EPR Properties (EPR) has carved out a unique niche for itself in the real estate investment trust (REIT) landscape, establishing itself as a premier player in the experiential real estate sector. With a focus on specialized, high-quality properties that cater to consumers’ evolving preferences for immersive experiences, EPR Properties has steadily built a diversified portfolio that has weathered challenging economic conditions.
Company Background and Evolution
EPR Properties was formed on August 22, 1997, as a Maryland real estate investment trust (REIT), with its initial public offering completed on November 18, 1997. Since its inception, the company has faced and overcome various challenges, including locating suitable properties, negotiating favorable lease or financing terms, and managing its growing portfolio. The management team’s industry knowledge and relationships have been instrumental in facilitating opportunities to acquire, finance, and lease properties.
Portfolio Composition
Over the years, EPR Properties has strategically focused its investment portfolio on Experiential and Education properties. As of September 30, 2024, the company’s Experiential investments comprised 93% of its total investments, with holdings across various property types including theatres, eat-play destinations, attractions, ski properties, experiential lodging, fitness & wellness, and cultural assets. The remaining 7% of investments were in the Education sector, primarily early childhood education centers and private schools.
Experiential Portfolio
EPR Properties’ Experiential portfolio comprises an impressive 283 properties across 52 operators, encompassing a diverse array of asset classes, including theatres, eat-play destinations, attractions, ski resorts, experiential lodging, and fitness and wellness facilities. This diversification has enabled the company to weather the challenges posed by the COVID-19 pandemic, which disproportionately impacted certain sectors. As of the end of the third quarter of 2024, the company’s Experiential portfolio, excluding properties held for sale, was 99% leased.
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 and wellness properties, 1 gaming property, and 1 cultural property. The portfolio also included $76.9 million in property under development and $20.2 million in undeveloped land inventory as of September 30, 2024.
Education Portfolio
Complementing its Experiential focus, EPR Properties also maintains a robust Education portfolio, comprising 69 properties with 8 operators. This segment, which accounts for 7% of the company’s total investments, has demonstrated resilience, with the portfolio excluding properties held for sale being 100% leased as of the end of the third quarter of 2024. The Education segment consists of 60 early childhood education center properties and 9 private school properties.
Investment Strategy
One of the key drivers of EPR Properties’ success has been its disciplined investment approach. The company has demonstrated a keen ability to identify high-quality, well-located properties that align with its strategic focus on experiential real estate. This selective acquisition strategy, combined with strategic dispositions of non-core assets, has allowed EPR Properties to optimize its portfolio and maintain a strong financial position.
Financials
In the third quarter of 2024, EPR Properties reported total revenue of $180.5 million, a slight decrease from the $189.4 million reported in the same period of the previous year. This decline was primarily attributable to a reduction in out-of-period deferral collections from cash basis tenants, as well as the comprehensive restructuring agreement with Regal Cinemas. Despite these headwinds, the company’s net income available to common shareholders was $40.6 million, or $0.53 per diluted share, compared to $50.2 million, or $0.66 per diluted share, in the prior-year quarter.
For the most recent fiscal year (2023), EPR Properties reported 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. In the most recent quarter (Q3 2024), the company 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. Year-over-year, revenue decreased by 5.0% due to the decrease in rental revenue from the comprehensive restructuring agreement with Regal and lower deferred rental payments from cash basis tenants received in 2023. Net income decreased by 17.2% due to the decrease in revenue and higher impairment charges.
The performance of the Experiential segment has been mixed during the reported period. Rental revenue decreased by $15.26 million, or 9.3%, for the three months ended September 30, 2024 compared to the same period in 2023, primarily due to a decrease in minimum rent from the comprehensive restructuring agreement with Regal, lower deferred rental repayments from cash basis tenants, and reduced rental revenue from property dispositions and vacant properties. This was partially offset by increases in rental revenue from property acquisitions, developments, and existing properties. During the nine months ended September 30, 2024, the Experiential segment generated $491.14 million in total revenue.
For the three and nine months ended September 30, 2024, the Education segment generated $9.64 million and $29.14 million in total revenue, respectively.
Liquidity and Capital Structure
The company’s focus on maintaining a strong balance sheet has been a crucial element of its success. As of the end of the third quarter of 2024, EPR Properties had total debt of $2.9 billion, of which 99% was either fixed-rate debt or debt that had been fixed through interest rate swaps. This conservative capital structure, combined with a weighted average debt maturity of just under four years, has provided the company with the financial flexibility to navigate the challenging economic landscape.
EPR Properties’ debt-to-equity ratio stands at 1.19, with $35.33 million in cash on hand. The company has access to a $1.0 billion unsecured revolving credit facility, of which $160 million was drawn as of Q3 2024. The current ratio and quick ratio both stand at 3.75, indicating strong short-term liquidity.
Future Outlook
Looking ahead, EPR Properties remains cautiously optimistic about the future, with its emphasis on high-quality, well-located experiential properties positioning it for continued success. The company has narrowed its investment guidance for 2024 to a range of $225 million to $275 million, reflecting its disciplined approach to growth. Additionally, EPR Properties has increased its guidance for disposition proceeds to a range of $70 million to $100 million, as it continues to optimize its portfolio through strategic asset sales.
EPR Properties has also updated its guidance for various financial metrics. The company narrowed its 2024 FFO as Adjusted per share guidance to a range of $4.80 to $4.92. They increased their percentage rent and participating interest guidance to a range of $13.5 million to $16.5 million and confirmed their general and administrative expense guidance of $49 million to $52 million. For wholly owned operating properties, they revised 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. For joint ventures, they revised equity and loss guidance to a range of $13 million to $10 million and FFO as Adjusted from JVs to a range of negative $3 million to 0.
Expansion into Fitness and Wellness
One area of particular focus for EPR Properties has been its expansion into the fitness and wellness sector, a segment that has seen growing consumer demand, particularly among baby boomers and millennials. The company’s recent investment in the Iron Mountain Hot Springs in Glenwood Springs, Colorado, is a testament to its ability to identify and capitalize on emerging trends within the experiential real estate landscape.
Resilience and Adaptability
Despite the challenges posed by the COVID-19 pandemic and the ongoing economic uncertainty, EPR Properties has demonstrated its resilience and adaptability. The company’s ability to navigate these turbulent waters, while maintaining a focus on its core strategic objectives, has earned it the trust of investors and industry peers alike.
Industry Trends and Geographic Markets
The experiential real estate sector, which EPR Properties specializes in, has seen steady growth in recent years driven by consumer demand for entertainment and leisure experiences. The compound annual growth rate (CAGR) for EPR’s total investments from 2019-2023 was approximately 7%, reflecting the overall positive trend in the industry.
EPR Properties primarily operates in the United States, with some properties in Canada. While the company does not break out performance by geographic market, its diverse portfolio across various states and regions provides a measure of geographic diversification.
Conclusion
As EPR Properties continues to cement its position as a leader in the experiential real estate space, investors will undoubtedly keep a close eye on the company’s ability to execute its growth strategy, optimize its portfolio, and maintain its strong financial footing. With a proven track record of success and a clear vision for the future, EPR Properties appears well-positioned to capitalize on the evolving preferences of consumers and cement its status as a premier player in the dynamic experiential real estate market.
The company’s diversified portfolio of Experiential and Education properties has generated relatively stable cash flows, though the Experiential segment has faced some headwinds from the impact of the comprehensive restructuring agreement with Regal and lower deferred rental repayments. By actively managing its portfolio, making strategic investments, dispositions, and operational improvements, EPR Properties continues to drive long-term shareholder value in an ever-evolving real estate landscape.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.