EPR Properties (EPR) is the leading diversified experiential net lease real estate investment trust (REIT), specializing in select enduring experiential properties. The company's portfolio is focused on real estate venues that create value by facilitating out-of-home leisure and recreation experiences where consumers choose to spend their discretionary time and money.
Business Overview and History
EPR Properties was formed on August 22, 1997 as a Maryland real estate investment trust and completed its initial public offering on November 18, 1997. Since its inception, the company has evolved into a leading diversified experiential REIT, expanding its portfolio across a variety of sectors including theatres, eat-play destinations, attractions, ski properties, experiential lodging, fitness and wellness, and cultural assets.
In its early years, EPR focused on locating suitable properties, negotiating favorable lease or financing terms, and managing its growing portfolio as it continued to expand. The company's management team leveraged their industry knowledge and relationships to facilitate acquisition, financing, and leasing opportunities.
Over time, EPR built a diverse portfolio of Experiential and Education properties, including theatre, eat-play, attraction, ski, experiential lodging, fitness & wellness, cultural, early childhood education, and private school assets. The company's growth trajectory has been generally positive, although it has faced challenges, particularly during the COVID-19 pandemic when many of its tenants were forced to temporarily close or scale back operations. EPR worked closely with its customers to provide rent relief and maintain occupancy levels. Additionally, the company had to navigate the Regal Cinemas bankruptcy in 2023, taking possession of 11 vacant theatre properties before successfully selling off the majority of these assets.
As of September 30, 2024, EPR's total investments stood at approximately $6.9 billion, comprising 352 properties that were 99% leased, excluding properties the company intends to sell. The company's Experiential portfolio accounted for 93% of total investments, or $6.4 billion, across 283 properties with 52 operators. The remaining 7% of investments, or $500 million, was allocated to the Education portfolio, which consisted of 69 properties with 8 operators.
EPR's portfolio of Experiential properties includes 159 theatre properties, 58 eat-play destinations (including 7 theatres located in entertainment districts), 24 attraction properties, 11 ski properties, 7 experiential lodging properties, 22 fitness and wellness properties, 1 gaming property, and 1 cultural property. The company's Education portfolio is composed of 60 early childhood education center properties and 9 private school properties.
Financials
Financial Performance and Ratios
For the nine months ended September 30, 2024, EPR reported total revenue of $520.8 million, a decrease of 2% from the same period in the prior year. Net income available to common shareholders was $136.4 million, or $1.80 per diluted share, compared to $109.4 million, or $1.45 per diluted share, in the prior-year period.
EPR's financial ratios remain strong, with a fixed charge coverage ratio of 3.4x, an interest coverage ratio of 4.0x, and a debt service coverage ratio of 4.0x as of September 30, 2024. The company's net debt to adjusted EBITDA ratio stood at 5.0x, and its net debt to gross assets ratio was 39% on a book basis.
For the most recent quarter, EPR reported revenue of $180,507,000, net income of $46,650,000, operating cash flow of $131,067,000, and free cash flow of $131,067,000. The company's current ratio and quick ratio both stand at 3.75, indicating strong short-term liquidity.
Guidance and Outlook
EPR has narrowed its 2024 FFO (Funds From Operations) as adjusted per share guidance to a range of $4.80 to $4.92. The company has also narrowed its 2024 investment spending guidance to a range of $225 million to $275 million, down from the previous range of $200 million to $300 million.
The company has increased its 2024 disposition proceeds guidance to a range of $70 million to $100 million, up from the prior range of $60 million to $75 million. EPR has also increased its percentage rent and participating interest guidance to a range of $13.5 million to $16.5 million, from a prior range of $12 million to $16 million.
EPR is confirming its 2024 general and administrative expense guidance of $49 million to $52 million. For the company's wholly owned operating properties, EPR has revised its other income guidance to a range of $54 million to $60 million and other expense guidance to a range of $53.5 million to $59.5 million.
The company has revised its equity and loss from joint ventures guidance to a range of -$13 million to -$10 million and FFO as adjusted from joint ventures guidance to a range of -$3 million to $0 million.
