The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in this Quarterly Report on Form 10-Q ofEPR Properties (the "Company", "EPR", "we" or "us"). The forward-looking statements included in this discussion and elsewhere in this Quarterly Report on Form 10-Q involve risks and uncertainties, including anticipated financial performance, anticipated liquidity and capital resources, business prospects, industry trends, shareholder returns, performance of leases by tenants, performance on loans to customers and other matters, which reflect management's best judgment based on factors currently known. See "Cautionary Statement Concerning Forward-Looking Statements" which is incorporated herein by reference. Actual results and experience could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in Item 1A - "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onFebruary 25, 2021 . 29 --------------------------------------------------------------------------------
Overview
Business
Our principal business objective is to enhance shareholder value by achieving predictable and increasing Funds From Operations As Adjusted ("FFOAA") and dividends per share. Our strategy is to focus on long-term investments in the Experiential sector which benefit from our depth of knowledge and relationships, and which we believe offer sustained performance throughout most economic cycles. Our investment portfolio includes ownership of and long-term mortgages on Experiential and Education properties. Substantially all of our owned single-tenant properties are leased pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of the property. Tenants at our owned multi-tenant properties are typically required to pay common area maintenance charges to reimburse us for their pro-rata portion of these costs. We also own certain experiential lodging assets structured using traditional REIT lodging structures. It has been our strategy to structure leases and financings to ensure a positive spread between our cost of capital and the rentals or interest paid by our tenants. We have primarily acquired or developed new properties that are pre-leased to a single tenant or multi-tenant properties that have a high occupancy rate. We have also entered into certain joint ventures and we have provided mortgage note financing. We intend to continue entering into some or all of these types of arrangements in the foreseeable future. Prior to the COVID-19 pandemic, our primary challenges had been locating suitable properties, negotiating favorable lease or financing terms (on new or existing properties), and managing our portfolio as we have continued to grow. We believe our management's knowledge and industry relationships have facilitated opportunities for us to acquire, finance and lease properties. The current economic situation created by the pandemic has impeded our growth in the near term while our focus has been addressing challenges brought on by the pandemic, including monitoring customer status and working with customers to help ensure long-term stability as well as assisting them in reopening plans. See more discussion on the impact of the pandemic on our business below. We expect to return to growth as our customers' businesses continue to recover and, in turn, our cashflows stabilize. Our business is subject to a number of risks and uncertainties, including those described in Item 1A - "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onFebruary 25, 2021 . As ofMarch 31, 2021 , our total assets were approximately$6.2 billion (after accumulated depreciation of approximately$1.1 billion ) with properties located in 44 states andOntario, Canada . Our total investments (a non-GAAP financial measure) were approximately$6.5 billion atMarch 31, 2021 . See "Non-GAAP Financial Measures" for the calculation of total investments and reconciliation of total investments to "Total assets" in the consolidated balance sheet atMarch 31, 2021 andDecember 31, 2020 . We group our investments into two reportable segments, Experiential and Education. As ofMarch 31, 2021 , our Experiential investments comprised$5.9 billion , or 91%, and our Education investments comprised$0.6 billion , or 9%, of our total investments. As ofMarch 31, 2021 , our Experiential segment consisted of the following property types (owned or financed): •177 theatre properties; •55 eat & play properties (including seven theatres located in entertainment districts); •18 attraction properties; •13 ski properties; •six experiential lodging properties; •one gaming property; •three cultural properties; and •seven fitness & wellness properties. 30 -------------------------------------------------------------------------------- As ofMarch 31, 2021 , our owned Experiential real estate portfolio consisted of approximately 19.3 million square feet, which was 92.8% leased and included$94.8 million in property under development and$20.2 million in undeveloped land inventory. As ofMarch 31, 2021 , our Education segment consisted of the following property types (owned or financed): •65 early childhood education center properties; and •9 private school properties. As ofMarch 31, 2021 , our owned Education real estate portfolio consisted of approximately 1.4 million square feet, which was 100% leased and included$3.0 million in undeveloped land inventory.
The combined owned portfolio consisted of 20.7 million square feet and was 93.3% leased.
