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Section 1: 10-Q (10-Q)

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epr:properties iso4217:CAD iso4217:USD
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-13561
 
EPR PROPERTIES
(Exact name of registrant as specified in its charter)
Maryland
 
43-1790877
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
909 Walnut Street,
Suite 200
 
 
Kansas City,
Missouri
 
64106
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(816)
472-1700

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common shares, par value $0.01 per share
 
EPR
 
New York Stock Exchange
 
 
 
 
 
5.75% Series C cumulative convertible preferred shares, par value $0.01 per share
 
EPR PrC
 
New York Stock Exchange
 
 
 
 
 
9.00% Series E cumulative convertible preferred shares, par value $0.01 per share
 
EPR PrE
 
New York Stock Exchange
 
 
 
 
 
5.75% Series G cumulative redeemable preferred shares, par value $0.01 per share
 
EPR PrG
 
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes      No  

At August 5, 2020, there were 74,611,864 common shares outstanding.



CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of historical information, certain statements contained or incorporated by reference herein may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as those pertaining to the uncertain financial impact of COVID-19, our capital resources and liquidity, expected liquidity and performance of our customers, including AMC, our expected dividend payments and share repurchases and our results of operations and financial condition. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of actual events. There is no assurance the events or circumstances reflected in the forward-looking statements will occur. You can identify forward-looking statements by use of words such as “will be,” “intend,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “pipeline,” “estimates,” “offers,” “plans,” “would,” or other similar expressions or other comparable terms or discussions of strategy, plans or intentions in this Quarterly Report on Form 10-Q. In addition, references to our budgeted amounts and guidance are forward-looking statements.

Factors that could materially and adversely affect us include, but are not limited to, the factors listed below:
Risks associated with the current outbreak of the novel coronavirus, or COVID-19, or the future outbreak of any other highly infectious or contagious diseases;
Global economic uncertainty and disruptions in financial markets;
Reduction in discretionary spending by consumers;
Adverse changes in our credit ratings;
Fluctuations in interest rates;
Defaults in the performance of lease terms by our tenants;
Defaults by our customers and counterparties on their obligations owed to us;
A borrower's bankruptcy or default;
Our ability to renew maturing leases on terms comparable to prior leases and/or our ability to locate substitute lessees for these properties on economically favorable terms;
Risks of operating in the experiential real estate industry;
Our ability to compete effectively;
Risks associated with three tenants representing a substantial portion of our lease revenues;
The ability of our build-to-suit tenants to achieve sufficient operating results within expected time-frames and therefore have capacity to pay their agreed upon rent;
Risks associated with our dependence on third-party managers to operate certain of our experiential lodging properties;
Risks associated with our level of indebtedness;
Risks associated with use of leverage to acquire properties;
Financing arrangements that require lump-sum payments;
Our ability to raise capital;
Covenants in our debt instruments that limit our ability to take certain actions;
The concentration and lack of diversification of our investment portfolio;
Our continued qualification as a real estate investment trust for U.S. federal income tax purposes and related tax matters;
The ability of our subsidiaries to satisfy their obligations;
Financing arrangements that expose us to funding and completion risks;
Our reliance on a limited number of employees, the loss of which could harm operations;
Risks associated with the employment of personnel by managers of our experiential lodging properties;
Risks associated with the gaming industry;
Risks associated with gaming and other regulatory authorities;
Delays or prohibitions of transfers of gaming properties due to required regulatory approvals;
Risks associated with security breaches and other disruptions;
Changes in accounting standards that may adversely affect our financial statements;
Fluctuations in the value of real estate income and investments;
Risks relating to real estate ownership, leasing and development, including local conditions such as an

i


oversupply of space or a reduction in demand for real estate in the area, competition from other available space, whether tenants and users such as customers of our tenants consider a property attractive, changes in real estate taxes and other expenses, changes in market rental rates, the timing and costs associated with property improvements and rentals, changes in taxation or zoning laws or other governmental regulation, whether we are able to pass some or all of any increased operating costs through to tenants or other customers, and how well we manage our properties;
Our ability to secure adequate insurance and risk of potential uninsured losses, including from natural disasters;
Risks involved in joint ventures;
Risks in leasing multi-tenant properties;
A failure to comply with the Americans with Disabilities Act or other laws;
Risks of environmental liability;
Risks associated with the relatively illiquid nature of our real estate investments;
Risks with owning assets in foreign countries;
Risks associated with owning, operating or financing properties for which the tenants', mortgagors' or our operations may be impacted by weather conditions, climate change and natural disasters;
Risks associated with the development, redevelopment and expansion of properties and the acquisition of other real estate related companies;
Our ability to pay dividends in cash or at current rates;
Fluctuations in the market prices for our shares;
Certain limits on changes in control imposed under law and by our Declaration of Trust and Bylaws;
Policy changes obtained without the approval of our shareholders;
Equity issuances that could dilute the value of our shares;
Future offerings of debt or equity securities, which may rank senior to our common shares;
Risks associated with changes in foreign exchange rates; and
Changes in laws and regulations, including tax laws and regulations.

