EPR Properties — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. EPR is a specialty REIT investing in entertainment, education and recreation properties in the U.S. and Canada. Its portfolio included 114 megaplex theatres, 41 charter schools, one early education center and other properties; owned properties were 98% leased.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $83.6 million | $78.0 million | $166.9 million | $154.8 million |
| Net income available to common shareholders | $26.5 million | $30.8 million | $61.8 million | $46.2 million |
| Diluted EPS | $0.56 | $0.65 | $1.31 | $0.98 |
| FFOAA per diluted share | $0.98 | $0.92 | $1.92 | $1.78 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $112.7 million | $103.4 million |
First-half revenues rose about 8%, while common earnings increased about 34%; the year-over-year earnings comparison benefited from prior-year impairment charges and 2013 gains. Q2 common earnings fell about 14%, chiefly reflecting $5.9 million of loan refinancing/payoff costs. FFOAA is a non-GAAP measure and is not equivalent to cash flow.
For the first half, investing activities used $98.3 million and financing activities used $4.7 million. Cash and cash equivalents were $20.0 million at June 30, versus $10.7 million at year-end; restricted cash was $17.0 million. Total assets were $3.02 billion, long-term debt $1.47 billion and total equity $1.45 billion. Management reported a debt-to-gross-assets ratio of 43% and compliance with debt covenants.
Changes, outlook and risks
- Mortgage and other financing income increased, principally due to greater real estate lending. Acquisition-related rental revenue supported growth, but rental revenue on existing properties declined slightly.
- On significant renewals and new leases, rental rates decreased 6.9% on approximately 220,000 square feet in Q2; for the first half, rates decreased 28.3% on approximately 635,000 square feet. Tenant-improvement funding was required on these transactions.
- EPR issued $275 million of 5.25% unsecured senior notes due 2023, using proceeds in part to repay Canadian and New York secured mortgages and reduce revolver borrowings. A discounted payoff of an Omaha theatre loan generated a $4.5 million gain. Refinancing/payoff costs were $5.9 million.
- After quarter-end, EPR amended and expanded its revolving and term loan facilities, extended their maturities to 2017 and 2018, respectively, and lowered pricing at closing. Management expected cash, operating cash flow and revolver availability to cover operations, debt service, distributions and commitments; it cautioned that future financing availability and terms were not assured.
- Development and mortgage-funding commitments totaled approximately $154.7 million ($127.9 million for development projects and $26.8 million for mortgage notes); nearly all were expected to be funded in 2013. The company reported no consolidated debt maturities for the rest of 2013 or 2014.
- Imagine remained current on its master lease for 27 schools, but several properties were non-operational, subleased or affected by charter nonrenewals. EPR held a $16.4 million letter of credit and reported no expected payment delays.
- Tenant concentration is material: AMC and its parent accounted for approximately 26% of first-half revenue. EPR also disclosed extensive litigation tied to a proposed Sullivan County casino development, including claims seeking $800 million and $1.5 billion. The company said losses were not considered probable and could not estimate a reasonably possible loss range.
- EPR sold a winery and related vineyards for $24.1 million and recognized a $0.6 million gain; it continued to exit its winery business. The filing provided no formal earnings guidance.
Key facts for investors to verify
- Confirm the maturity date of the new 5.25% notes: the debt footnote and subsequent disclosures state July 15, 2023; one MD&A passage appears to say 2013.
- Assess AMC tenant and guarantor credit exposure, given the revenue concentration and AMC’s reported recent losses.
- Track Imagine school occupancy, charter renewals, subleases and the status of the letter-of-credit support.
- Review lease rollover economics and tenant-improvement requirements in light of reported rental-rate declines.
- Monitor the Sullivan County litigation, development commitments, refinancing capacity and dividend coverage.