COVID-19 Update We continue to be subject to risks and uncertainties as a result of the COVID-19 pandemic. The outbreak of the COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The COVID-19 pandemic has severely impacted experiential real estate properties, given that such properties involve congregate social activity and discretionary consumer spending. The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict, as there are no comparable recent events that provide guidance as to how to measure or predict the effect the pandemic may have on our business. Approximately 96% of the Company's non-theatre and 71% of the Company's theatre locations were open for business as ofApril 30, 2021 . Certain theatre locations remain closed due to local restrictions or operator decision to close as a result of the impact of the COVID-19 pandemic, specifically the decision by many major studios to delay the release of blockbuster movies in hopes that larger audiences will be available as additional markets open. It is expected that byMay 21, 2021 approximately 98% of our theatres will be open based on the reopening schedule recently announced by Regal Cinemas ("Regal"), with bothNew York andCalifornia now allowing theatres to reopen. The severity of the impact of the COVID-19 pandemic on our business will depend on several factors, including, but not limited to, the scope, severity and duration of the pandemic, the actions taken to contain the outbreak or mitigate its impact, the development and distribution of vaccines and the efficacy of those vaccines, the public's confidence in the health and safety measures implemented by our tenants and borrowers, and the direct and indirect economic effects of the outbreak and containment measures, all of which are uncertain and cannot be predicted. During 2020 and the first quarter of 2021, the COVID-19 pandemic negatively affected our business, and could continue to have material adverse effects on our financial condition, results of operations and cash flows. Our Consolidated Financial Statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and reported amounts of revenue and expenses during the reporting periods presented. We considered the impact of the COVID-19 pandemic on the assumptions and estimates used in determining our financial condition and results of operations for the three months endedMarch 31, 2021 . The following were adverse impacts to our financial statements during the three months endedMarch 31, 2021 : •We continued to recognize revenue on a cash basis for certain tenants includingAmerican-Multi Cinema, Inc. ("AMC") and Regal, a subsidiary of Cineworld Group. •We reduced rental revenue by$4.2 million due to rent abatements. •We have deferred approximately$57.0 million of amounts due from tenants and$2.1 million due from borrowers that were booked as receivables as ofMarch 31, 2021 . Additionally, we have amounts due from tenants that were not booked as receivables because the full amounts were not deemed probable of collection as a result of the COVID-19 pandemic. The amounts not booked as receivables remain obligations of the tenants and will be recognized as revenue when received. The repayment terms for all of these deferments vary by tenant or borrowers. 31 -------------------------------------------------------------------------------- •We continue to be in the Covenant Relief Period under the agreement which governs our unsecured revolving credit facility and our unsecured term loan facility ("Consolidated Credit Agreement") and the agreement which governs our private placement notes ("Note Purchase Agreement"). During the Covenant Relief Period, our obligation to comply with certain covenants under these agreements has been waived in light of the uncertainty related to impacts of the COVID-19 pandemic on us and our tenants and borrowers. We pay higher interest costs during the Covenant Relief Period. The amendments to the Consolidated Credit Agreement and Note Purchase Agreement also impose additional restrictions on us during the Covenant Relief Period, including limitations on making investments, incurring indebtedness, making capital expenditures, paying dividends or making other distributions, repurchasing our shares, voluntarily prepaying certain indebtedness, encumbering certain assets and maintaining a minimum liquidity amount, in each case subject to certain exceptions. The term "Covenant Relief Period," as used in this Quarterly Report on Form 10-Q, generally means the period of time beginning onJune 29, 2020 and ending on (i)December 31, 2021 , in the case of our Consolidated Credit Agreement, or (ii)October 1, 2021 (subject to extension toJanuary 1, 2022 at our election, subject to certain conditions), in the case of our Note Purchase Agreement governing our private placement notes. We have the right under certain circumstances to terminate the Covenant Relief Period earlier. •In connection with the loan amendments discussed above, certain of our key subsidiaries guaranteed our obligations based on our unsecured debt ratings. If our unsecured debt rating is further downgraded by Moody's, we will be required to pledge the equity interests in certain subsidiary guarantors to secure our obligations under our unsecured credit facilities and private placement notes. The monthly cash dividends to common shareholders were suspended following the common share dividend paid onMay 15, 2020 to shareholders of record as ofApril 30, 2020 . The suspension of the monthly cash dividend to common shareholders will continue through the Covenant Relief Period, except as may be necessary to maintain REIT status and to not owe income tax. There can be no assurances as to our ability to reinstitute cash dividend payments to common shareholders or the timing thereof. Collections of rent and interest were impacted during the quarter by the COVID-19 pandemic. For the three months endedMarch 31, 2021 , tenants and borrowers paid approximately 72% contractual cash revenue (including approximately$1.5 million in deferred rent from cash basis tenants and from tenants for which the deferred payments were not previously recognized as revenue). In addition, during the three months endedMarch 31, 2021 , we collected$29.5 million of deferred rent and interest from accrual basis tenants and borrowers that reduced related accounts and interest receivable. Contractual cash revenue is an operational measure and represents aggregate cash payments for which we are entitled under existing contracts, excluding the impact of any temporary abatements or deferrals, percentage rent (rents received over base amounts), non-cash revenue and revenue from taxable REIT subsidiaries ("TRSs"). While deferments for this and future periods delay rent or mortgage payments, these deferments generally do not release customers from the obligation to pay the deferred amounts in the future. Deferred rent amounts are reflected in our financial statements as accounts receivable if collection is determined to be probable or will be recognized when received as variable lease payments if collection is determined to not be probable, while deferred mortgage payments are reflected as mortgage notes and related accrued interest receivable, less any allowance for credit loss. Certain agreements with tenants where remaining lease terms are extended, or other changes are made that do not qualify for the treatment in theFinancial Accounting Standards Board ("FASB") Staff Q&A on Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic, are treated as lease modifications. In these circumstances upon an executed lease modification, if the tenant is not being recognized on a cash basis, the contractual rent reflected in accounts receivable and the straight-line rent receivable will be amortized over the remaining term of the lease against rental revenue. In limited cases, tenants may be entitled to the abatement of rent during governmentally imposed prohibitions on business operations which is recognized in the period to which it relates, or we may provide rent concessions to tenants. In cases where we provide concessions to tenants to which they are not otherwise entitled, those amounts are recognized in the period in which the concession is granted unless the changes are accounted for as lease modifications. 