Our forward-looking statements represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. For further discussion of these factors see Item 1A - "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 filed with the Securities and Exchange Commission ("SEC") on May 11, 2020.

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference herein. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except as required by law, we do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.



ii


TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
Financial Statements
 
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
 
Controls and Procedures
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
Legal Proceedings
 
Item 1A.
 
Risk Factors
 
Item 2.
 
Unregistered Sale of Equity Securities and Use of Proceeds
 
Item 3.
 
Defaults Upon Senior Securities
 
Item 4.
 
Mine Safety Disclosures
 
Item 5.
 
Other Information
 
Item 6.
 
Exhibits

iii


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EPR PROPERTIES
Consolidated Balance Sheets
(Dollars in thousands except share data)
 
June 30, 2020
 
December 31, 2019
 
(unaudited)
 
 
Assets
 
 
 
Real estate investments, net of accumulated depreciation of $1,034,771 and $989,254 at June 30, 2020 and December 31, 2019, respectively
$
5,110,059

 
$
5,197,308

Land held for development
26,244

 
28,080

Property under development
39,039

 
36,756

Operating lease right-of-use assets
189,058

 
211,187

Mortgage notes and related accrued interest receivable
357,668

 
357,391

Investment in joint ventures
28,925

 
34,317

Cash and cash equivalents
1,006,981

 
528,763

Restricted cash
2,615

 
2,677

Accounts receivable
134,774

 
86,858

Other assets
107,615

 
94,174

Total assets
$
7,002,978

 
$
6,577,511

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$
96,454

 
$
122,939

Operating lease liabilities
229,030

 
235,650

Common dividends payable
19

 
29,424

Preferred dividends payable
6,034

 
6,034

Unearned rents and interest
81,096

 
74,829

Debt
3,854,088

 
3,102,830

Total liabilities
4,266,721

 
3,571,706

Equity:
 
 
 
Common Shares, $.01 par value; 100,000,000 shares authorized; and 81,903,786 and 81,588,489 shares issued at June 30, 2020 and December 31, 2019, respectively
819

 
816

Preferred Shares, $.01 par value; 25,000,000 shares authorized:
 
 
 
5,394,050 Series C convertible shares issued at June 30, 2020 and December 31, 2019; liquidation preference of $134,851,250
54

 
54

3,447,381 Series E convertible shares issued at June 30, 2020 and December 31, 2019; liquidation preference of $86,184,525
34

 
34

6,000,000 Series G shares issued at June 30, 2020 and December 31, 2019; liquidation preference of $150,000,000
60

 
60

Additional paid-in-capital
3,848,984

 
3,834,858

Treasury shares at cost: 7,290,948 and 3,125,569 common shares at June 30, 2020 and December 31, 2019, respectively
(260,351
)
 
(147,435
)
Accumulated other comprehensive income
(4,331
)
 
7,275

Distributions in excess of net income
(849,012
)
 
(689,857
)
Total equity
$
2,736,257

 
$
3,005,805

Total liabilities and equity
$
7,002,978

 
$
6,577,511

See accompanying notes to consolidated financial statements.

1


EPR PROPERTIES
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
(Unaudited)
(Dollars in thousands except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Rental revenue
$
97,531

 
$
147,003

 
$
232,574

 
$
287,295

Other income
416

 
5,726

 
7,989

 
6,070

Mortgage and other financing income
8,413

 
9,011

 
16,809

 
18,902

Total revenue
106,360

 
161,740

 
257,372

 
312,267

Property operating expense
15,329

 
14,597

 
28,422

 
30,148

Other expense
2,798

 
8,091

 
12,332

 
8,091

General and administrative expense
10,432

 
12,230

 
21,420

 
23,940

Severance expense

 

 

 
420

Costs associated with loan refinancing or payoff
820

 

 
820

 

Interest expense, net
38,340

 
36,458

 
73,093

 
70,421

Transaction costs
771

 
6,923

 
1,846

 
12,046

Credit loss expense
3,484

 

 
4,676

 

Impairment charges
51,264

 

 
51,264

 

Depreciation and amortization
42,450

 
38,790

 
86,260

 
74,792

(Loss) income before equity in (loss) income from joint ventures, other items and discontinued operations
(59,328
)
 
