EPR Properties — Q2 2016 Form 10-Q
Business context and period. EPR Properties is a specialty REIT focused on entertainment, education and recreation properties in the U.S. and Canada. This filing covers the quarter and six months ended June 30, 2016. Its owned portfolio was 99% leased; entertainment, education and recreation properties were each reported as 98% or 100% leased.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $118.0 million | $101.3 million | $236.8 million | $200.7 million |
| Net income available to common shareholders | $49.2 million | $42.8 million | $97.4 million | $79.7 million |
| Diluted GAAP EPS | $0.77 | $0.75 | $1.54 | $1.39 |
| Diluted FFOAA per share (non-GAAP) | $1.17 | $1.08 | $2.33 | $2.11 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $152.5 million | $120.4 million |
- Q2 and first-half revenue increased 17% and 18%, respectively; diluted EPS increased 3% and 11%; diluted FFOAA per share increased 8% and 10%.
- At June 30, total assets were $4.46 billion and total debt was $2.10 billion, versus $4.22 billion and $1.98 billion at year-end 2015. Cash was $8.5 million and restricted cash was $16.6 million.
- Debt included $1.2 billion of unsecured senior notes, $347 million drawn on a $650 million revolver (with $303 million available), and a $350 million term loan. The company reported compliance with debt covenants.
- Net debt to adjusted EBITDA was 5.17x; management’s target range is 4.6x–5.6x. Net debt was 42% of gross assets and 28% of total market capitalization.
- Cash dividends paid were $131.7 million in the first half. Dividends per common share were $0.96 for Q2 and $1.92 for the first half.
Material changes and notable items
- Revenue growth primarily reflected acquisitions and development completions. First-half investment spending was $371.8 million, including $164.3 million in entertainment, $116.2 million in education and $91.1 million in recreation.
- Rental properties increased to $3.33 billion from $3.03 billion at year-end. Property under development declined to $301.6 million from $378.9 million, partly reflecting $224.1 million of projects transferred into rental property.
- Interest expense rose to $46.0 million for the first half from $38.6 million. Management cited higher average borrowings and lower capitalized interest, partly offset by lower financing rates on acquisitions and mortgage lending.
- First-half results included a $3.6 million mortgage prepayment fee, a $2.3 million gain tied to a charter-school tenant purchase option, and $2.0 million of insurance recoveries. The prior-year first half included $23.9 million of real-estate sale gains and $18.6 million of former CEO retirement severance expense.
- Common shares issued increased during the period, including a January public offering that generated approximately $125 million net and $16.9 million from the dividend reinvestment/direct purchase plan; proceeds were used to reduce revolver borrowings.
Outlook, risks and contingencies
- No specific earnings or FFO guidance was provided. Management expects operating cash, available revolver capacity and expected private-placement proceeds to fund operations, debt service, distributions and planned investment, while noting future financing availability and terms are not assured.
- Management expects net debt to adjusted EBITDA generally to remain within 4.6x–5.6x. It identified $37.9 million of debt balloon payments due in the remainder of 2016.
- Development commitments totaled approximately $340 million, with about $205.9 million expected to be funded in 2016; separate Adelaar waterpark-hotel and adventure-park commitments were approximately $120 million over three years. Mortgage-note funding commitments were $14.3 million.
- EPR is responsible for Adelaar common infrastructure. Revenue bonds of $110 million were issued in June; EPR received $43.4 million in reimbursements and expected another $44.9 million. Infrastructure completion was expected in 2017. The casino and resort project remains exposed to financing, construction, licensing and litigation risks.
- One remaining Cappelli Group lawsuit in New York seeks at least $800 million; the company said loss was not probable and that it could not estimate a reasonably possible loss range. A separate federal case was closed after dismissal was affirmed on appeal.
- AMC accounted for approximately 18% of first-half revenue, creating tenant and customer concentration exposure. Other disclosed risks include discretionary consumer spending, lease renewals and tenant defaults, leverage and interest rates, development execution, foreign exchange, REIT qualification and real-estate market conditions.
- After quarter-end, EPR agreed to issue $340 million of senior unsecured notes in two tranches: $148 million at 4.35% due 2024 and $192 million at 4.56% due 2026.
Investor verification priorities
- Assess whether revenue and FFOAA growth from acquisitions and development can be sustained, and distinguish recurring results from insurance recoveries, mortgage prepayment fees and tenant termination gains.
- Review the funding plan for development and Adelaar commitments, expected bond reimbursements and the post-quarter $340 million note issuance.
- Track leverage against management’s stated range, interest costs, revolver availability and upcoming debt maturities.
- Monitor AMC concentration, lease renewals and the financial health of major tenants and borrowers.
- Follow the remaining Cappelli litigation and Adelaar project financing, construction and licensing developments; the filing provides no clear estimate of potential loss for the remaining suit.