32 -------------------------------------------------------------------------------- Operating Results Our total revenue, net (loss) income available to common shareholders per diluted share and Funds From Operations As Adjusted ("FFOAA") per diluted share (a non-GAAP financial measure) are detailed below for the three months endedMarch 31, 2021 and 2020 (in millions, except per share information): Three Months Ended March 31, 2021 2020 Change Total revenue$ 111.8 $ 151.0 (26) %
Net (loss) income available to common shareholders per diluted share
$ (0.04) $ 0.40 (110) % FFOAA per diluted share $ 0.48$ 0.97 (51) % The major factors impacting our results for the three months endedMarch 31, 2021 , as compared to the three months endedMarch 31, 2020 were as follows: •The effects of the COVID-19 pandemic as described above; •The effect of write-offs of straight-line receivables of approximately$12.5 million recognized during the three months endedMarch 31, 2020 ; •The effect of property dispositions and mortgage note payoffs that occurred in 2021 and 2020; •The increase in property operating expenses related to vacant properties; •The decrease in other income and other expenses primarily due to the government-required closure of theKartrite Resort and Indoor Waterpark inSullivan County, New York due to the COVID-19 pandemic in mid-March of 2020; •The decrease in credit loss (benefit) expense; and •The decrease in common shares outstanding. For further detail on items impacting our operating results, see the section below titled "Results of Operations". FFOAA is a non-GAAP financial measure. For the definitions and further details on the calculations of FFOAA and certain other non-GAAP financial measures, see the section below titled "Non-GAAP Financial Measures."
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States ("GAAP") requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, management has made its best estimates and assumptions that affect the reported assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions and estimates relate to the valuation of real estate, accounting for real estate acquisitions, assessing the collectibility of receivables and the credit loss related to mortgage and other notes receivable. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates. A summary of critical accounting policies is included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . For the three months endedMarch 31, 2021 , there were no changes to critical accounting policies. Recent Developments Investment Spending Our investment spending during the three months endedMarch 31, 2021 and 2020 totaled$52.1 million and$41.9 million , respectively, and is detailed below (in thousands): 33 --------------------------------------------------------------------------------
Three Months Ended March 31, 2021 Mortgage Notes Total Investment or Notes Investment in Operating Segment Spending New Development Re-development Asset Acquisition Receivable Joint Ventures Experiential: Theatres$ 2,440 $ 2,382 $ 58 $ - $ - $ - Eat & Play 30,847 4,061 111 26,675 - - Attractions 14 - 14 - - - Ski 1,013 - - - 1,013 - Experiential Lodging 11,993 6,680 3,688 - - 1,625 Cultural 4,383 - 4 - 4,379 - Fitness & Wellness 1,423 - - - 1,423 - Total Experiential 52,113 13,123 3,875 26,675 6,815 1,625 Education: Total Education - - - - - - Total Investment Spending$ 52,113 $ 13,123$ 3,875 $ 26,675$ 6,815 $ 1,625 Three Months Ended March 31, 2020 Mortgage Notes Total Investment or Notes Investment in Operating Segment Spending New Development Re-development Asset Acquisition Receivable Joint Ventures Experiential: Theatres$ 24,108 $ 650$ 1,350 $ 22,108 $ - $ - Eat & Play 5,073 4,985 88 - - - Attractions 959 - 959 - - - Experiential Lodging 9,797 9,580 217 - - - Cultural 6 - 6 - - - Fitness & Wellness 1,999 - - - 1,999 - Total Experiential 41,942 15,215 2,620 22,108 1,999 - Education: Early Childhood Education Centers 3 - - - 3 - Total Education 3 - - - 3 -
Total Investment Spending
2,620 $ 22,108$ 2,002 $ - The above amounts include$0.6 million and$0.3 million in capitalized interest and$25 thousand and$39 thousand in capitalized other general and administrative direct project costs for the three months endedMarch 31, 2021 and 2020, respectively. Excluded from the table above is approximately$0.8 million and$0.9 million of maintenance capital expenditures and other spending for the three months endedMarch 31, 2021 and 2020, respectively. We limited our investment spending during the three months endedMarch 31, 2021 to enhance our liquidity position in light of the negative impact of the COVID-19 pandemic. We will continue to limit our investment spending during the Covenant Relief Period under the amendments to the agreements governing our bank credit facilities and private placement notes as discussed above. 34 --------------------------------------------------------------------------------
Dispositions
During the three months ended
On
Results of Operations
Three months ended
Analysis of Revenue
The following table summarizes our total revenue (dollars in thousands):
Three Months Ended March 31, 2021 2020 Change Minimum rent (1)$ 94,190 $ 138,219 $ (44,029) Percentage rent 2,030 2,757 (727) Straight-line rent (2) 1,289 (9,708) 10,997 Tenant reimbursements 4,822 3,698 1,124 Other rental revenue 283 77 206 Total Rental Revenue$ 102,614 $ 135,043 $ (32,429) Other income (3) 678 7,573 (6,895) Mortgage and other financing income 8,473 8,396 77 Total revenue$ 111,765 $ 151,012 $ (39,247) (1) For the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 , the decrease in minimum rent resulted primarily from the impact of the COVID-19 pandemic, with a decrease of$34.5 million on existing properties mostly due to restructured agreements, rent recognized on a cash basis, deferred rent not recognized because collection was determined not probable and rent abatements. In addition, there was a decrease in rental revenue of$5.1 million from property dispositions and$5.3 million due to vacant properties. This was partially offset by an increase in minimum rent of$0.9 million related to property acquisitions and developments completed in 2021 and 2020 as well as scheduled rent increases.
