EPR Properties — Q1 2016 Form 10-Q
Business context and period. EPR Properties is a specialty REIT investing in entertainment, education and recreation properties, primarily in the United States and Canada. This filing covers the three months ended March 31, 2016; financial figures below are in U.S. dollars unless noted.
Financial performance and position
- Revenue: $118.8 million, up 19% from $99.4 million. Rental revenue rose to $93.8 million from $76.7 million; mortgage and other financing income was $19.9 million.
- Profit: Net income attributable to EPR was $54.2 million versus $42.8 million. Net income available to common shareholders was $48.2 million versus $36.9 million. Diluted GAAP EPS was $0.77 versus $0.64.
- REIT operating measures: Diluted FFOAA per share was $1.18, up from $1.03. FFOAA is a non-GAAP measure and is not equivalent to cash flow.
- Cash flow: Operating cash flow was $69.1 million, compared with $57.5 million. Investing activities used $130.9 million versus $93.2 million; financing activities provided $68.4 million versus $135.0 million. Cash and cash equivalents ended at $11.0 million, with restricted cash of $23.4 million.
- Debt and liquidity: Total debt was $2.0 billion at quarter-end. The $650 million revolving facility had $217 million drawn and $433 million available. Net debt to annualized adjusted EBITDA was 4.81x; management’s stated target range is 4.6x–5.6x. The company reported compliance with debt covenants.
- Balance sheet and portfolio: Total assets were $4.34 billion, up from $4.22 billion at year-end 2015. Total investments, a non-GAAP measure, were $4.74 billion. The owned portfolio was 99% leased; entertainment, education and recreation properties were each reported as highly or fully leased.
- Dividends and equity: Reported dividends per common share were $0.960 versus $0.908 in Q1 2015. EPR issued 2.25 million common shares in January for approximately $125 million net proceeds, used to reduce its revolver.
Material changes versus Q1 2015
- Revenue growth primarily reflected $17.4 million of rental revenue from properties acquired or developed in 2015 and 2016, plus the $3.6 million mortgage prepayment fee.
- Net income increased despite the absence of the prior-year $23.9 million real estate sale gain. Q1 2015 also included $18.6 million of CEO retirement severance expense and $8.4 million of income tax expense; Q1 2016 had a $0.1 million tax benefit.
- Net interest expense rose $4.7 million to $23.3 million, reflecting higher average borrowings, lower capitalized interest and changes in hedged borrowing rates. Depreciation and amortization increased $6.6 million to $26.0 million.
- G&A increased $1.5 million to $9.2 million, primarily due to payroll, benefits and share-based compensation. Transaction costs declined to $0.4 million from $1.6 million.
- Investment spending was $145.1 million versus $136.4 million, including $72.4 million for new development and $53.7 million for mortgage or other notes receivable.
Outlook, commentary and risks
- Management expects cash on hand, operating cash flow and revolver availability to fund operations, debt service, distributions and near-term commitments. It said sources of cash were expected to exceed remaining 2016 commitments, while cautioning that future financing availability and terms are not assured. No specific earnings or FFO guidance is provided in the supplied filing text.
- Management expects net debt to adjusted EBITDA to remain within 4.6x–5.6x, while noting that development projects and financing timing can cause temporary departures.
- Development commitments totaled approximately $274.6 million, with about $216.3 million expected to be funded in 2016. A further $120 million is committed over three years for the Adelaar indoor waterpark hotel and adventure park. Adelaar common infrastructure was budgeted at about $90 million, subject to adjustments and approvals; $35 million had been funded.
- Adelaar carries significant execution, financing and litigation risks. A remaining state-court claim sought at least $800 million; the company said the loss was not considered probable and it could not estimate a reasonably possible loss range. A separate federal case was dismissed and affirmed on appeal in March 2016, with a possible Supreme Court petition period remaining.
- Other key exposures include tenant or borrower defaults, consumer discretionary spending, theatre lease renewals, development and construction costs, interest rates, access to capital, foreign-exchange movements, and concentration in entertainment tenants. AMC and its parent accounted for approximately 18% of Q1 revenue.
- Q1 revenue and earnings benefited from a $3.6 million mortgage prepayment fee and a $0.5 million insurance-claim gain; they were adversely affected by the weaker Canadian dollar and increased G&A. Derivative fair-value changes reduced other comprehensive income by a net amount in the quarter.
Important facts for investors to verify
- Progress, funding arrangements and remaining costs for the Adelaar casino/resort, waterpark and common infrastructure, including the expected infrastructure-bond financing.
- Developments in the remaining Cappelli Group litigation and any change to management’s assessment of potential losses.
- Tenant and borrower credit quality, particularly AMC-related revenue concentration and public charter school funding and lease continuity.
- Debt maturities, revolving-credit availability, covenant headroom and whether leverage stays within management’s stated range.
- Whether development commitments, new property additions and dividend distributions remain supportable by recurring cash generation; distinguish GAAP cash flow from non-GAAP FFO and FFOAA.
- The effect of the $44.3 million mortgage prepayment received after quarter-end and the subsequent $16.9 million DSPP proceeds on liquidity and investment income.