Liquidity
Liquidity and Capital Structure
As of September 30, 2024, EPR had $35.3 million in cash and cash equivalents and $160 million drawn on its $1 billion unsecured revolving credit facility, which was recently amended and restated to extend the maturity to October 2028 with two six-month extension options. The credit facility bears interest at SOFR plus 1.15% and has a 0.25% facility fee. The company's total debt of $2.9 billion was primarily fixed-rate or swapped to fixed-rate, with a weighted average interest rate of approximately 4.4% and a weighted average maturity of just under four years.
EPR's strong liquidity position and conservative capital structure provide the company with the financial flexibility to continue executing its investment strategy focused on high-quality experiential properties.
Investment Activity and Dispositions
During the nine months ended September 30, 2024, EPR invested $214.6 million, with 100% of the spending allocated to the Experiential portfolio. Notable investments included a $52 million mortgage financing for the Iron Mountain Hot Springs in Glenwood Springs, Colorado, a $33.4 million acquisition of an attraction property in New York, and $19.9 million for the acquisition and financing of land for three build-to-suit eat-play developments.
EPR also continued its strategic disposition program, completing the sale of two cultural properties, six vacant theatre properties, one leased theatre property, and one vacant early childhood education center for net proceeds of $65.1 million and a net gain of $16.0 million.
Subsequent to the end of the third quarter, the company sold another vacant Regal theatre for net proceeds of $2.6 million. In total, since early 2021, EPR has disposed of 23 theatre properties as part of its efforts to optimize its portfolio.
Operational Highlights and Outlook
EPR's Experiential portfolio, excluding properties intended for sale, was 99% leased as of September 30, 2024, while the Education portfolio, excluding properties for sale, was 100% leased.
The company's overall portfolio coverage ratio remained strong at 2.1x, with the non-theatre portion of the portfolio maintaining a coverage ratio of 2.6x. Theatre coverage, which was impacted by the writers' and actors' strikes, was 1.5x for the trailing 12-month period ending July 31, 2024, with box office totaling $7.9 billion.
Segment Performance
The Experiential segment, which represents approximately 93% of EPR's total investments, generated $491.1 million in total revenue for the nine months ended September 30, 2024, accounting for about 94% of the company's total revenue. This segment includes 159 theatre properties, 58 eat-play properties (including 7 theatres in entertainment districts), 24 attraction properties, 11 ski properties, 7 experiential lodging properties, 22 fitness and wellness properties, 1 gaming property, and 1 cultural property.
The Experiential segment faced some challenges during the period, including $11.8 million in impairment charges related to a closed theatre property being prepared for sale, and $12.1 million in impairment charges on equity investments in two joint ventures owning experiential lodging properties damaged by hurricanes in Florida.
The Education segment, representing about 7% of EPR's total investments, consists of 60 early childhood education center properties and 9 private school properties. This segment generated $29.1 million in total revenue for the nine months ended September 30, 2024, with rental revenue of $28.4 million, down slightly from $29.3 million in the same period of 2023 due to property dispositions.
Risks and Challenges
EPR's business is subject to various risks and uncertainties, including:
1. Exposure to the performance of the experiential real estate industry, which can be affected by economic conditions, consumer spending patterns, and industry trends. 2. Reliance on key tenants, such as Topgolf, AMC, and Regal, which represented a significant portion of the company's total revenue. 3. Potential impact of rising interest rates on the company's cost of capital and ability to finance future investments. 4. Ongoing impact of the COVID-19 pandemic and other macroeconomic factors on the company's tenants and their ability to meet lease obligations. 5. Risks associated with the development, redevelopment, and acquisition of properties, including construction delays, cost overruns, and the ability to find suitable tenants.
Conclusion
EPR Properties is a well-positioned diversified experiential REIT that has demonstrated its ability to navigate challenging market conditions. The company's focus on high-quality, enduring experiential properties, conservative financial management, and strategic capital allocation have positioned EPR for continued growth and value creation for its shareholders. With a strong liquidity position, a diversified portfolio, and a clear strategic direction, EPR Properties is well-equipped to capitalize on opportunities in the experiential real estate market while managing potential risks and challenges in the evolving economic landscape.