EPR Properties — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. EPR is a specialty REIT investing in entertainment, education and recreation properties in the U.S. and Canada. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $151.4m | $125.6m | $428.3m | $362.4m |
| Net income | $63.0m | $57.5m | $197.4m | $166.8m |
| Net income available to common shareholders | $57.0m | $51.6m | $179.6m | $149.0m |
| Diluted EPS | $0.77 | $0.81 | $2.55 | $2.35 |
| Diluted FFOAA per share | $1.26 | $1.23 | $3.73 | $3.56 |
| Cash provided by operating activities | — | $300.3m | $215.8m |
Revenue increased 21% in the quarter and 18% year to date, driven mainly by property acquisitions and developments, including the April CNL Lifestyle/OZRE transaction. Q3 diluted EPS declined 5% despite higher revenue; the company cited higher interest expense, G&A, refinancing costs, bad debt expense and a larger share count. Year-to-date EPS rose 9%, benefiting in part from $28.5m in real estate sale gains and a $1.0m debt-extinguishment gain, partly offset by a $10.2m impairment charge and higher interest costs. FFOAA per diluted share, a non-GAAP measure, increased 2% for Q3 and 5% year to date.
Net operating income before unallocated items was $145.1m for Q3, compared with $120.0m a year earlier, and $409.5m for the nine months, compared with $345.7m. The filing does not provide a directly comparable consolidated operating margin measure.
Balance sheet, debt and liquidity
- At September 30, 2017, total assets were $6.13bn, debt was $2.99bn, and equity was $2.89bn. Debt was up from $2.49bn at December 31, 2016, alongside significant investment and acquisition activity.
- Cash and cash equivalents were $11.4m; restricted cash was $24.3m. The amended $1.0bn revolving facility had $170m drawn and $830m available. EPR reported compliance with all debt covenants.
- About 99% of debt was unsecured. Net debt to adjusted EBITDA was 5.66x, slightly above management’s stated 4.6x–5.6x range; a company-adjusted ratio incorporating projects and other items was reported within range. Net debt to gross assets was 44%.
- The company issued $450m of 4.50% senior notes due 2027. September credit-agreement amendments increased revolving capacity, extended maturities and lowered stated pricing. Management said cash, operating cash flow, revolver availability and disposition proceeds should meet expected commitments and distributions, while noting future financing availability and terms are not assured.
- Cash used in investing activities was $635.1m for the first nine months, exceeding operating cash flow; financing activities provided $326.7m. Dividends paid were $228.9m.
Material changes and business activity
- In April, EPR completed a transaction valued at $730.8m with CNL Lifestyle and OZRE: it acquired Northstar Resort and other attractions and provided $251m of secured financing for OZRE’s purchase of 14 ski properties. The transaction was funded partly with 8.85m newly issued common shares valued at $657.5m, increasing dilution.
- Year-to-date investment spending totaled $1.46bn, versus $526.9m in the comparable 2016 period. Recreation spending was $951.6m, including the CNL/OZRE transaction.
- The owned portfolio was 99% leased overall at quarter-end; entertainment properties were 99% leased, education 98%, and recreation 100%. AMC accounted for approximately 20% of nine-month revenue and leased 34% of EPR’s megaplex theatre properties.
- Nine-month property dispositions generated $136.5m of proceeds and $28.5m of gains. These gains materially contributed to reported net income.
Outlook, risks and unusual items
- No specific full-year earnings or FFO guidance is stated in the provided filing text. Management’s stated capital objective is to maintain net debt to adjusted EBITDA between 4.6x and 5.6x; the reported ratio was slightly above that range.
- EPR had $202.4m of development-funding commitments, with about $65.9m expected to be funded in 2017. It also committed approximately $155m over three years to the Adelaar waterpark hotel and adventure park, of which $22.3m had been funded. EPR is responsible for common infrastructure at the casino and resort project; infrastructure completion was expected in 2018.
- An early-childhood education tenant faced financial and expansion challenges. EPR was negotiating a rent restructuring and, in October 2017, terminated nine leases; the tenant continued operating completed locations as a holdover tenant. Receivables associated with the tenant included approximately $5.4m in tenant balances and $9.0m in straight-line rent receivables.
- EPR recorded $10.2m of impairment charges related to Imagine Schools direct-financing lease assets after revised lease terms reduced rent and term. The lease changes were intended to support potential sales of the properties.
- A remaining New York lawsuit concerning the Adelaar project seeks at least $800m. Discovery was ongoing; management said losses were not determined probable and that it could not estimate a reasonably possible loss range.
- Other key risks include consumer discretionary spending and tenant defaults, theatre-tenant concentration and lease renewals, education tenant enrollment and funding, interest rates and refinancing access, leverage, and delays, financing or cost overruns at the Adelaar project.
Important facts for investors to verify
- Whether the early-childhood tenant restructuring is completed, what rent reductions or lease terminations result, and the recoverability of related receivables.
- Performance and credit quality of AMC and other concentrated tenants, and the ability to renew theatre leases on acceptable terms.
- Progress, funding, construction costs and any litigation developments relating to the Adelaar casino and resort project.
- Whether leverage returns to management’s stated target range and whether the company can fund development commitments and dividends without unfavorable financing or additional dilution.
- Underlying recurring performance excluding real estate sale gains, impairment and other unusual items; FFO and FFOAA are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.