During the three months ended
(2) The increase in straight-line rent was primarily due to write-offs totaling$12.5 million recognized during the three months endedMarch 31, 2020 , which was comprised of$4.5 million of straight-line accounts receivable and$8.0 million of sub-lessor ground lease straight-line accounts receivable due to the COVD-19 pandemic. This increase was partially offset by a reduction in straight-line rental revenue due to revenue from several tenants being recognized on a cash basis.
(3) The decrease in other income for the three months ended
35 --------------------------------------------------------------------------------
Analysis of Expenses and Other Line Items
The following table summarizes our expenses and other line items (dollars in thousands): Three Months Ended March 31, 2021 2020 Change Property operating expense (1)$ 15,313 $ 13,093 $ 2,220 Other expense (2) 2,552 9,534 (6,982) General and administrative expense 11,336 10,988 348 Costs associated with loan refinancing or payoff 241 - 241 Interest expense, net (3) 39,194 34,753 4,441 Transaction costs 548 1,075 (527) Credit loss (benefit) expense (4) (2,762) 1,192 (3,954) Depreciation and amortization (5) 40,326 43,810 (3,484) Equity in loss from joint ventures (1,431) (420) (1,011) Gain on sale of real estate 201 220 (19) Income tax (expense) benefit (407) 751 (1,158) Preferred dividend requirements (6,034) (6,034) - (1) Our property operating expenses arise from the operations of our retail centers and other specialty properties as well as operating ground lease expense, vacancy expense and the gross up of tenant reimbursed expenses. The increase in property operating expenses resulted primarily from an increase in costs due to higher vacancies. (2) The decrease in other expenses for the three months endedMarch 31, 2021 related primarily to a decrease in operating expenses as a result of the closure of theKartrite Resort due to the COVID-19 pandemic. (3) The increase in interest expense, net for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 , resulted primarily from an increase in the weighted average amount outstanding on the revolving credit facility borrowed for precautionary reasons, as well as an increase in the weighted average interest rate on outstanding debt and a decrease in interest income from short-term investments related to cash on hand. This was partially offset by an increase in interest cost capitalized on development projects. (4) The change in the credit loss benefit (expense) for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 was primarily due to the expectation in the credit loss model of the timing of the economic recovery from the impacts of the COVID-19 pandemic.
(5) The decrease in depreciation and amortization expense resulted primarily from property dispositions that occurred during 2020 and 2021 as well as property impairments that occurred during 2020. This decrease was partially offset by acquisitions and developments completed in 2020 and 2021.
