EPR Properties — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; balance sheet compared with December 31, 2018. Amounts are in millions, except per-share data. EPR is a specialty REIT focused on entertainment, recreation and education properties in the U.S. and Canada.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Total revenue | $184.9 | $176.4 | $525.1 | $534.2 |
| Net income | $34.0 | $91.8 | $165.9 | $213.0 |
| Net income available to common shareholders | $28.0 | $85.8 | $147.8 | $194.8 |
| Diluted EPS | $0.36 | $1.15 | $1.94 | $2.62 |
| Diluted FFOAA per share (non-GAAP) | $1.46 | $1.58 | $4.19 | $4.70 |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | $337.3 | $400.9 |
- Q3 revenue rose 5%, while nine-month revenue fell 2%. Rental revenue increased 14% for the first nine months to $469.3 million, but mortgage and other financing income fell $83.5 million to $38.3 million, principally because 2018 included substantial mortgage prepayment fees.
- Common diluted EPS declined 69% in Q3 and 26% year to date. FFOAA per diluted share, a company-defined non-GAAP measure, declined 8% and 11%, respectively. Q3 results included $38.4 million of refinancing/payoff costs; FFOAA adds this item back.
- Operating cash flow declined 16% year to date. Investing used $284.8 million, versus $7.9 million provided in 2018, reflecting heavier investment spending partly offset by property-sale proceeds and mortgage paydowns.
- At September 30, total assets were $6.63 billion, debt was $3.10 billion and equity was $3.04 billion. Cash and cash equivalents were $115.8 million, plus $5.9 million restricted cash. Debt was 99% unsecured. Net debt was $3.02 billion, a non-GAAP measure.
- Net debt to adjusted EBITDA was 5.2x, within management’s stated target range of 4.6x–5.6x. The common dividend was $1.125 per share in Q3 and $3.375 year to date.
Material changes and capital allocation
- Investment spending totaled $684.7 million in the first nine months, versus $355.0 million in 2018. This included $377.8 million for 24 megaplex theatres, recreation acquisitions and mortgage investments, and development across the portfolio.
- EPR issued $500 million of 3.75% unsecured notes due 2029 and used proceeds in part to tender and redeem its 5.75% notes due 2022. Premiums and financing-cost write-off produced $38.4 million of reported refinancing costs. The company also prepaid $24.8 million of variable-rate economic development bonds.
- The company issued 3.78 million common shares through its direct share purchase plan for $288.9 million net proceeds during the period. Debt increased about $115.6 million from year-end, while common shares issued increased.
- Property sales generated $182.7 million in cash proceeds. Nine charter schools sold under tenant purchase options produced $129.3 million net proceeds and a $28.3 million gain; other property and land sales generated $53.3 million and a $2.1 million gain.
- On July 1, EPR received $189.8 million from full repayment of its Schlitterbahn-related mortgage notes. The Kartrite Resort and Indoor Waterpark was completed and began operations in May; its revenue and costs are reported in other income and other expense.
Outlook, risks and unusual items
- Management expects cash on hand, operating cash flow, the $1.0 billion undrawn revolving facility and asset-sale proceeds to cover operating needs, debt service, distributions and existing commitments. Management reported no debt payments due before 2023 and said it expected liquidity to exceed remaining 2019 commitments; future financing availability and terms are not assured.
- At September 30, development commitments totaled $60.2 million across nine projects; $10.1 million was expected to be funded in 2019. Additional potential funding commitments on notes receivable totaled $11.9 million. The company also had $30.4 million of surety bonds outstanding.
- Four early-childhood education properties remained to be transferred from Children’s Learning Adventure (CLA) to Crème de la Crème as of October 30. Management expected completion before year-end but cautioned that licensing, cooperation and creditor-related issues could delay or prevent transfers with operating schools, reducing near-term rent. Crème leases are 20 years once operations commence and include school-level performance-based termination rights.
- Tenant and sector concentration remains material: AMC, Topgolf and Regal contributed approximately 17.6%, 11.0% and 10.2% of nine-month revenue, respectively. Management also cites consumer spending, tenant defaults, entertainment-industry conditions, financing access, interest rates, real-estate markets and REIT qualification among significant risks.
- The company adopted ASC 842 lease accounting in 2019, increasing reported rent and related expenses for certain ground leases and tenant reimbursements. It expects the credit-loss accounting standard effective in 2020 to affect mortgage notes and direct financing leases and potentially require earlier or higher loan-loss provisions; no loan-loss reserves were recorded at September 30.
- The filing reports no material change to the risk factors in the 2018 Form 10-K. Management said disclosure controls were effective and the company was in compliance with debt covenants at September 30.
Key facts for investors to verify
- How much of the decline in GAAP earnings and FFOAA reflects recurring operating performance versus refinancing costs, asset-sale gains and prior-year mortgage prepayment fees.
- Whether the remaining CLA-to-Crème transfers were completed and whether all schools commenced operations under the new leases.
- Tenant credit and revenue concentration, particularly exposure to AMC, Topgolf and Regal, and operating performance at the Kartrite resort.
- Funding needs for the investment pipeline, dividend coverage, leverage and compliance with debt covenants as investment spending continues.
- The eventual credit-loss allowance and accounting impact of adoption of the expected-credit-loss standard.