EPR Properties — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. EPR is a specialty REIT focused on entertainment, recreation and education properties in the U.S. and Canada. Unless otherwise noted, figures are in U.S. dollars.
Business context and portfolio
- At quarter-end, EPR reported total assets of $6.43 billion and a portfolio of 22.4 million square feet that was 99% leased. Owned properties spanned 42 states and Ontario.
- Q1 investment spending was $174.6 million, including $93.3 million to acquire five megaplex theatres. Property dispositions generated $37.7 million in net proceeds.
- AMC represented 18.6% of Q1 revenue; Topgolf represented 11.3%, highlighting tenant concentration.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $164.5 million | $155.0 million | Up 6% |
| Net income | $65.3 million | $29.5 million | Up 121% |
| Net income available to common shareholders | $59.3 million | $23.5 million | Up 152% |
| Diluted GAAP EPS | $0.79 | $0.32 | Up 147% |
| Diluted FFOAA per share (non-GAAP) | $1.36 | $1.26 | Up 8% |
| Operating cash flow | $122.4 million | $109.0 million | Up 12% |
- Rental revenue rose 13% to $150.7 million, while mortgage and other financing income fell to $13.5 million from $21.4 million, mainly because of prior-period mortgage payoffs and property sales.
- Net cash used in investing was $127.8 million; net cash provided by financing was $9.2 million. Cash and cash equivalents were $11.1 million, with another $11.2 million restricted.
- Debt was $3.05 billion, approximately 99% unsecured. EPR had $70 million drawn on its $1.0 billion revolver, leaving $930 million available. Management reported covenant compliance and no debt payments due until 2022.
- Net debt to adjusted EBITDA was 5.7x, above EPR’s stated 4.6x–5.6x target range; management expected it to return to range by June 30, 2019. Net debt was 42% of gross assets. The common dividend was $1.125 per share for the quarter.
Material changes and unusual items
- GAAP earnings benefited from the absence of $31.9 million in Q1 2018 refinancing costs and from $6.3 million in real estate sale gains in Q1 2019. Q1 2019 transaction costs increased to $5.1 million, primarily for pre-opening costs at Resorts World Catskills.
- FFOAA growth also reflected higher tenant purchase-option termination fees. FFOAA and other REIT measures are non-GAAP and may not be comparable across companies.
- EPR adopted ASC 842 lease accounting on January 1, 2019 without recasting prior periods. The new presentation added sublessor ground-lease revenue and related expenses, including $5.7 million of revenue and $5.9 million of ground-lease expense in Q1; it also grossed up certain tenant reimbursements.
- During Q1, EPR issued shares through its direct share purchase plan for $78.6 million in net proceeds. Share issuance and other equity activity should be considered when assessing per-share performance.
Outlook, risks and contingencies
- Management expected cash, operating cash flow, revolver capacity and disposition proceeds to cover 2019 commitments and liquidity needs, while noting that future financing availability and terms are not assured.
- Development commitments were approximately $83.0 million, with about $69.4 million expected to be funded in 2019. A further $206.9 million was committed to the Resorts World Catskills indoor waterpark hotel and adventure park; $178.8 million had been funded, and the project was expected to enter service in Q2 2019.
- A $186.4 million mortgage note secured by three waterparks was expected to be repaid in Q2 2019, subject to completion of a third-party agreement. EPR extended its maturity to June 1, 2019 after quarter-end.
- The transition of 21 former Children’s Learning Adventure properties to Crème de la Crème remains uncertain. EPR terminated its asset purchase agreement after a bankruptcy-court hearing did not resolve objections. Crème’s leases are contingent on delivery, licensing and operations; delays or unsuccessful transfers could reduce near-term rent.
- EPR guaranteed its pro-rata share, approximately $14.6 million, of renovation completion costs for its lodging joint venture. It also disclosed $50.7 million of outstanding surety bonds and $2.8 million of potential mortgage-note funding commitments.
- Other key risks include tenant defaults, consumer discretionary spending, interest-rate and foreign-exchange movements, leverage and refinancing access, and concentration in a limited number of property categories and tenants.
Important facts for investors to verify
- Whether the expected Q2 payoff of the $186.4 million waterpark mortgage note occurred and how proceeds affected leverage and liquidity.
- Progress, timing and rent terms for transfers of the former CLA properties to Crème, including required licenses and any school-level termination rights.
- Whether net debt to adjusted EBITDA returned to management’s target range and whether anticipated disposition proceeds were received.
- Resorts World Catskills opening, remaining funding needs and operating performance after the expected Q2 2019 service date.
- Tenant concentration and payment performance, particularly AMC, Topgolf and education tenants, alongside the sustainability of the common dividend.