EPR Properties — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. EPR is a REIT focused on experiential real estate, with legacy Education investments. COVID-19 materially disrupted venues reliant on in-person activity and discretionary spending.
Financial performance and position
- Revenue: $414.7 million, down 36% from $652.0 million in 2019. Rental revenue fell to $372.2 million from $593.0 million. The company attributed the decline principally to pandemic-related closures, rent concessions and deferrals, and cash-basis or restructured leases.
- Profit: Net loss was $131.7 million; net loss available to common shareholders was $155.9 million, or $2.05 per diluted share, versus net income available to common shareholders of $178.1 million, or $2.32 per diluted share, in 2019.
- REIT operating measures: FFOAA was $108.7 million, or $1.43 per diluted share, versus $423.2 million, or $5.44 per diluted share, in 2019. AFFO was $143.4 million. These are non-GAAP measures and are not equivalent to cash flow from operations.
- Cash flow: Operating cash flow was $65.3 million, down from $439.5 million in 2019. Investing activities provided $134.0 million and financing activities provided $297.2 million. Year-end cash and cash equivalents were $1.026 billion.
- Debt and liquidity: Debt was $3.694 billion, up from $3.103 billion; 99% was unsecured. Net debt to gross assets was 40%, versus 37% in 2019; net debt to adjusted EBITDAre was reported as not meaningful due to pandemic disruption. After year-end, EPR paid down $500 million on its revolver, leaving $90 million outstanding. The filing says no scheduled debt payments were due until 2022.
- Portfolio: Total assets were $6.704 billion. Experiential investments represented 91% of total investments and Education 9%. The owned portfolio was 94.2% leased, with an average remaining base lease term of about 12 years.
Material changes and unusual items
- EPR wrote off $65.1 million of tenant receivables and straight-line rent receivables, reduced rental revenue by $13.6 million for abatements, and recorded $85.7 million of property and lease-asset impairment charges. It also recorded $30.7 million of credit loss expense, including a full reserve for $25.5 million of exposure to one borrower, and a $24.9 million valuation allowance on deferred tax assets at year-end.
- Rent and interest collections remained weak: tenants and borrowers paid approximately 29% of pre-COVID contractual cash revenue for Q2, 43% for Q3 and 46% for Q4. At year-end, 92% of non-theatre locations and 58% of theatre locations were open. EPR reported that it had reached resolutions with customers representing approximately 95% of pre-COVID contractual revenue.
- AMC lease restructuring reduced fixed annual rent on 46 master-lease theatres by about $19.4 million to $87.8 million, with additional deferred rent scheduled to raise contractual rent to $90.7 million by February 2021. EPR terminated leases on seven other AMC theatres and planned to rebrand or sell those properties.
- Investment spending fell sharply to $85.1 million from $794.7 million in 2019 as EPR prioritized liquidity. The sale of six private schools and four early-childhood centers generated $201.2 million in net proceeds and a $39.7 million gain; other dispositions generated $26.6 million in proceeds and $10.4 million in gains.
- Net debt to gross assets increased, and credit ratings were downgraded during the year. Covenant amendments waived certain financial tests temporarily, raised borrowing costs and imposed a $500 million minimum-liquidity requirement and restrictions on investment spending, capital expenditures, dividends, share repurchases and other actions. EPR reported covenant compliance at December 31, 2020.
Outlook, management commentary and risks
Management expected to return to growth as customers recovered and cash flows stabilized, and anticipated that consumers would return to out-of-home leisure and recreation as pandemic conditions improved. The filing provides no quantified earnings or revenue guidance and gives no assurance about the timing of recovery. EPR’s common cash dividend was suspended after the payment made May 15, 2020; reinstatement was conditional, with timing uncertain. The 2020 common dividend declared was $1.515 per share, compared with $4.50 in 2019.
Key risks include the duration and effects of COVID-19; tenant defaults, bankruptcies and inability to repay deferred rent; concentrated exposure to experiential venues and major customers; cinema attendance, studio release practices and competition from streaming; debt refinancing, covenant compliance and credit-rating pressure; and the ability to restore collections and common dividends. Topgolf contributed 19.5% of 2020 total revenue, Cinemark 10.1%, AMC 7.2% and Regal 3.1%.
The auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting. The audit highlighted impairment valuation and collectibility of lease receivables as critical audit matters.
Investor verification priorities
- Track actual rent and mortgage collections, repayment of deferred amounts, and the share of tenants still on cash-basis revenue recognition.
- Review the recovery and credit condition of AMC, Regal, Cinemark and Topgolf, including the economics and performance of restructured leases.
- Confirm liquidity, revolver balances, debt maturities, borrowing costs, covenant-relief end dates and compliance with the $500 million minimum-liquidity covenant.
- Assess whether cash generation can support preferred dividends, REIT distribution requirements and any eventual restoration of the common dividend.
- Monitor further impairments, borrower credit losses, theatre vacancies and property dispositions as pandemic assumptions and valuations change.