EPR Properties — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 25, 2020. EPR is a REIT investing primarily in experiential properties through long-term leases and mortgage financing.
Business context
EPR began shifting its growth focus to experiential real estate and sold its remaining public charter school portfolio in 2019. At year-end, experiential investments represented 89% of total investments ($6.0 billion) and Education 11% ($0.7 billion). The owned portfolio was 99.1% leased, with an average remaining base lease term of approximately 11 years.
Financial and operating highlights
- Revenue: $652.0 million, up 2% from $639.9 million in 2018. Rental revenue rose to $593.0 million from $509.1 million; mortgage and other financing income declined to $33.0 million from $128.8 million, mainly reflecting substantial prior-year prepayment fees and note payoffs.
- Profit: Net income was $202.2 million versus $267.0 million. Income from continuing operations was $154.6 million versus $221.9 million. Diluted earnings per common share were $2.32 versus $3.27; continuing-operations diluted EPS was $1.70 versus $2.66.
- REIT operating measure: FFOAA per diluted share, a non-GAAP measure, was $5.44 versus $6.10. Management’s definition includes adjustments for refinancing costs, transaction costs, severance and other items; it is not a substitute for GAAP results or cash flow.
- Cash flow: Cash from operations was $439.5 million, down from $484.3 million. Investing activities provided $96.5 million, primarily reflecting asset-sale and loan-payoff proceeds; financing activities used $23.2 million. Year-end cash and equivalents were $528.8 million. Free cash flow is not clearly presented as a defined measure.
- Debt and liquidity: Debt was $3.10 billion, with 99% unsecured; net debt was $2.61 billion. The $1.0 billion revolving credit facility was undrawn. Net debt to adjusted EBITDA was 4.7x, within the stated target range of 4.6x–5.6x. No debt principal payments were due until 2023; $675 million was scheduled for 2023.
- Dividends and assets: Common dividends declared were $4.50 per share, up from $4.32. Total assets were $6.58 billion and equity was $3.01 billion. A conventional consolidated operating-margin figure is not clearly provided.
Material changes versus 2018
- Revenue increased modestly, while net income and FFOAA per diluted share declined. Results included $38.3 million of costs from refinancing or redeeming 5.75% notes due 2022, $23.8 million of transaction costs, and $2.2 million of impairment charges in continuing operations.
- Sale of the charter-school portfolio generated approximately $449.6 million in net proceeds and a $21.4 million impairment; other charter-school sales produced gains. Charter-school operating results were classified as discontinued operations, contributing $47.7 million to 2019 net income, including sale-related items.
- Investment spending rose to $794.7 million from $572.0 million, with over 93% directed to experiential investments. Disposition proceeds and mortgage-note payoffs rose to $882.9 million from $471.1 million.
- Common shares issued through the Dividend Reinvestment and Direct Share Purchase Plan generated $305.9 million net proceeds. The share count increased, which management identified as one factor affecting per-share results.
- Adoption of lease accounting standard Topic 842 increased reported ground-lease assets and liabilities and affected presentation of rental revenue and property expenses; 2018 comparative periods were not recast.
Outlook, risks and contingencies
- Management expected 2020 investment spending to increase and dispositions to decrease from 2019 as it pursued experiential investments. No numerical earnings or FFOAA guidance is provided in the supplied filing text.
- Management expected cash, operating cash flow, the undrawn revolver and disposition proceeds to cover commitments and liquidity needs, while noting financing availability and terms cannot be assured. It also stated that sources of cash were expected to exceed existing commitments over the remainder of 2020.
- Key risks include dependence on consumer discretionary spending; exposure to theatres and concentration in AMC, Topgolf and Regal; tenant defaults or lease-renewal risk; leverage, refinancing and balloon maturities; and the ability to sustain dividends. These three tenants represented 17.6%, 11.2% and 10.8% of total revenue, respectively, including discontinued operations.
- Development commitments totaled $79.3 million, of which about $50.8 million was expected to be funded in 2020; two note commitments totaled $23.1 million. The company also guaranteed approximately $24.3 million of renovation completion costs for lodging joint ventures and had $32.0 million of surety bonds outstanding.
- The filing identifies weather, natural disasters, climate change and pandemic outbreaks as risks to properties and consumer activity. Ordinary-course claims and lawsuits were not expected by management to have a material adverse effect in aggregate.
Investor facts to verify
- Review the charter-school sale proceeds, impairment, discontinued-operation treatment and resulting effects on recurring earnings.
- Assess the sustainability of FFOAA and the $4.50 common dividend against operating cash flow, debt service and future investment requirements.
- Evaluate tenant concentration and tenant health, particularly AMC, Topgolf and Regal, and the theatre sector’s share of portfolio income.
- Confirm the timing and refinancing plan for the 2023 debt maturity and monitor covenant compliance, leverage and access to capital.
- Track execution of the experiential-focused investment strategy, including development commitments, tenant performance and 2020 investment and disposition levels.