EPR Properties (Entertainment Properties Trust) — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This annual filing reports full-year results, not a standalone fourth-quarter financial summary.
Business context
EPR is a specialty REIT investing primarily in megaplex theatres, entertainment retail centers, public charter schools, ski areas, wineries and other specialty properties. Its portfolio was 98% occupied at year-end, with 112 theatre properties and 33 charter-school properties. Most single-tenant properties are leased on a long-term triple-net basis. AMC generated approximately 35% of 2011 total revenue.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $301.7 million | $289.8 million |
| Income from continuing operations | $102.6 million | $117.2 million |
| Net income attributable to EPR | $115.2 million | $114.9 million |
| Net income available to common shareholders | $84.3 million | $84.7 million |
| Diluted EPS | $1.80 | $1.86 |
| FFO available to common shareholders | $150.3 million; $3.20 diluted per share | $128.1 million; $2.81 diluted per share |
| AFFO available to common shareholders | $161.3 million | $149.0 million |
| Net cash provided by operating activities | $195.8 million | $180.4 million |
| Long-term debt | $1.154 billion | $1.191 billion |
Revenue increased about 4% year over year, while continuing-operations income declined about 13%. Net income included a $19.5 million gain on sale or acquisition of real estate and substantial impairment charges. FFO and AFFO are non-GAAP measures; the filing cautions that they are not substitutes for GAAP results or cash flow.
At December 31, cash and cash equivalents were $14.6 million and restricted cash was $19.3 million. Total assets were $2.734 billion and equity was $1.498 billion. Debt to gross assets was 38%; management’s stated target range was 35%–45%. Interest coverage was 3.7x, fixed-charge coverage 2.6x and debt-service coverage 2.7x. The $400 million revolver had $223 million drawn and $177 million available at year-end.
Common distributions declared were $2.80 per share for 2011, up from $2.60 in 2010. Preferred dividends remained subject to stated series rates: 5.75% Series C, 7.375% Series D and 9.00% Series E.
Material changes versus 2010
- Revenue rose by $11.8 million, primarily from acquisitions, rent increases and higher mortgage and financing income; lower winery and vineyard rents partly offset the increase.
- Continuing-operations income fell, principally reflecting $27.1 million of impairment charges, mostly on winery and vineyard properties, versus $0.5 million in 2010.
- FFO increased to $150.3 million from $128.1 million. Common diluted EPS declined to $1.80 from $1.86.
- Operating cash flow increased to $195.8 million from $180.4 million. Investing cash flow was positive $89.7 million, mainly due to proceeds from the Toronto Dundas Square sale; it had been negative $320.3 million in 2010.
- EPR sold Toronto Dundas Square for approximately C$226 million gross proceeds and reported an $18.3 million U.S.-dollar net gain. It also sold three vineyard and winery investments and listed the broader winery and vineyard portfolio for sale or lease.
- EPR redeemed all 3.2 million Series B preferred shares for approximately $80 million; the redemption reduced common-shareholder income by $2.8 million in redemption costs.
Outlook, risks and unusual items
- Management expected to maintain debt to gross assets between 35% and 45%, and said lower leverage and liquidity remained priorities. It anticipated pursuing acquisitions, development and financing opportunities, but provided no specific earnings or FFO guidance.
- Management reported more potentially attractive theatre build-to-suit opportunities as box-office performance improved. Investment spending in 2011 was relatively low because of high acquisition pricing and fewer development opportunities.
- After year-end, EPR entered a $240 million, five-year term loan, used primarily to reduce the revolver balance to zero. Interest-rate swaps fixed the loan’s all-in rate at 2.66% for four years.
- A major concentration risk is AMC, which accounted for about 35% of total revenue. Imagine-affiliated operators leased 82% of EPR’s charter-school properties; some Imagine schools faced probationary reviews and one charter revocation, which could affect rent collection or require operator substitutions.
- Litigation related to the planned Sullivan County, New York casino and resort sought specific performance and $800 million in damages. EPR said it intended to defend the claims and believed it had meritorious defenses. The project’s timing and outcome remained uncertain.
- Winery and vineyard exposure was affected by tenant distress, rent concessions and impairment charges. Other risks include lease renewals, tenant and borrower defaults, refinancing and balloon maturities, interest rates, charter-school funding and regulation, and Canadian currency exposure.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- AMC’s financial condition, lease performance and guarantee support, given its substantial share of EPR revenue.
- Charter-school tenant performance, Imagine-related charter reviews and the availability of acceptable substitute operators.
- Progress and potential financial exposure from the Sullivan County litigation and the proposed development arrangements.
- Whether winery and vineyard sales proceed on acceptable terms, and whether further impairments or rent concessions arise.
- Debt maturities, refinancing capacity, covenant headroom and post-year-end revolver repayment following the term-loan issuance.
- Cash available for distributions and the sustainability of the common dividend; future declarations remain at the Board’s discretion.