EPR Properties — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. EPR is a specialty REIT investing in entertainment, education and recreation properties in the U.S. and Canada. Its portfolio included 113 megaplex theatres, 39 public charter schools and one early education center; owned properties totaled 13.7 million square feet and were 98% leased.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Total revenue | $83.4 million | $76.8 million; up 9% |
| Net income | $41.2 million | $21.4 million |
| Net income available to common shareholders | $35.3 million; $0.75 diluted EPS | $15.4 million; $0.33 diluted EPS |
| FFOAA per diluted share | $0.94 | $0.86 |
| Operating cash flow | $40.2 million | $42.0 million |
| Cash and cash equivalents | $11.8 million | $10.7 million at Dec. 31, 2012 |
| Total assets | $2.95 billion | $2.95 billion at Dec. 31, 2012 |
| Long-term debt | $1.38 billion | $1.37 billion at Dec. 31, 2012 |
| Common dividend per share | $0.79 | $0.75 |
Revenue growth reflected investment activity in 2012 and 2013, particularly increased mortgage and financing income. Net income growth also benefited from a $4.5 million debt-extinguishment gain and a $0.6 million property-sale gain; the prior-year period included impairment charges. FFOAA is a non-GAAP measure and should not be treated as cash flow or a substitute for GAAP earnings.
Q1 investing cash outflow was $14.9 million, versus $69.8 million in Q1 2012; financing cash outflow was $24.0 million, compared with $24.5 million of inflow a year earlier. Restricted cash was $32.6 million and is not equivalent to unrestricted liquidity. Management reported a 41% debt-to-gross-assets ratio and said it was in compliance with debt covenants.
Material changes and notable items
- Rental revenue rose $3.5 million, primarily from acquisitions; mortgage and other financing income increased $3.1 million.
- Net interest expense increased $1.9 million to $20.0 million, reflecting higher average borrowings, partly offset by lower weighted-average financing rates.
- Q1 investment spending was $38.7 million, including development, acquisitions and mortgage funding across all four segments. The company sold a Sonoma County winery and part of its vineyards for $24.1 million, recognizing a $0.6 million gain.
- A discounted payoff of an Omaha theatre-property loan generated a $4.5 million gain. EPR also increased its unsecured term-loan facility from $240 million to $255 million; proceeds were used primarily to reduce its revolving-credit borrowing.
- Management reported a 39.7% decrease in rental rates on approximately 415,000 square feet covered by significant renewals and new leases during the quarter; tenant improvements averaged up to $34.89 per square foot.
Outlook, risks and contingencies
Management expects cash on hand, operating cash flow and available revolving-credit capacity to fund operations, debt service, shareholder distributions and planned commitments. It reported no consolidated debt maturities for the remainder of 2013, and expected cash sources to exceed existing commitments; these expectations are subject to financing availability and market conditions. No specific annual earnings or FFO guidance is provided in the filing.
- At March 31, 2013, commitments included approximately $96.3 million for development projects and $38.3 million for potential mortgage-note funding; approximately $15.1 million of the latter was expected to be funded in 2013.
- Tenant concentration is significant: AMC/its parent accounted for approximately 26% of Q1 revenue, down from 33% a year earlier. The filing also identifies tenant default, theatre-sector conditions and reliance on a limited number of tenants as risks.
- Litigation tied to the planned Sullivan County casino and resort development includes claims seeking $800 million and a separate amended complaint seeking $1.5 billion, plus interest and fees. EPR stated that losses were not considered probable and that it intended to defend the claims; outcomes remain uncertain.
- Other risks include refinancing and interest-rate exposure, foreign-currency movements, development execution, charter-school funding and operator continuity, and REIT qualification. EPR uses derivatives to hedge some interest-rate and Canadian-dollar exposure.
Investor verification checklist
- Assess the quality and sustainability of earnings growth after excluding the debt-payoff and property-sale gains, and compare GAAP earnings with FFOAA and operating cash flow.
- Review AMC’s financial condition and its share of rents, alongside the disclosed lease-renewal rate decline and tenant-improvement costs.
- Confirm liquidity available under the revolving facility, including borrowing-base limits, and evaluate debt covenants, maturities and refinancing exposure.
- Track funding needs and completion/leasing of development projects, mortgage commitments, and the September 2013 maturity of Atlantic-EPR II’s $11.7 million mortgage.
- Monitor developments in the Sullivan County litigation and whether any change affects the planned project, potential exposure or recorded amounts.