million discontinued-operations impairment, contributing to the 2009 losses. In 2010, the related loans were extinguished or settled; nine-month loan-loss provision was $0.7 million.
Outlook, risks, contingencies, and unusual items
- No numerical earnings or FFO guidance was provided. Management expected available liquidity to exceed expected uses for the remainder of 2010, while noting that future financing availability and terms were uncertain. It reported no significant consolidated debt maturities before 2012; approximately $65.3 million was due in 2012.
- Tenant and asset concentration are notable: AMC generated approximately 36% of nine-month revenue, and Imagine affiliates lease all charter schools. Ontario entertainment retail centers contributed approximately 19% of nine-month revenue. Management also identified the single-tenant exposure in ski areas and charter schools as a risk.
- Vineyard and winery tenants faced industry and financial pressures. Sapphire Wines entered receivership; $2.1 million of receivables was fully reserved and written off. A separate $1.0 million rent deferral granted in Q3 was not guaranteed and was fully reserved.
- Commitments included approximately $27 million under three mortgage notes, $2.4 million for a charter-school expansion, and a conditional $30 million participation in proposed Concord casino-project financing. The latter depends, among other conditions, on a $100 million gaming-operator equity investment by December 31, 2010. EPR also guaranteed specified Louisiana theatre bonds; no loss accrual was recorded because payment was not considered probable.
- Interest-rate and Canadian-dollar exposure is partly hedged with swaps and forwards. Derivative liabilities had a $6.7 million fair value; a contractual breach could require settlement at a reported termination value of $7.0 million. EPR cautioned about tenant defaults, credit-market conditions, leverage, development and financing commitments, and its ability to raise capital and maintain dividends.
Important facts for investors to verify
- Whether AMC, Imagine, Peak Resorts, and other major tenants can meet lease, loan, and reserve obligations, and whether tenant concentration changes.
- The status and recoverability of the $168.5 million SVVI mortgage, the $33.7 million Peak mortgage, and the other impaired notes and receivables.
- Actual revolver availability, covenant headroom, refinancing needs, and the funding of the $27 million mortgage commitments and conditional Concord participation.
- Progress on Toronto Dundas Square and the Concord property, including the Concord purchase option, proposed casino financing conditions, and related lease obligations.
- Whether AFFO and FFO trends support the $0.65 quarterly common dividend; these non-GAAP measures are not substitutes for operating cash flow.