EPR PROPERTIES annual report, FY2010

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EPR Properties (Entertainment Properties Trust) — 2010 Form 10-K

Business context and reporting period

The filing covers the fiscal year ended December 31, 2010; it is an annual report, not a standalone fourth-quarter filing. EPR is a specialty REIT investing primarily in megaplex theaters, entertainment retail centers, charter schools, and recreational and specialty properties. Its portfolio was 97% occupied across 13.2 million square feet at year-end. Most single-tenant properties are leased on a long-term triple-net basis.

Financial performance and position

  • Revenue: $313.1 million, up from $259.1 million in 2009. Rental revenue rose to $235.0 million from $195.8 million; mortgage and other financing income was $52.3 million.
  • Profit: Net income was $113.1 million, versus a net loss of $11.9 million in 2009. Net income available to common shareholders was $84.7 million, or $1.87 per share, compared with a loss of $22.2 million, or $0.61 per share.
  • REIT operating measures: FFO available to common shareholders was $136.6 million ($3.02 per share), versus $4.9 million ($0.13 per share) in 2009. AFFO was $149.0 million, versus $119.0 million.
  • Cash flow: Operating cash flow was $180.4 million, compared with $148.8 million in 2009. Investing activities used $320.3 million; financing activities provided $128.0 million.
  • Assets, debt, and liquidity: Total assets were $2.92 billion and long-term debt was $1.19 billion. Cash and cash equivalents were $11.8 million, plus $16.3 million of restricted cash. The $320 million unsecured revolver had $142 million drawn and $178 million available. Debt to gross assets was 37%, down from 39% in 2009; management targeted 35%–45%.
  • Coverage and distributions: Interest, fixed-charge, and debt-service coverage ratios were 3.4x, 2.4x, and 2.5x, respectively. Common dividends remained $2.60 per share for the year, unchanged from 2009.

Material changes versus the prior comparable period

  • Revenue growth reflected acquisitions and rent increases, partly offset by weaker vineyard and winery tenants. Toronto Dundas Square acquisition also increased tenant reimbursements and property operating costs.
  • Results improved markedly from 2009, which included a $71.0 million provision for loan losses and a $43.7 million discontinued-operations loss. In 2010, the company recorded a $9.0 million gain on acquisition, mainly related to Toronto Dundas Square, and $15.2 million of refinancing costs.
  • During 2010, EPR issued 3.6 million common shares for net proceeds of $141.0 million and $250 million of 7.75% senior notes due 2020. It established a $320 million unsecured revolving facility, advancing its strategy to move toward unsecured financing.
  • Major investments included $124.4 million for 12 Cinemark theaters, $51.7 million for charter schools and expansions, and the Toronto Dundas Square acquisition. The Cappelli settlement consolidated EPR’s interest in the Concord resort land and New Roc, while relinquishing its City Center interest.

Outlook, commentary, risks, and unusual items

  • Management said it had shifted from prioritizing FFO growth toward liquidity and balance-sheet strength amid economic and credit-market uncertainty, and believed improved financing access would support selective investment opportunities. It did not provide specific FFO or earnings guidance.
  • After year-end, EPR agreed to sell Toronto Dundas Square for net proceeds expected to exceed CAD $220 million; closing was expected in or shortly after the first quarter of 2011. EPR expected a gain exceeding $17 million, including the currency hedge impact. These were expectations, not completed results in this filing.
  • Also after year-end, EPR repaid $86.2 million of vineyard and winery loans, acquired a waiver of a related covenant default, and agreed to acquire four theaters for $36.8 million. These subsequent events were not reflected in year-end debt balances.
  • Wine-industry weakness led to tenant defaults, property repossessions, rent concessions, and reserves. A 2011 modification reduced annual rent on certain winery and vineyard leases; another lease, formerly generating about $5.5 million annually, was terminated.
  • Key concentration risks include AMC, which generated about 36% of 2010 total revenue; five Ontario entertainment retail centers, which generated about 20%; Imagine affiliates as lessees of all charter schools; and Peak Resorts as the ski-property tenant and borrower. The planned Concord casino and resort remained uncertain.
  • Other material risks include tenant or borrower defaults, refinancing and balloon maturities, access to capital, interest and Canadian currency movements, real estate and entertainment-sector concentration, and maintaining REIT qualification. Management reported no material litigation and effective financial reporting controls; the auditor issued an unqualified opinion.

Important facts for investors to verify

  • Whether the Toronto Dundas Square sale closed, its final proceeds and gain, and the outcome of the currency hedge.
  • Post-year-end debt repayment and the actual remaining revolver availability, near-term maturities, and compliance with debt covenants.
  • AMC’s lease performance and credit condition, given its share of revenue, and the financial condition of Imagine and Peak.
  • Collection, impairment, and rent outcomes for vineyard and winery properties, and the status of the Concord resort development.
  • The sustainability of the $2.60 common dividend against cash available for distribution; FFO and AFFO are non-GAAP measures and are not equivalent to operating cash flow.