EPR Properties (EPR) is a diversified experiential net lease real estate investment trust (REIT) that has carved out a unique niche in the real estate industry. The company specializes in owning and leasing properties that facilitate out-of-home leisure and recreation experiences, catering to consumers' increasing appetite for experiential spending. With a portfolio spanning various sectors, including entertainment, fitness, education, and more, EPR Properties has demonstrated its ability to navigate the evolving real estate landscape and deliver consistent returns to its shareholders.
Business Overview and History EPR Properties was formed on August 22, 1997 as a Maryland real estate investment trust (REIT) and completed its initial public offering on November 18, 1997. Since its inception, the company has steadily grown its portfolio, transitioning from a traditional net lease REIT to a specialized experiential property owner and operator. In its early years, EPR Properties faced challenges in locating suitable properties, negotiating favorable lease or financing terms, and managing its growing portfolio. However, the company's management team leveraged their industry knowledge and relationships to facilitate opportunities to acquire, finance, and lease properties.
Over the years, EPR Properties expanded its real estate investment portfolio through acquisitions, financings, and joint ventures. By 2023, the company had total assets of approximately $5.7 billion, with properties located in 44 states, Ontario and Quebec, Canada. The company's portfolio included a diverse mix of experiential and education properties, including theatres, eat-play destinations, attractions, ski properties, experiential lodging, fitness/wellness centers, and early childhood education centers.
In 2020, EPR Properties faced significant challenges due to the COVID-19 pandemic, which negatively impacted many of its tenants. The company worked proactively with its tenants to provide relief and renegotiate lease terms. Despite these headwinds, EPR Properties maintained a strong balance sheet and liquidity position, which allowed it to continue selectively investing in new properties that fit its experiential focus.
As of September 30, 2024, EPR Properties' total investments stood at approximately $6.94 billion, with a diverse portfolio of 352 properties across the United States and Canada. The company's Experiential segment, which accounts for 93% of its total investments, includes 283 properties leased to 52 different operators. These properties span various experiential categories, such as theatres, eat-and-play destinations, attractions, ski resorts, fitness and wellness centers, and more. The remaining 7% of EPR Properties' investments are allocated to its Education segment, which comprises 69 properties leased to 8 operators, primarily in the early childhood education and private school sectors.
Financial Performance and Ratios EPR Properties has demonstrated a strong financial profile, with a focus on maintaining a conservative capital structure and a disciplined approach to investment decisions. As of September 30, 2024, the company reported a net debt to gross assets ratio of 39%, well within its target range, and a net debt to adjusted EBITDA ratio of 5.0x, indicating a healthy balance sheet.
In the latest reported quarter (Q3 2024), EPR Properties generated total revenue of $180.51 million, a decrease of 4.6% year-over-year. This decline was primarily due to a decrease in minimum rent from the comprehensive restructuring agreement with Regal and lower deferred rental repayments from cash basis tenants, partially offset by an increase in rental revenue from property acquisitions and developments. Net income for the quarter stood at $46.65 million, a decrease of 17.1% compared to the same period in the prior year, primarily due to higher interest expense, impairment charges, and lower gain on sale of real estate.
For the nine-month period ended September 30, 2024, the company's total revenue was $520.8 million, a slight decrease of 2.0% year-over-year. However, net income available to common shareholders for this period increased 24.0% to $136.4 million, or $1.80 per diluted share, compared to the same period in the prior year.
The company's Funds from Operations as Adjusted (FFOAA), a key performance metric for REITs, stood at $3.64 per diluted share for the nine-month period, down 9.0% from the prior-year period. This decline was primarily attributable to the aforementioned factors impacting revenue, as well as higher interest expense and impairment charges related to the company's experiential lodging joint ventures.
For the full fiscal year 2023, EPR Properties reported revenue of $659.72 million, net income of $173.05 million, and operating cash flow (OCF) and free cash flow (FCF) of $447.09 million each.
Liquidity EPR Properties has maintained a strong liquidity position, which has been crucial in navigating the challenges posed by the COVID-19 pandemic and subsequent market volatility. The company's recently expanded $1 billion unsecured revolving credit facility provides significant financial flexibility. As of September 30, 2024, $169 million was outstanding on this facility. This, combined with cash on hand of $35.33 million, cash flow from operations, and proceeds from asset dispositions, positions EPR Properties well to fund its ongoing investment activities and meet its financial obligations.
