EPR Properties — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. EPR is an experiential and education real estate investment trust with properties in the United States and Canada. At quarter-end, its owned portfolio was 98.4% leased; experiential investments represented 89% of total investments.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior period |
|---|---|---|
| Total revenue | $151.0 million | $150.5 million |
| Net income | $37.1 million | $65.3 million |
| Net income available to common shareholders | $31.1 million; $0.40 diluted EPS | $59.3 million; $0.79 diluted EPS |
| Continuing-operations diluted EPS | $0.40 | $0.57 |
| FFOAA per diluted share, non-GAAP | $0.97 | $1.36 |
| Cash provided by operating activities | $89.0 million | $122.4 million |
| Cash and cash equivalents at March 31 | $1.225 billion | $528.8 million at December 31, 2019 |
| Total debt at March 31 | $3.854 billion | $3.103 billion at December 31, 2019 |
- Rental revenue declined to $135.0 million from $140.3 million. Total revenue remained nearly flat, reflecting higher other income, partly offset by lower rental and mortgage-financing income.
- Reported net income and EPS comparisons also reflect $16.9 million of 2019 discontinued-operations income, including sale gains from the public charter school portfolio.
- Q1 net cash from investing activities was an outflow of $39.8 million, versus $127.8 million in Q1 2019. Financing activities provided $649.2 million, principally reflecting $750 million borrowed under the revolver; dividends paid were $94.3 million.
- Debt was approximately 99% unsecured. EPR reported net debt to adjusted EBITDA of 5.1x and net debt to gross assets of 38% at March 31. Management’s long-term target range for net debt to adjusted EBITDA is 4.6x–5.6x; these are non-GAAP measures.
- Management reported no scheduled debt payments until 2022. The $1.0 billion revolver had $750 million drawn at quarter-end; its remaining availability is subject to agreement terms and covenant compliance.
Material changes and COVID-19 developments
- COVID-19 materially disrupted experiential businesses, and substantially all tenants had announced temporary closures. Management said the pandemic’s ultimate impact was uncertain and could materially affect operations, collections, cash flows and asset values.
- Q1 pandemic-related items included $12.5 million of straight-line receivable write-offs, $1.5 million of rent abatements and a $1.2 million increase in expected credit-loss expense. Straight-line rental revenue, net of write-offs, reduced rental revenue by $9.7 million. EPR began recognizing revenue from AMC on a cash basis in Q1.
- For April 2020, tenants and borrowers paid approximately 15% of contractual base rent and mortgage payments. EPR agreed to month-to-month deferrals for substantially all customers that did not pay; deferrals generally do not waive amounts owed.
- Management expected technical, non-payment covenant noncompliance at the end of Q2 2020. Required bank lenders had approved temporary covenant suspension or modification, subject to definitive agreements; private placement noteholder discussions were ongoing. Management expected agreements within approximately 30 days and considered completion with bank lenders probable, but not assured.
- EPR said it would suspend monthly cash dividends on common shares after the dividend payable May 15, 2020, except as needed for REIT status and tax purposes. It also planned to suspend the share repurchase program when covenant modifications became effective. After quarter-end, it repurchased 1,116,643 shares for approximately $22.9 million.
- Management anticipated adequate liquidity for the next 12 months assuming covenant modifications were obtained. It deferred the planned gaming venue investment and limited 2020 anticipated investment spending to previously committed amounts of approximately $100 million.
Other risks, commitments and unusual items
- Regal, Topgolf and AMC generated 14.1%, 13.3% and 13.3% of Q1 total revenue, respectively, presenting significant tenant concentration risk.
- At March 31, EPR had 10 development projects with approximately $89.1 million of funding commitments, about $49.4 million expected in 2020; mortgage and note receivable commitments totaled approximately $21.1 million. Surety bonds totaled $31.6 million.
- EPR guaranteed approximately $24.3 million of renovation completion costs for its lodging joint ventures; its maximum exposure also included its $29.6 million investment in those ventures.
- Management cited risks from tenant defaults or bankruptcies, discretionary consumer spending, refinancing and capital access, covenant compliance, interest rates, and the concentration of investments in experiential properties. It gave no reliable quantified full-year earnings or FFOAA guidance in the provided filing text.
- The company adopted the expected-credit-loss accounting standard on January 1, 2020, recording approximately $2.2 million of opening retained-earnings allowance.
Most important facts for investors to verify
- Execution, scope and duration of covenant waivers or amendments, including terms for private placement notes and any effect on revolver access.
- Actual rent and mortgage collections, deferred-payment recoveries, tenant concessions, and credit-loss or rent-receivable write-offs in subsequent quarters.
- Liquidity and debt metrics after the revolver draw, including cash needs, covenant headroom and refinancing plans.
- Common dividend suspension, REIT distribution requirements, and conditions and timing for any resumption of dividends or share repurchases.
- Financial condition and rent-paying capacity of AMC, Topgolf and Regal, as well as changes in tenant concentration and property occupancy.
- Progress and remaining funding needs for committed developments and joint-venture renovations.