EPR Properties — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. EPR is a diversified experiential net-lease REIT with properties and mortgage investments in the U.S. and Canada. At quarter-end, its combined owned portfolio was 97% leased; experiential investments represented 92% of total investments.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $172.9 million | $160.4 million | $344.3 million | $317.9 million |
| Net income | $13.6 million | $40.9 million | $71.3 million | $83.1 million |
| Net income available to common shareholders | $7.6 million | $34.9 million | $59.2 million | $71.0 million |
| Diluted GAAP EPS | $0.10 | $0.46 | $0.78 | $0.95 |
| Diluted FFOAA per share (non-GAAP) | $1.28 | $1.17 | $2.53 | $2.27 |
| Cash from operating activities | — | $220.9 million | $217.1 million |
- Revenue increased 8% for both the quarter and six-month period. Higher contractual rent and improved collections from cash-basis tenants, acquisitions and developments, and higher mortgage income contributed.
- GAAP earnings declined, chiefly reflecting $43.8 million of real estate impairment charges, including $42.4 million related to eight Regal properties surrendered under the restructuring. The charge was non-cash. Lower credit-loss expense and interest expense partly offset cost increases.
- Six-month investing cash use was $89.5 million, versus $203.7 million in 2022; financing cash use was $139.7 million, including $136.1 million of shareholder dividends.
- At June 30, total assets were $5.70 billion, debt was $2.81 billion, cash and cash equivalents were $99.7 million, and equity was $2.48 billion. Debt was 99% unsecured; the $1.0 billion revolving facility had no borrowings. Management reported compliance with debt covenants.
- Reported leverage measures included debt to total assets of 49%, net debt to gross assets of 39%, and net debt to adjusted EBITDAre of 5.0x. The common dividend was $0.825 per share in Q2.
Material changes and developments
- Regal restructuring: Regal emerged from Chapter 11 on July 31, 2023, after signing a restructuring agreement. A new triple-net master lease covers 41 of the 57 former Regal properties, with $65 million annual base rent beginning August 1, 2023, 10% escalations every five years, and potential percentage rent. EPR will recognize rent on an accrual basis from the effective date.
- Regal surrendered the other 16 properties. EPR arranged third-party management for five and plans to sell the remaining 11, with proceeds intended for non-theatre experiential investments. The average term for the new master-lease properties increased to 13 years.
- Regal’s approximately $76.3 million deferred-rent balance is not recognized as a receivable. About $50.1 million tied to master-lease properties is held in abeyance and can be forgiven if Regal avoids uncured defaults through the 15th anniversary; about $19.5 million tied to surrendered properties is expected to have no material recovery.
- Southern Theatres paid $11.6 million of previously unrecognized deferred rent after its announced acquisition by Santikos. EPR expects to recognize the amount as rental revenue in Q3 2023.
- Investment spending fell to $98.7 million for the first half, from $239.2 million a year earlier. EPR acquired a fitness and wellness property for approximately $46.7 million and continued development and redevelopment spending.
Outlook, risks and commitments
- Management expects near-term investment spending to remain lower and says it will be more selective until economic conditions and its cost of capital improve. It expects liquidity from cash, operating cash flow, its revolver and asset-sale proceeds to cover commitments, debt service and distributions, but provides no specific earnings or FFOAA guidance in the filing text.
- Management identified inflation, higher interest rates and elevated capital costs, recession risk, consumer discretionary spending, and tenant performance as risks. The writers’ and actors’ strikes may delay film production and weaken theatre recovery. EPR plans to limit new theatre investment and diversify toward other experiential property types.
- Regal, AMC and Topgolf together contributed significant revenue: for the first half, Regal was 16.3%, AMC 13.8% and Topgolf 13.8% of total revenue. EPR continued cash-basis revenue recognition for certain tenants, including AMC.
- Approximately $102.8 million of customer amounts were not recorded as receivables because collection was not deemed probable; these amounts remain customer obligations and are generally recognized when received. EPR had approximately $1.0 million of deferred tenant amounts recorded as receivables.
- Commitments included $178.3 million for 16 development projects, with about $70.7 million expected to be funded in 2023, and $85.0 million of commitments on four mortgage notes, with about $34.3 million expected to be funded in 2023. Debt maturities included $136.6 million in 2024; none were scheduled for 2023.
- EPR agreed to reimburse Regal for 50% of approved qualifying renovations, subject to a $32.5 million aggregate cap and a $10 million annual cap. It also reported guarantees and completion obligations related to certain joint-venture projects.
Important facts for investors to verify
- Regal’s performance and payment under the new lease, including the conditional deferred-rent balance and renovation reimbursements.
- Progress and sale proceeds for the 16 surrendered Regal properties, and whether those proceeds are redeployed into non-theatre assets as planned.
- Collection prospects for the unrecorded $102.8 million of tenant/customer amounts and the credit quality of mortgage borrowers, including collateral-dependent loans.
- Ability to fund development and loan commitments while maintaining leverage, covenant compliance, liquidity and the common and preferred dividends.
- Effects of film-labor disruptions, consumer spending, inflation and interest rates on theatre tenants and the broader experiential portfolio.