EPR Properties — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. EPR is a specialty REIT investing in entertainment, recreation and education properties in the U.S. and Canada. Its owned portfolio comprised 21.2 million square feet and was 99% leased at quarter-end.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $176.4 million | $151.4 million | $534.2 million | $428.3 million |
| Net income | $91.8 million | $63.0 million | $213.0 million | $197.4 million |
| Net income available to common shareholders | $85.8 million | $57.0 million | $194.8 million | $179.6 million |
| Diluted EPS | $1.15 | $0.77 | $2.62 | $2.55 |
| Diluted FFOAA per share | $1.58 | $1.26 | $4.70 | $3.73 |
| Net cash from operating activities | Not presented as a quarterly figure | $400.9 million | $314.7 million |
Balance sheet and liquidity: At September 30, 2018, total assets were $6.11 billion and debt was $2.95 billion, versus $6.19 billion and $3.03 billion, respectively, at December 31, 2017. Cash and cash equivalents were $74.2 million, with another $22.0 million restricted. The $1.0 billion unsecured revolver was undrawn; management reported no debt payments due until 2022 and compliance with all debt covenants.
Net debt was $2.92 billion. Net debt to adjusted EBITDA was 5.3x, within management’s stated target range of 4.6x–5.6x; net debt to gross assets was 42%. Approximately 99% of total debt was unsecured. Dividends per common share were $1.08 for Q3 and $3.24 for the first nine months, compared with $1.02 and $3.06 in 2017.
Changes versus comparable periods
- Q3 revenue rose 17% and diluted EPS rose 49%; nine-month revenue rose 25%, while diluted EPS increased 3%.
- Growth reflected acquisitions, development completions and mortgage-to-lease conversions. Mortgage and other financing income also benefited from $20.0 million of Q3 and $67.3 million of nine-month mortgage prepayment fees, principally related to the OZRE loan payoff. These fees are unusual and may not recur.
- Nine-month net income growth was restrained by higher interest expense, $32.0 million in refinancing/payoff costs, $16.5 million in impairment charges, a $2.1 million litigation settlement expense, higher depreciation and lower gains on real estate sales than in 2017.
- Operating cash flow increased to $400.9 million from $314.7 million. Investing activities provided $7.9 million, compared with $634.9 million used in the prior-year period; financing activities used $371.5 million, versus $326.7 million provided in 2017.
- The company redeemed $250 million of 7.75% notes due 2020, incurring a $28.6 million redemption premium, and issued $400 million of unsecured 4.95% notes due 2028. Proceeds paid down the revolver.
Outlook, commentary and risks
- No specific earnings or revenue guidance is provided in the filing. Management expects cash, operating cash flow, the undrawn revolver and asset-sale proceeds to fund operations, debt service, distributions and current commitments; it cautions that future financing may not be available on acceptable terms.
- Children’s Learning Adventure (CLA) remains a significant tenant risk. Ten CLA subsidiaries are in Chapter 11; the 21 operating schools are under a short-term lease at $1.0 million monthly plus property-tax reimbursements, extended through October 2018. The company may seek replacement operators if the lease is not extended. The 21 schools had $248.4 million of carrying value, and approximately $7.3 million of CLA receivables was fully reserved. Four CLA development properties were impaired by $16.5 million.
- AMC generated approximately 16.2% of nine-month total revenue, creating tenant concentration exposure. Other disclosed risks include tenant defaults, consumer discretionary spending, interest rates, leverage, development execution and licensing, and the casino/resort project.
- At quarter-end, commitments included $84.4 million for development projects and $203.7 million for the Sullivan County waterpark hotel/adventure park, of which $129.5 million had been funded. EPR is also responsible for casino-project common infrastructure; completion was expected in the remainder of 2018.
- The company settled the Cappelli Group litigation for $2.0 million plus approximately $90,000 of professional fees; the pending case was dismissed with prejudice. Management reported effective disclosure controls and no material change in previously disclosed risk factors.
- EPR expected adoption of the new lease accounting standard on January 1, 2019; estimated lessee right-of-use assets and liabilities were expected to be less than 4% of total assets, subject to the portfolio at adoption.
Most important facts for investors to verify
- Whether CLA achieves a restructuring, whether the short-term lease is extended, and the occupancy, collections and recoverable value of the affected schools.
- How much reported growth and FFOAA depended on mortgage prepayment fees, and the earnings impact as those fees roll off.
- Progress, remaining costs and funding for the Sullivan County project and other development commitments.
- Debt maturities, covenant headroom, interest-rate exposure and the sustainability of the 5.3x net-debt-to-adjusted-EBITDA ratio.
- AMC’s financial condition and the ongoing revenue concentration represented by that tenant.
FFOAA and leverage ratios are non-GAAP measures; the filing notes that definitions may differ across REITs.