Liquidity and Capital Resources
Cash and cash equivalents were$538.1 million atMarch 31, 2021 . In addition, we had restricted cash of$5.9 million atMarch 31, 2021 . Of the restricted cash atMarch 31, 2021 ,$4.9 million related to cash held for our tenants' off-season rent reserves and$1.0 million related primarily to escrow deposits required for property management agreements or held for potential acquisitions and redevelopments. Mortgage Debt, Senior Notes, Unsecured Revolving Credit Facility and Unsecured Term Loan Facility AtMarch 31, 2021 , we had total debt outstanding of$3.2 billion of which 99% was unsecured. AtMarch 31, 2021 , we had outstanding$2.4 billion in aggregate principal amount of unsecured senior notes (excluding the private placement notes discussed below) ranging in interest rates from 3.75% to 5.25%. The notes contain various covenants, including: (i) a limitation on incurrence of any debt that would cause the ratio of our debt to adjusted total assets to exceed 60%; (ii) a limitation on incurrence of any secured debt that would cause the ratio 36 -------------------------------------------------------------------------------- of secured debt to adjusted total assets to exceed 40%; (iii) a limitation on incurrence of any debt that would cause our debt service coverage ratio to be less than 1.5 times; and (iv) the maintenance at all times of our total unencumbered assets such that they are not less than 150% of our outstanding unsecured debt. In light of the continuing financial and operational impacts of the COVID-19 pandemic on us, our tenants and borrowers, during the year endedDecember 31, 2020 , we amended our Consolidated Credit Agreement, which governs our unsecured revolving credit facility and our unsecured term loan facility. The amendments modified certain provisions and waived our obligation to comply with certain covenants under this debt agreement throughDecember 31, 2021 . We can elect to terminate the Covenant Relief Period early, subject to certain conditions. The interest rates on the revolving credit facility and term loan facility both during and after the Covenant Relief Period continue to be dependent on our unsecured debt ratings. During the year endedDecember 31, 2020 , we further amended our Note Purchase Agreement, which governs our private placement notes. The amendments modified certain provisions and waived our obligation to comply with certain covenants under this debt agreement throughOctober 1, 2021 . We can elect to extend such period throughJanuary 1, 2022 and may elect to terminate the Covenant Relief Period early, subject to certain conditions. AtMarch 31, 2021 , we had$90.0 million outstanding balance under our$1.0 billion unsecured revolving credit facility with interest at a floating rate of LIBOR plus 1.625% (with a LIBOR floor of 0.50%), which was 2.125%, with a facility fee of 0.375%. After the Covenant Relief Period and based on our current unsecured debt ratings, the interest rate is scheduled to return to LIBOR plus 1.20% (with a LIBOR floor of zero) and the facility fee will be 0.25%. OnApril 9, 2021 , due to stronger collections, disposition proceeds and significant liquidity, we used$90.0 million of our cash on hand to pay off the remaining borrowings under our unsecured revolving credit facility. AtMarch 31, 2021 , the unsecured term loan facility had a balance of$400.0 million with interest at a floating rate of LIBOR plus 2.00% (with a LIBOR floor of 0.50%), which was 2.50%. After the Covenant Relief Period and based on our current unsecured debt ratings, the interest rate is scheduled to return to LIBOR plus 1.35% (with a LIBOR floor of zero). As ofMarch 31, 2021 , all of this LIBOR-based debt was fixed with interest rate swaps fromApril 5, 2019 toFebruary 7, 2022 . During the Covenant Relief Period and based on our current unsecured debt ratings, the interest rate swaps are fixed at 4.40% for$350.0 million of borrowings and 4.60% for the remaining$50.0 million of borrowings, and after the Covenant Relief Period will be 3.40% for$350.0 million of borrowings and 3.60% for the remaining$50.0 million of borrowings, however these rates are subject to change based on the Company's unsecured debt ratings. AtMarch 31, 2021 , we had outstanding$316.2 million of senior unsecured notes that were issued in a private placement transaction. The private placement notes were issued in two tranches with$148.0 million dueAugust 22, 2024 , and$192.0 million dueAugust 22, 2026 . As noted above, during the year endedDecember 31, 2020 , we amended the Note Purchase Agreement which governs our private placement notes to modify certain provisions and obtain covenant waivers. AtMarch 31, 2021 , the interest rates for the private placement notes were 5.60% and 5.81% for the Series A notes due 2024 and the Series B notes due 2026, respectively. After the Covenant Relief Period, the interest rates for the private placement notes are scheduled to return to 4.35% and 4.56% for the Series A notes and the Series B notes, respectively. During the three months endedMarch 31, 2021 , we used a portion of our cash proceeds from property sales to reduce the principal of our private placement notes by$23.8 million in accordance with the above amendments to the Note Purchase Agreement. Our unsecured credit facilities and the private placement notes contain financial covenants or restrictions that limit our levels of consolidated debt, secured debt, investment levels outside certain categories, stock repurchases and dividend distributions and require us to maintain a minimum consolidated tangible net worth and meet certain coverage levels for fixed charges and debt service. The amendments to these debt agreements imposed a new minimum liquidity financial covenant during the Covenant Relief Period, provided relief from compliance with certain other financial covenants during the Covenant Relief Period and permanently modified certain other financial covenants. The amendments also imposed additional restrictions on us during the Covenant Relief Period, including limitations on making investments, incurring indebtedness, making capital expenditures and paying dividends and making other distributions, repurchasing our shares, voluntarily prepaying certain indebtedness, encumbering certain 37 -------------------------------------------------------------------------------- assets and maintaining a minimum liquidity amount, in each case subject to certain exceptions. In addition, the amendments required us to cause certain of our key subsidiaries to guarantee our obligations based on our unsecured debt ratings, and we are required to pledge the equity interests of such subsidiary guarantors if certain subsequent events occur; however, both of these requirements end when the Covenant Relief Period is over. Additionally, these debt instruments contain