EPR Properties — Q1 2018 Form 10-Q
Business context and reporting period
Specialty REIT focused on entertainment, recreation and education properties in the U.S. and Canada. This filing covers the three months ended March 31, 2018. Its owned portfolio totaled 21.0 million square feet and was 99% leased; total assets were $6.24 billion.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $155.0 million | $129.1 million |
| Net income | $29.5 million | $53.9 million |
| Net income available to common shareholders | $23.5 million; $0.32 diluted EPS | $48.0 million; $0.75 diluted EPS |
| FFOAA per diluted share (non-GAAP) | $1.26 | $1.19 |
| Operating cash flow | $109.0 million | $93.6 million |
| Cash and restricted cash | $40.2 million | $59.0 million at December 31, 2017 |
| Total debt | $3.13 billion | $3.03 billion at December 31, 2017 |
Net cash used in investing was $106.9 million; net cash used in financing was $20.8 million. Net debt to adjusted EBITDA was 5.80x, above management’s stated 4.6x–5.6x target range. Net debt was 45% of gross assets. Debt was 99% unsecured. The company reported $430 million available under its revolving credit facility at quarter-end. No material operating margin figure was stated in the filing.
Material changes versus the prior comparable period
- Revenue rose 20%, mainly reflecting acquisitions, development completions and mortgage-note conversions, including prior-year CNL Lifestyle and OZRE transactions.
- GAAP net income available to common shareholders fell 51%, and diluted EPS declined from $0.75 to $0.32. Results included $31.9 million of refinancing/payoff costs, primarily the premium and deferred financing write-off from redeeming $250 million of 7.75% notes due 2020. Depreciation, interest, bad debt and transaction costs also increased; Q1 2017 included a $2.0 million property-sale gain.
- FFOAA per diluted share increased 6% to $1.26. This non-GAAP measure adds back refinancing costs and should not be treated as GAAP earnings or cash flow.
- Investment spending was $108.6 million, down from $227.2 million. A $142.9 million mortgage note backed by 28 education properties converted to a 23-year triple-net master lease.
- Common dividends per share reported for the period were $1.08, versus $1.02 in Q1 2017.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow, the revolver and asset-sale proceeds were expected to meet operating needs, distributions and commitments; it expected sources of cash to exceed existing commitments for the remainder of 2018, while cautioning that financing availability and terms are uncertain. Management reported no debt payments due until 2022.
- At March 31, development-funding commitments were approximately $143.5 million, with about $120.9 million expected to be funded in 2018. The company also had a $201.0 million commitment over three years for its Sullivan County waterpark hotel/adventure park, of which $60.4 million had been funded; it is responsible for common infrastructure construction.
- After quarter-end, EPR issued $400 million of 4.95% unsecured notes due 2028; net proceeds of $391.8 million were used to reduce the revolver. Also after quarter-end, OZRE prepaid approximately $175.4 million of its mortgage note; EPR expected to recognize a roughly $45 million prepayment fee in Q2.
- Children’s Learning Adventure (CLA) subsidiaries filed for Chapter 11. EPR fully reserved approximately $6.7 million of CLA receivables and had $253.6 million of related rental properties, plus land and development assets. A court-approved forbearance arrangement set rent payments and a July 31, 2018 restructuring deadline; the ultimate outcome and ability to re-lease properties remain uncertain.
- A new risk disclosure concerns criminal indictments involving a waterpark borrower and related parties. The related mortgage loans and accrued interest totaled $176.2 million; repayment depends partly on future STAR Bond approvals and waterpark performance.
- Pending Westchester litigation relating to the casino/resort project seeks at least $800 million. EPR said loss was not determined probable and it could not estimate a reasonably possible loss range. The company also faces project execution, tenant-credit, interest-rate, capital-access and concentrated-portfolio risks.
- Management targeted completion of Sullivan County infrastructure improvements during the remainder of 2018. No numeric full-year earnings or FFO guidance is provided in the supplied filing text.
Important facts for investors to verify
- CLA restructuring progress, rent collection, potential lease rejection or eviction, and recoverability or re-leasing of its properties.
- Performance and repayment prospects of the $176.2 million waterpark-related loan, including required STAR Bond approvals and effects of the indictments.
- Progress, costs and remaining funding needs for the Sullivan County resort and infrastructure commitments, and status of the Westchester litigation.
- Effect of the OZRE prepayment and expected fee, the new 2028 notes, and subsequent changes in debt, liquidity and leverage against the 4.6x–5.6x target.
- Underlying operating trends apart from the large refinancing charge, including tenant credit, portfolio concentration and the sustainability of distributions.