Business Overview and History
EPR Properties (EPR) is a leading diversified experiential net lease real estate investment trust (REIT) that has been strategically positioning itself for continued growth in the ever-evolving real estate landscape. With a focus on select enduring experiential properties, EPR has built a robust portfolio of assets that cater to the increasing demand for out-of-home leisure and recreation experiences.
Incorporated in 1997 and headquartered in Kansas City, Missouri, EPR Properties has established itself as a key player in the experiential real estate industry. The company's investment strategy has centered around the acquisition, development, and financing of a diverse range of experiential properties, including theatres, eat-and-play destinations, attractions, ski resorts, fitness and wellness facilities, and more.
EPR Properties completed its initial public offering on November 18, 1997, marking the beginning of its journey as a publicly-traded REIT. In its early years, the company faced challenges in locating suitable properties, negotiating favorable lease or financing terms, and managing its growing portfolio. However, the management team's industry knowledge and relationships facilitated opportunities for EPR to acquire, finance, and lease properties effectively.
Throughout its history, EPR has maintained a focus on structuring leases and financings to ensure a positive spread between its cost of capital and the rentals or interest paid by its tenants. The company has primarily acquired or developed new properties that are pre-leased to a single tenant or multi-tenant properties with high occupancy rates. Additionally, EPR has entered into joint ventures and provided mortgage note financing, a strategy it continues to employ.
In recent years, EPR has faced additional challenges, including an economic environment that increased its cost of capital and negatively impacted its ability to make investments in the near term. The COVID-19 pandemic in 2023 presented further obstacles, leading the company to recognize revenue on a cash basis for certain tenants and collect deferred rent and interest payments. EPR has worked diligently to manage these challenges by collecting deferred payments and selectively disposing of non-core assets.
Financial Performance and Ratios
EPR's financial performance has been largely resilient, despite the challenges posed by the COVID-19 pandemic and broader economic uncertainties. For the fiscal year ended December 31, 2023, the company reported total revenue of $659.72 million, net income of $173.05 million, operating cash flow of $447.09 million, and free cash flow of $447.09 million.
For the third quarter of 2024, EPR reported revenue of $180.51 million, net income of $46.65 million, operating cash flow of $131.07 million, and free cash flow of $131.07 million. Compared to Q3 2023, revenue decreased 4.6% primarily due to a decrease in rental revenue from the comprehensive restructuring agreement with Regal entered into in June 2023 and a decrease in deferred rental repayments from cash basis tenants, partially offset by an increase in rental revenue from property acquisitions and developments. Net income decreased 17.1% due to the decrease in rental revenue, increase in interest expense, and impairment charges on joint ventures related to hurricane damage.
The company's strong balance sheet is evidenced by a debt-to-total-assets ratio of 50% and a net-debt-to-adjusted-EBITDA ratio of 5.0x as of September 30, 2024. The debt-to-equity ratio stood at 1.19, while the current ratio and quick ratio were both 3.75 as of the same date.
Liquidity
The company's liquidity position remains robust, with $35.33 million in cash and cash equivalents and $840 million in available borrowing capacity under its $1 billion unsecured revolving credit facility as of the end of the third quarter of 2024. EPR's interest coverage ratio of 3.4x and debt service coverage ratio of 4.0x further demonstrate its financial stability and ability to service its debt obligations.
Diversification and Expansion Strategies
A key factor in EPR's success has been its strategic diversification across various experiential property types. As of September 30, 2024, the company's Experiential portfolio comprised 93% of its total investments, or approximately $6.4 billion, with the remaining 7% allocated to its Education portfolio.
The Experiential segment includes 159 theatre properties, 58 eat-play properties (including 7 theatres located in entertainment districts), 24 attraction properties, 11 ski properties, 7 experiential lodging properties, 22 fitness/wellness properties, 1 gaming property, and 1 cultural property. As of September 30, 2024, the Experiential portfolio, excluding properties intended for sale, consisted of approximately 19.5 million square feet and was 99% leased.
The Education segment consists of 60 early childhood education center properties and 9 private school properties, totaling approximately 1.3 million square feet and 100% leased, excluding properties intended for sale.
Within the Experiential segment, EPR has continued to expand its presence in high-growth sectors, such as fitness and wellness. During the third quarter of 2024, the company acquired a $52 million mortgage financing for the Iron Mountain Hot Springs in Glenwood Springs, Colorado, adding to its portfolio of iconic hot spring resorts that also includes the Springs Resort in Pagosa Springs and the recently opened Murrieta Hot Springs Resort.
Moreover, EPR has demonstrated its ability to successfully recycle capital through strategic dispositions. In the first nine months of 2024, the company completed the sale of two cultural properties, six vacant theatre properties, one leased theatre property, and one vacant early childhood education center, generating $65.1 million in net proceeds and a net gain of $16.0 million.
Outlook and Guidance
Looking ahead, EPR remains cautiously optimistic about the future, as it navigates the evolving economic landscape. For the full year 2024, the company has narrowed its FFO as adjusted per share guidance to a range of $4.80 to $4.92. EPR has also narrowed its investment spending guidance to a range of $225 million to $275 million, primarily funded by cash on hand, cash from operations, and proceeds from dispositions.
Additionally, EPR has increased its 2024 guidance for percentage rent and participating interest to a range of $13.5 million to $16.5 million, reflecting the continued recovery in its theatre portfolio and strong performance from other experiential tenants. The company has also updated its disposition proceeds guidance to a range of $70 million to $100 million, underscoring its ongoing efforts to optimize its portfolio and allocate capital to the most promising opportunities.
EPR has confirmed its 2024 general and administrative expense guidance of $49 million to $52 million. The company has 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. EPR has also 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 to a range of -$3 million to $0.
Risks and Challenges
While EPR's diversified portfolio and strategic initiatives have positioned the company for long-term success, it is not without its fair share of risks and challenges. The company's reliance on the experiential real estate sector, which can be susceptible to changes in consumer behavior and economic conditions, remains a key area of concern. Additionally, the potential for rising interest rates and inflationary pressures could impact the company's cost of capital and future investment decisions.
Furthermore, EPR's exposure to the theatre industry, which has faced its own set of challenges in recent years, presents an ongoing risk that the company must actively manage. The company's decision to exit its joint venture hotels in St. Petersburg Beach, Florida, following significant hurricane damage, underscores the importance of risk mitigation and portfolio optimization in the face of unexpected external events.
Industry Trends and Market Position
The experiential real estate industry, which is EPR's primary focus, has seen a compound annual growth rate (CAGR) of approximately 8% over the past five years. This growth is driven by increasing consumer demand for out-of-home entertainment and leisure experiences. EPR's strategic positioning within this growing market segment has allowed the company to capitalize on these favorable industry trends.
EPR Properties operates primarily in the United States, with six properties located in Canada. This geographic concentration allows the company to leverage its deep understanding of the North American market while potentially exposing it to regional economic fluctuations.
Conclusion
EPR Properties has firmly established itself as a leading player in the experiential real estate sector, leveraging its diverse portfolio and strategic initiatives to navigate the ever-changing industry landscape. By continually adapting its investment strategies, the company has demonstrated its ability to capitalize on emerging trends and deliver consistent financial performance for its shareholders.
As EPR looks to the future, its focus on diversification, prudent capital allocation, and a disciplined approach to risk management will be critical in driving long-term growth and solidifying its position as a premier experiential REIT. With a strong balance sheet, ample liquidity, and a commitment to innovation, EPR is well-positioned to continue expanding its footprint and delivering value to its stakeholders in the dynamic experiential real estate market.