cross-default provisions if we default under other indebtedness exceeding certain amounts. Those cross-default thresholds vary from$50.0 million to$75.0 million , depending upon the debt instrument. We were in compliance with all financial and other covenants under our debt instruments atMarch 31, 2021 . Our principal investing activities are acquiring, developing and financing Experiential and Education properties. These investing activities have generally been financed with senior unsecured notes, as well as the proceeds from equity offerings. Our unsecured revolving credit facility is also used to finance the acquisition or development of properties, and to provide mortgage financing. We have and expect to continue to issue debt securities in public or private offerings. We have and may in the future assume mortgage debt in connection with property acquisitions or, after the expiration of the Covenant Relief Period, incur new mortgage debt on existing properties. We may also issue equity securities in connection with acquisitions. Continued growth of our real estate investments and mortgage financing portfolios will depend in part on our continued ability to access funds through additional borrowings and securities offerings and, to a lesser extent, our ability to assume debt in connection with property acquisitions. We may also fund investments with the proceeds from asset dispositions. Liquidity Requirements Short-term liquidity requirements consist primarily of normal recurring corporate operating expenses, debt service requirements and distributions to shareholders. We have historically met these requirements primarily through cash provided by operating activities. The table below summarizes our cash flows (dollars in thousands): Three Months Ended March 31, 2021 2020 Net cash provided by operating activities $ 78,306 $ 89,044 Net cash used by investing activities (29,894) (39,759) Net cash (used) provided by financing activities (532,435) 649,237 We currently anticipate that our cash on hand, cash from operations and proceeds from asset dispositions will provide adequate liquidity to meet our financial commitments for the next 12 months, including to fund our operations, make interest and principal payments on our debt, allow distributions to our preferred shareholders, and allow distributions to our common shareholders to avoid corporate level federal income or excise tax in accordance with REIT Internal Revenue Code requirements. We may also use funds available under our unsecured revolving credit facility, subject to compliance with financial covenants. As discussed above, we have agreed to rent and mortgage payment deferral arrangements with most of our customers as a result of the COVID-19 pandemic. Under these deferral arrangements, our customers are required to resume rent and mortgage payments at negotiated times, and begin repaying deferred amount under negotiated schedules, which will begin at various times in the future. In addition, the continuing impact of the COVID-19 pandemic may result in further extensions or adjustments for our customers, which we cannot predict at this time. In the near term, we believe we can fund our short-term liquidity requirements primarily with cash on hand, including funds borrowed under our unsecured revolving credit facility. Commitments As ofMarch 31, 2021 , we had 18 development projects with commitments to fund an aggregate of approximately$98.9 million , of which approximately$31.7 million is expected to be funded in 2021. Development costs are advanced by us in periodic draws. If we determine that construction is not being completed in accordance with the terms of the development agreement, we can discontinue funding construction draws. We have agreed to lease the properties to the operators at pre-determined rates upon completion of construction. 38 -------------------------------------------------------------------------------- We have certain commitments related to our mortgage notes and notes receivable investments that we may be required to fund in the future. We are generally obligated to fund these commitments at the request of the borrower or upon the occurrence of events outside of our direct control. As ofMarch 31, 2021 , we had two mortgage notes and one note receivable with commitments totaling approximately$23.9 million of which approximately$19.5 million is expected to be funded in 2021. If commitments are funded in the future, interest will be charged at rates consistent with the existing investments.
In connection with construction of our development projects and related
infrastructure, certain public agencies require posting of surety bonds to
guarantee that our obligations are satisfied. These bonds expire upon the
completion of the improvements or infrastructure. As of
Liquidity Analysis As noted above, we had$90.0 million outstanding under our unsecured revolving credit facility atMarch 31, 2021 . OnApril 9, 2021 , due to stronger collections, disposition proceeds and significant liquidity, we used$90.0 million of our cash on hand to pay off our remaining borrowings under our unsecured revolving credit facility. We believe our unrestricted cash position and borrowing capacity on our unsecured revolving credit facility will provide us with sufficient liquidity and aid us in this time of market disruption. We have no scheduled debt payments due until 2022. We currently believe that we will be able to repay, extend, refinance or otherwise settle our debt maturities as the debt comes due and that we will be able to fund our remaining commitments, as necessary. However, there can be no assurance that additional financing or capital will be available, or that terms will be acceptable or advantageous to us, particularly in light of the current economic uncertainty caused by the COVID-19 pandemic. Our primary use of cash after paying operating expenses, debt service, distributions to shareholders, funding share repurchases and funding existing commitments is in growing our investment portfolio through the acquisition, development and financing of additional properties. We expect to finance these investments with borrowings under our unsecured revolving credit facility as well as debt and equity financing alternatives or proceeds from asset dispositions. The availability and terms of any such financing or sales will depend upon market and other conditions, which have been negatively impacted by the COVID-19 pandemic. If we borrow the maximum amount available under our unsecured revolving credit facility, there can be no assurance that we will be able to obtain additional or substitute investment financing. We may also assume mortgage debt in connection with property acquisitions. Our investment spending and uses of cash during the Covenant Relief Period will be subject to limitations under the amendments to