The company's debt-to-equity ratio stood at 1.19 as of September 30, 2024, while its current ratio and quick ratio were both 3.75, indicating strong short-term liquidity.
Operational Highlights and Outlook Despite the challenges posed by the COVID-19 pandemic, EPR Properties has continued to execute on its strategic initiatives, demonstrating the resilience and adaptability of its business model. The company has been proactive in recycling capital, having sold 23 theatre properties since early 2021, including the disposition of nine former Regal Cinemas locations in the first nine months of 2024.
Looking ahead, EPR Properties has narrowed its investment guidance for 2024 to a range of $225 million to $275 million, down from its previous range of $200 million to $300 million. This reflects the company's disciplined approach to capital allocation amidst the current macroeconomic environment. The company plans to fund these investments primarily from cash on hand, cash flow from operations, proceeds from asset dispositions, and its recently expanded $1 billion unsecured revolving credit facility.
In terms of its outlook, EPR Properties has expressed confidence in the recovery of the theatre industry, increasing its box office guidance for 2024 to a range of $8.3 billion to $8.7 billion, compared to its prior expectation of $8.2 billion to $8.5 billion. This optimism is driven by the anticipated release of several high-profile titles in the fourth quarter of 2024 and into 2025.
The company has also highlighted its growing exposure to non-commoditized fitness and wellness assets, such as hot springs resorts and specialized climbing gyms, as areas of focus for future investment. These experiential properties align with the company's strategy of owning and leasing assets that cater to consumers' evolving preferences for unique, curated leisure experiences.
EPR Properties has provided updated guidance for 2024. The company has narrowed its FFO as adjusted per share guidance to a range of $4.80 to $4.92. It has also increased its disposition proceeds guidance to a range of $70 million to $100 million and raised its guidance for percentage rent and participating interest to a range of $13.5 million to $16.5 million. The company confirmed its general and administrative expense guidance of $49 million to $52 million for 2024. Additionally, EPR revised its guidance for other income to a range of $54 million to $60 million and other expense to a range of $53.5 million to $59.5 million. The company also updated its equity and loss from joint ventures to a range of negative $13 million to negative $10 million and FFO as adjusted from joint ventures to a range of negative $3 million to $0.
Risks and Challenges While EPR Properties has navigated the challenges of the past few years with agility, the company faces several risks that investors should consider. The company's heavy exposure to the theatre industry, which has faced significant disruptions due to the COVID-19 pandemic and changing consumer viewing habits, remains a potential area of concern. Additionally, the company's experiential lodging assets have been impacted by severe weather events, leading to the recognition of impairment charges related to its joint venture investments in Florida.
Furthermore, the broader macroeconomic environment, characterized by high inflation, rising interest rates, and potential recessionary pressures, could have downstream effects on the company's tenants' financial performance and the broader demand for experiential real estate. EPR Properties' ability to continue executing its investment strategy and maintaining its dividend payout will be crucial in navigating these challenges.
Conclusion EPR Properties has established itself as a leading diversified experiential net lease REIT, with a focus on owning and leasing properties that cater to consumers' growing appetite for unique, out-of-home leisure and recreation experiences. The company's diversified portfolio, conservative financial profile, and strategic capital allocation have positioned it well to navigate the evolving real estate landscape.
With its Experiential segment comprising 93% of total investments and including 283 properties leased to 52 operators across various categories, EPR Properties has demonstrated its commitment to the experiential real estate sector. The Education segment, although smaller at 7% of total investments, provides additional diversification with 69 properties leased to 8 operators.
The company's financial performance, while facing some headwinds, remains solid. EPR Properties continues to actively manage its portfolio, as evidenced by its strategic dispositions and narrowed investment guidance. The increase in disposition proceeds guidance and the revision of various financial metrics demonstrate the company's adaptability to market conditions.
While challenges remain, including potential impacts from macroeconomic factors and industry-specific risks, EPR Properties' demonstrated resilience and adaptability suggest that it is poised for continued growth and value creation for its shareholders. The company's focus on long-term investments in the Experiential real estate sector, which it believes offers sustained performance throughout most economic cycles, coupled with its strategic management of assets and conservative financial approach, positions EPR Properties well for the future.