EPR Properties (formerly Entertainment Properties Trust) — Q2 2011 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2011; financial results compare the three and six months ended June 30, 2011 with the corresponding 2010 periods. EPR is a REIT investing in megaplex theatres, entertainment retail, charter schools, destination recreation and specialty properties, as well as real-estate loans. At quarter-end, it reported 112 megaplex theatre properties and total assets of $2.73 billion.
Financial performance and condition
- Revenue: Q2 total revenue was $74.4 million, up 5.0% from $70.9 million; six-month revenue was $148.1 million, up 4.4% from $141.8 million. Rental revenue and mortgage/financing income increased, primarily from acquisitions, rent increases and additional lending.
- Profit: Q2 continuing operations recorded a $1.0 million loss versus $21.2 million income a year earlier. Net income attributable to EPR was approximately break-even, and loss available to common shareholders was $7.5 million, or $0.16 per share, versus income of $8.0 million, or $0.18 per share. For the first half, continuing-operations income was $22.8 million versus $51.7 million; net income available to common shareholders was $26.6 million versus $30.6 million, or $0.57 versus $0.70 per share.
- Notable non-GAAP measures: First-half FFO was $34.0 million ($0.73 per diluted share), down from $55.5 million ($1.26); Q2 FFO was $4.4 million ($0.09 diluted), down from $21.7 million ($0.48). First-half AFFO increased to $77.6 million from $71.7 million; Q2 AFFO was $39.3 million versus $38.2 million. FFO and AFFO are non-GAAP measures and are not substitutes for GAAP income or cash flow.
- Cash flow: First-half operating cash flow was $92.3 million, compared with $74.6 million. Investing activities provided $144.0 million, principally reflecting $212.4 million of net real-estate sale proceeds; financing activities used $232.7 million. Cash and equivalents ended at $15.7 million, with an additional $34.1 million restricted.
- Balance sheet and debt: Total assets were $2.73 billion, down from $2.92 billion at year-end 2010; total liabilities were $1.15 billion and long-term debt was $1.05 billion, down from $1.19 billion. Debt-to-gross-assets was 34%; management’s stated target range is 35%–45%. Six-month interest, fixed-charge and debt-service coverage ratios were 3.6x, 2.6x and 2.7x, respectively, all higher than the comparable 2010 ratios.
- Liquidity: The $382.5 million unsecured revolving facility had $90.0 million drawn and $292.5 million available; the drawn balance bore 3.19% interest. Management reported compliance with debt covenants and expected cash, operating cash flow and available revolver capacity to cover near-term needs.
- Distributions: Common dividends were $0.70 per share in Q2 and $1.40 for the first half, versus $0.65 and $1.30 in 2010. Preferred dividend requirements were $15.1 million for the first half.
Material changes versus the prior comparable period
- Q2 included $34.3 million of impairment charges on winery and vineyard properties; no comparable impairment was recorded in Q2 2010. Including a $1.8 million first-quarter impairment on a property held for sale, first-half impairment charges were $36.1 million.
- Revenue rose, but first-half continuing income declined substantially, reflecting the impairments, higher interest expense and other cost increases. First-half net income also included an $18.3 million gain on the sale of Toronto Dundas Square.
- EPR sold Toronto Dundas Square in March for net proceeds of approximately CAD $222.7 million before escrow treatment, converted proceeds largely to U.S. dollars and used them to reduce its revolving credit borrowings. The sale was classified in discontinued operations.
- EPR repaid $86.2 million of vineyard/winery term loans in February and terminated associated swaps, recording $6.2 million of first-half refinancing costs, including a $4.6 million swap-related charge and $1.8 million of deferred financing cost write-offs. Revolver capacity increased from $320 million to $382.5 million.
- Investments included four theatre properties acquired for $36.8 million and multiple charter-school development transactions. Property under development rose to $19.9 million from $6.0 million at year-end.
Outlook, commentary, risks and contingencies
- Management’s objective is predictable growth in FFO and dividends, with investment focused on selected property categories. It provided no specific earnings or FFO guidance in the supplied filing text.
- Management expected liquidity sources to exceed existing commitments through the remainder of 2011, while cautioning that future financing availability and terms are not assured. It anticipated about $44.4 million of development funding in 2011 and early 2012, approximately $3.5 million of mortgage commitments expected to be funded in 2011, and an approximately $81.0 million Series B preferred-share redemption in Q3 2011.
- On July 29, 2011, EPR announced redemption of all 3.2 million Series B preferred shares for $25.32 per share on August 31, 2011. It expected an approximately $2.9 million reduction to income available to common shareholders from issuance-cost write-offs and related expenses.
- Management identified continuing weakness in the wine industry, tenant performance issues, rent concessions and property repossessions. It listed all winery and vineyard properties for sale or lease, with a primary focus on sales within two years; a sale of the Paso Robles property for $13.3 million was expected by year-end, but remained subject to completion.
- Tenant and borrower concentration is significant: AMC generated approximately 36% of first-half revenue; affiliates of Imagine leased 82% of charter-school properties; and a single tenant is associated with the ski-area investments. EPR’s $175.0 million SVVI mortgage exposure had a stated maximum exposure of $178.5 million.
- Other risks include tenant and borrower defaults, economic and credit-market conditions, property valuation and development risk, leverage and refinancing, interest rates, foreign exchange, and dependence on capital markets. EPR reported no material change in previously disclosed risk factors, no material litigation identified, and effective disclosure controls.
- Subsequent to quarter-end, EPR contracted to acquire a Northbrook, Illinois entertainment facility for approximately $7.0 million, subject to expected Q3 closing.
Important facts for investors to verify
- Whether the winery and vineyard impairments, planned asset sales and tenant concessions indicate further valuation or rent-collection risk.
- AMC’s financial condition and ability to meet lease obligations, given its share of EPR revenue and theatre-property exposure.
- Execution, cost and leasing of charter-school and other developments, including the remaining $44.4 million of development commitments.
- Liquidity after the $81.0 million Series B redemption and scheduled commitments, and the terms and availability of refinancing when debt matures.
- Underlying recurring operating performance: reconcile GAAP results and FFO/AFFO to sale gains, impairment add-backs and other non-recurring items.
- Performance and collateral quality of the $175.0 million SVVI water-park loan and the remaining mortgage-note portfolio.