the agreements governing our Consolidated Credit Agreement and Note Purchase Agreement as discussed above. In addition, in certain circumstances, we will be required to apply 100% of the proceeds, net of certain costs, received during the Covenant Relief Period from certain sales and dispositions, debt issuances or equity issuances, in each case, subject to certain exceptions, to repay amounts outstanding under our Consolidated Credit Agreement (as applicable) and Note Purchase Agreement. Capital Structure We believe that our shareholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet as measured primarily by our net debt to adjusted EBITDAre ratio (see "Non-GAAP Financial Measures" for definitions). We also seek to maintain conservative interest, fixed charge, debt service coverage and net debt to gross asset ratios. Our net debt to adjusted EBITDAre ratio was not meaningful atMarch 31, 2021 given the temporary disruption caused by the COVID-19 pandemic and the associated accounting for tenant rent deferrals and other lease modifications. Our net debt to gross assets ratio was 39% as ofMarch 31, 2021 (see "Non-GAAP financial measures" for calculation). 39 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
Funds From Operations (FFO), Funds From Operations As Adjusted (FFOAA) and Adjusted Funds From Operations (AFFO)The National Association of Real Estate Investment Trusts ("NAREIT") developed FFO as a relative non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. Pursuant to the definition of FFO by theBoard of Governors of NAREIT, we calculate FFO as net (loss) income available to common shareholders, computed in accordance with GAAP, excluding gains and losses from disposition of real estate and impairment losses on real estate, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships, joint ventures and other affiliates. Adjustments for unconsolidated partnerships, joint ventures and other affiliates are calculated to reflect FFO on the same basis. We have calculated FFO for all periods presented in accordance with this definition. In addition to FFO, we present FFOAA and AFFO. FFOAA is presented by adding to FFO costs associated with loan refinancing or payoff, transaction costs, severance expense, preferred share redemption costs, impairment of operating lease right-of-use assets and credit loss (benefit) expense and subtracting gain on insurance recovery and deferred income tax (benefit) expense. AFFO is presented by adding to FFOAA non-real estate depreciation and amortization, deferred financing fees amortization, share-based compensation expense to management and Trustees and amortization of above and below market leases, net and tenant allowances; and subtracting maintenance capital expenditures (including second generation tenant improvements and leasing commissions), straight-lined rental revenue (removing the impact of straight-line ground sublease expense), and the non-cash portion of mortgage and other financing income. FFO, FFOAA and AFFO are widely used measures of the operating performance of real estate companies and are provided here as supplemental measures to GAAP net (loss) income available to common shareholders and earnings per share, and management provides FFO, FFOAA and AFFO herein because it believes this information is useful to investors in this regard. FFO, FFOAA and AFFO are non-GAAP financial measures. FFO, FFOAA and AFFO do not represent cash flows from operations as defined by GAAP and are not indicative that cash flows are adequate to fund all cash needs and are not to be considered alternatives to net income or any other GAAP measure as a measurement of the results of our operations or our cash flows or liquidity as defined by GAAP. It should also be noted that not all REITs calculate FFO, FFOAA and AFFO the same way so comparisons with other REITs may not be meaningful. 40 -------------------------------------------------------------------------------- The following table summarizes our FFO, FFOAA and AFFO including per share amounts for FFO and FFOAA, for the three months endedMarch 31, 2021 and 2020 and reconciles such measures to net income available to common shareholders, the most directly comparable GAAP measure (unaudited, in thousands, except per share information):
Three Months Ended
2021 2020
FFO:
Net (loss) income available to common shareholders of
(2,654)$ 31,084 Gain on sale of real estate
(201) (220)
Real estate depreciation and amortization 40,109 43,525 Allocated share of joint venture depreciation 354 383 FFO available to common shareholders of EPR Properties $
37,608
FFO available to common shareholders of EPR Properties$ 37,608 $ 74,772 Add: Preferred dividends for Series C preferred shares - 1,939 Add: Preferred dividends for Series E preferred shares - 1,939 Diluted FFO available to common shareholders of EPR Properties $
37,608
FFOAA:
FFO available to common shareholders of EPR Properties$ 37,608 $ 74,772 Costs associated with loan refinancing or payoff 241 - Transaction costs 548 1,075 Credit loss (benefit) expense (2,762) 1,192 Gain on insurance recovery (included in other income) (30) - Deferred income tax benefit - (1,113) FFOAA available to common shareholders of EPR Properties $
35,605
FFOAA available to common shareholders of EPR Properties$ 35,605 $ 75,926 Add: Preferred dividends for Series C preferred shares - 1,939 Add: Preferred dividends for Series E preferred shares - 1,939
Diluted FFOAA available to common shareholders of
35,605
AFFO:
FFOAA available to common shareholders of EPR Properties$ 35,605 $ 75,926 Non-real estate depreciation and amortization 217 285 Deferred financing fees amortization 1,547 1,634 Share-based compensation expense to management and trustees 3,784 3,509 Amortization of above and below market leases, net and tenant allowances (96) (152) Maintenance capital expenditures (1) (756) (928) Straight-lined rental revenue (1,288) 9,708 Straight-lined ground sublease expense 84 176 Non-cash portion of mortgage and other financing income (171) (91) AFFO available to common shareholders of EPR Properties $
38,926
41 -------------------------------------------------------------------------------- Three Months Ended March 31, 2021 2020 FFO per common share: Basic$ 0.50 $ 0.95 Diluted 0.50 0.95 FFOAA per common share: Basic$ 0.48 $ 0.97 Diluted 0.48 0.97 Shares used for computation (in thousands): Basic 74,627 78,467 Diluted 74,669 78,476 Weighted average shares outstanding-diluted EPS 74,669 78,476 Effect of dilutive Series C preferred shares - 2,232 Effect of dilutive Series E preferred shares - 1,664
Adjusted weighted average shares outstanding-diluted Series C and Series E
74,669 82,372 Other financial information: Dividends per common share $ -$ 1.1325
(1) Includes maintenance capital expenditures and certain second-generation tenant improvements and leasing commissions.