44,651

 
(22,761
)
 
92,409

Equity in (loss) income from joint ventures
(1,724
)
 
470

 
(2,144
)
 
959

Impairment charges on joint ventures
(3,247
)
 

 
(3,247
)
 

Gain (loss) on sale of real estate
22

 

 
242

 
(388
)
(Loss) income before income taxes
(64,277
)
 
45,121

 
(27,910
)
 
92,980

Income tax benefit
1,312

 
1,300

 
2,063

 
1,905

(Loss) income from continuing operations
$
(62,965
)
 
$
46,421

 
$
(25,847
)
 
$
94,885

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations before other items

 
10,399

 

 
20,568

Gain on sale of real estate from discontinued operations

 
9,774

 

 
16,490

Income from discontinued operations

 
20,173

 

 
37,058

Net (loss) income
(62,965
)
 
66,594

 
(25,847
)
 
131,943

Preferred dividend requirements
(6,034
)
 
(6,034
)
 
(12,068
)
 
(12,068
)
Net (loss) income available to common shareholders of EPR Properties
$
(68,999
)
 
$
60,560

 
$
(37,915
)
 
$
119,875

Net (loss) income available to common shareholders of EPR Properties per share:
 
 
 
 
 
 
 
Continuing operations
$
(0.90
)
 
$
0.53

 
$
(0.49
)
 
$
1.10

Discontinued operations

 
0.27

 

 
0.49

Basic
$
(0.90
)
 
$
0.80

 
$
(0.49
)
 
$
1.59

 
 
 
 
 
 
 
 
Continuing operations
$
(0.90
)
 
$
0.53

 
$
(0.49
)
 
$
1.10

Discontinued operations

 
0.26

 

 
0.49

Diluted
$
(0.90
)
 
$
0.79

 
$
(0.49
)
 
$
1.59

Shares used for computation (in thousands):
 
 
 
 
 
 
 
Basic
76,310

 
76,164

 
77,388

 
75,426

Diluted
76,310

 
76,199

 
77,388

 
75,467

 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Net (loss) income
$
(62,965
)
 
$
66,594

 
$
(25,847
)
 
$
131,943

Foreign currency translation adjustment
7,284

 
3,972

 
(9,211
)
 
7,782

Change in net unrealized loss on derivatives
(6,326
)
 
(7,195
)
 
(2,395
)
 
(14,693
)
Comprehensive (loss) income attributable to EPR Properties
$
(62,007
)
 
$
63,371

 
$
(37,453
)
 
$
125,032

See accompanying notes to consolidated financial statements.

2



EPR PROPERTIES
Consolidated Statements of Changes in Equity
(Unaudited)
(Dollars in thousands, except per share data)
 
EPR Properties Shareholders’ Equity
 
 
 
Common Stock
 
Preferred Stock
 
Additional
paid-in capital
 
Treasury
shares
 
Accumulated
other
comprehensive
income (loss)
 
Distributions
in excess of
net income
 
Total
 
Shares
 
Par
 
Shares
 
Par
 
 
Balance at December 31, 2018
77,226,443

 
$
772

 
14,841,431

 
$
148

 
$
3,504,494

 
$
(130,728
)
 
$
12,085

 
$
(521,748
)
 
$
2,865,023

Restricted share units issued to Trustees
1,156

 

 

 

 

 

 

 

 

Issuance of nonvested shares, net of cancellations
197,755

 
2

 

 

 
4,831

 
(403
)
 

 

 
4,430

Purchase of common shares for vesting

 

 

 

 

 
(9,499
)
 

 

 
(9,499
)
Share-based compensation expense

 

 

 

 
3,177

 

 

 

 
3,177

Share-based compensation included in severance expense

 

 

 

 
103

 

 

 

 
103

Foreign currency translation adjustment

 

 

 

 

 

 
3,810

 

 
3,810

Change in unrealized gain on derivatives

 

 

 

 

 

 
(7,498
)
 

 
(7,498
)
Net income

 

 

 

 

 

 

 
65,349

 
65,349

Issuances of common shares
1,064,600

 
11

 

 

 
78,982

 

 

 

 
78,993

Stock option exercises, net
111,815

 
1

 

 

 
5,543

 
(6,276
)
 

 

 
(732
)
Dividends to common shareholders ($1.125 per share)

 

 

 

 

 

 

 
(84,343
)
 
(84,343
)
Dividends to Series C preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series E preferred shareholders ($0.5625 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series G preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(2,156
)
 
(2,156
)
Balance at March 31, 2019
78,601,769

 
$
786

 
14,841,431

 
$
148

 
$
3,597,130

 
$
(146,906
)
 
