EPR Properties — Q2 2017 Form 10-Q
Business context and reporting period. EPR Properties is a specialty REIT investing in entertainment, education and recreation properties in the U.S. and Canada. This filing covers the quarter and six months ended June 30, 2017. Its owned portfolio was 99.3% leased, with approximately $6.4 billion in total investments at quarter-end.
Financial performance and position
- Q2 revenue: $147.8 million, up 25% from $118.0 million. Net income was $80.5 million; net income available to common shareholders was $74.6 million, or $1.02 per diluted share versus $0.77.
- Six-month revenue: $276.9 million, up 17%. Net income was $134.5 million; common diluted EPS was $1.78 versus $1.54.
- Funds from operations: Q2 diluted FFOAA was $1.29 per share, up 10%; six-month diluted FFOAA was $2.48, up 6%. These are non-GAAP measures. Common dividends were $1.02 per share in Q2 versus $0.96 a year earlier.
- Revenue mix and costs: Q2 rental revenue was $119.5 million and mortgage and other financing income was $23.1 million. Six-month interest expense was $63.7 million, up from $46.0 million; depreciation and amortization was $61.2 million, up from $51.6 million.
- Unusual income and charges: Q2 included a $25.5 million gain on real estate sales, a $1.0 million debt-extinguishment gain and $10.2 million of impairment charges. Six-month real estate-sale gains were $27.5 million. Net income growth therefore included material gains, while the impairment and higher interest expense offset some gains.
- Cash flow: Six-month operating cash flow was $180.3 million, compared with $152.5 million. Investing used $348.6 million and financing provided $219.8 million. Cash and cash equivalents were $70.9 million at June 30, excluding $24.3 million of restricted cash.
- Assets, debt and liquidity: Total assets were $5.94 billion, up from $4.87 billion at year-end 2016. Debt was $2.79 billion, up from $2.49 billion. The $650 million revolving credit facility had no balance outstanding and $650 million available; the company also had a $350 million term loan. Management reported compliance with debt covenants.
Material changes and transactions
- On April 6, EPR completed a $730.8 million CNL Lifestyle/OZRE transaction. It acquired Northstar California Resort and other attractions, and provided $251.0 million of secured financing to OZRE for 14 ski properties. Consideration included 8.85 million newly issued common shares valued at $657.5 million, cash and assumed working-capital liabilities.
- Six-month investment spending was $1.16 billion, compared with $371.8 million a year earlier. Recreation spending accounted for $866.1 million, including the CNL/OZRE transaction.
- In May, EPR issued $450 million of unsecured senior notes due 2027 at a 4.50% coupon. During the first half it also issued shares through its direct share purchase plan for $67.9 million in net proceeds.
- Six-month property sales generated $130.7 million in proceeds. The company reported $27.5 million in related aggregate real estate gains.
Outlook, risks and contingencies
- Management expects net debt to Adjusted EBITDA to remain between 4.6x and 5.6x; the reported ratio was 5.28x at June 30. Management expects cash, operating cash flow, revolver availability and asset-sale proceeds to cover financial commitments, but notes future financing may not be available on acceptable terms.
- Committed development funding was approximately $175.7 million, with about $111.5 million expected to be funded in 2017. EPR also had a $155 million commitment over three years for an indoor waterpark hotel and adventure park at the Adelaar project; common infrastructure work was expected to finish in 2018.
- EPR recorded $10.2 million of impairments tied to Imagine Schools leases and residual values. It was negotiating reduced rents and lease terms on six properties; those leases were expected to move from direct financing leases to operating leases in Q3.
- An early-childhood education tenant made no lease payments during the first half. A temporary payment agreement ran through September 15, 2017, while EPR pursued a permanent restructuring, potentially including a sale of properties.
- Tenant concentration remains notable: AMC accounted for approximately 20.8% of six-month revenue and leased 35% of EPR’s megaplex theatre properties.
- In ongoing Westchester litigation related to the Adelaar project, the Cappelli Group seeks at least $800 million. Discovery was ongoing; EPR said a loss was not considered probable and that it could not estimate a reasonably possible loss range. The company also cited the risk that the casino project could be delayed or cancelled.
- Other key risks include tenant defaults, education tenants’ enrollment and funding, interest-rate and refinancing exposure, development execution, consumer discretionary spending, and the company’s ability to maintain REIT status and dividends.
Important facts for investors to verify
- How much of reported earnings and FFOAA growth reflects property additions, asset-sale gains, and other adjustments rather than recurring performance.
- The expected rent recovery, impairment exposure and disposition plans for Imagine Schools properties and the nonpaying early-childhood education tenant.
- The ongoing contribution and financing needs of the CNL/OZRE portfolio, including the secured loan’s 8.5% rate and share issuance dilution.
- AMC’s ability to meet lease obligations and the impact of its substantial share of EPR’s theatre portfolio and revenue.
- Adelaar construction funding, reimbursements and timing, and developments in the Westchester litigation, for which the filing provides no loss estimate.
- Debt maturities, covenant headroom and the sustainability of dividends relative to recurring cash generation and investment commitments.