$
8,397

 
$
(546,776
)
 
$
2,912,779

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted share units issued to Trustees
26,236

 

 

 

 

 

 

 

 

Issuance of nonvested shares, net of cancellations
11,000

 

 

 

 
95

 
(95
)
 

 

 

Share-based compensation expense

 

 

 

 
3,283

 

 

 

 
3,283

Foreign currency translation adjustment

 

 

 

 

 

 
3,972

 

 
3,972

Change in unrealized loss on derivatives

 

 

 

 

 

 
(7,195
)
 

 
(7,195
)
Net income

 

 

 

 

 

 

 
66,594

 
66,594

Issuances of common shares
2,033,530

 
21

 

 

 
157,575

 

 

 

 
157,596

Stock option exercises, net
5,198

 

 

 

 
142

 
(142
)
 

 

 

Dividends to common shareholders ($1.125 per share)

 

 

 

 

 

 

 
(86,097
)
 
(86,097
)
Dividends to Series C preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series E preferred shareholders ($0.5625 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series G preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(2,156
)
 
(2,156
)
Balance at June 30, 2019
80,677,733

 
$
807

 
14,841,431

 
$
148

 
$
3,758,225

 
$
(147,143
)
 
$
5,174

 
$
(572,313
)
 
$
3,044,898

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continued on next page.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3


 
EPR Properties Shareholders’ Equity
 
 
 
Common Stock
 
Preferred Stock
 
Additional
paid-in capital
 
Treasury
shares
 
Accumulated
other
comprehensive
income (loss)
 
Distributions
in excess of
net income
 
Total
Continued from previous page.
Shares
 
Par
 
Shares
 
Par
 
 
Balance at December 31, 2019
81,588,489

 
$
816

 
14,841,431

 
$
148

 
$
3,834,858

 
$
(147,435
)
 
$
7,275

 
$
(689,857
)
 
$
3,005,805

Issuance of nonvested shares, net of cancellations
211,549

 
2

 

 

 
6,221

 
(90
)
 

 

 
6,133

Purchase of common shares for vesting

 

 

 

 

 
(6,769
)
 

 

 
(6,769
)
Share-based compensation expense

 

 

 

 
3,509

 

 

 

 
3,509

Foreign currency translation adjustment

 

 

 

 

 

 
(16,495
)
 

 
(16,495
)
Change in unrealized loss on derivatives

 

 

 

 

 

 
3,931

 

 
3,931

Credit loss expense for implementation of Current Expected Credit Loss standard

 

 

 

 

 

 

 
(2,163
)
 
(2,163
)
Net income

 

 

 

 

 

 

 
37,118

 
37,118

Issuances of common shares
10,368

 

 

 

 
442

 

 

 

 
442

Stock option exercises, net
1,410

 

 

 

 
63

 
(63
)
 

 

 

Dividends to common shareholders ($1.1325 per share)

 

 

 

 

 

 

 
(88,996
)
 
(88,996
)
Dividends to Series C preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series E preferred shareholders ($0.5625 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series G preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(2,156
)
 
(2,156
)
Balance at March 31, 2020
81,811,816

 
$
818

 
14,841,431

 
$
148

 
$
3,845,093

 
$
(154,357
)
 
$
(5,289
)
 
$
(749,932
)
 
$
2,936,481

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted share units issued to Trustees
74,767

 
1

 

 

 

 

 

 

 
1

Share-based compensation expense

 

 

 

 
3,463

 

 

 

 
3,463

Foreign currency translation adjustment

 

 

 

 

 

 
7,284

 

 
7,284

Change in unrealized loss on derivatives

 

 

 

 

 

 
(6,326
)
 

 
(6,326
)
Net loss

 

 

 

 

 

 

 
(62,965
)
 
(62,965
)
Issuances of common shares
17,203

 

 

 

 
428

 

 

 

 
428

Repurchase of common shares

 

 

 

 

 
(105,994
)
 

 

 
(105,994
)
Dividend equivalents accrued on performance shares

 

 

 

 

 

 

 
(19
)
 
(19
)
Dividends to common shareholders ($0.3825 per share)

 

 

 

 

 

 

 
(30,062
)
 
(30,062
)
Dividends to Series C preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series E preferred shareholders ($0.5625 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series G preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(2,156
)
 
(2,156
)
Balance at June 30, 2020
81,903,786

 
$
819

 
14,841,431

 
$
148

 
$
3,848,984

 
$
(260,351
)
 
$
(4,331
)
 
$
(849,012
)
 
$
2,736,257


See accompanying notes to consolidated financial statements.

4


EPR PROPERTIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 
Six Months Ended June 30,
 
2020