The effect of the conversion of our convertible preferred shares is calculated using the if-converted method and the conversion which results in the most dilution is included in the computation of per share amounts. The conversion of the 5.75% Series C cumulative convertible preferred shares and the 9.00% Series E cumulative convertible preferred shares would be dilutive to FFO and FFOAA per share for the three months endedMarch 31, 2020 . Therefore, the additional common shares that would result from the conversion and the corresponding add-back of the preferred dividends declared on those shares are included in the calculation of diluted FFO and FFOAA per share for this period. Net Debt Net Debt represents debt (reported in accordance with GAAP) adjusted to exclude deferred financing costs, net and reduced for cash and cash equivalents. By excluding deferred financing costs, net and reducing debt for cash and cash equivalents on hand, the result provides an estimate of the contractual amount of borrowed capital to be repaid, net of cash available to repay it. We believe this calculation constitutes a beneficial supplemental non-GAAP financial disclosure to investors in understanding our financial condition. Our method of calculating Net Debt may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. Gross Assets Gross Assets represents total assets (reported in accordance with GAAP) adjusted to exclude accumulated depreciation and reduced for cash and cash equivalents. By excluding accumulated depreciation and reducing cash and cash equivalents, the result provides an estimate of the investment made by us. We believe that investors commonly use versions of this calculation in a similar manner. Our method of calculating Gross Assets may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. 42 -------------------------------------------------------------------------------- Net Debt to Gross Assets Net Debt to Gross Assets is a supplemental measure derived from non-GAAP financial measures that we use to evaluate capital structure and the magnitude of debt to gross assets. We believe that investors commonly use versions of this ratio in a similar manner. Our method of calculating Net Debt to Gross Assets may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs.
EBITDAre
NAREIT developed EBITDAre as a relative non-GAAP financial measure of REITs, independent of a company's capital structure, to provide a uniform basis to measure the enterprise value of a company. Pursuant to the definition of EBITDAre by theBoard of Governors of NAREIT, we calculate EBITDAre as net (loss) income, computed in accordance with GAAP, excluding interest expense (net), income tax (benefit) expense, depreciation and amortization, gains and losses from disposition of real estate, impairment losses on real estate, costs associated with loan refinancing or payoff and adjustments for unconsolidated partnerships, joint ventures and other affiliates. Management provides EBITDAre herein because it believes this information is useful to investors as a supplemental performance measure as it can help facilitate comparisons of operating performance between periods and with other REITs. Our method of calculating EBITDAre may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. EBITDAre is not a measure of performance under GAAP, does not represent cash generated from operations as defined by GAAP and is not indicative of cash available to fund all cash needs, including distributions. This measure should not be considered an alternative to net income or any other GAAP measure as a measurement of the results of our operations or cash flows or liquidity as defined by GAAP. Adjusted EBITDAre Management uses Adjusted EBITDAre in its analysis of the performance of the business and operations of the Company. Management believes Adjusted EBITDAre is useful to investors because it excludes various items that management believes are not indicative of operating performance, and that it is an informative measure to use in computing various financial ratios to evaluate the Company. We define Adjusted EBITDAre as EBITDAre (defined above) for the quarter excluding gain on insurance recovery, severance expense, credit loss (benefit) expense, transaction costs, impairment losses on operating lease right-of-use assets and prepayment fees. For the three months endedMarch 31, 2020 , Adjusted EBITDAre was further adjusted to reflect the write-offs of straight-line rent receivables against rental revenue of$12.5 million related to the COVID-19 disruption. Our method of calculating Adjusted EBITDAre may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. Adjusted EBITDAre is not a measure of performance under GAAP, does not represent cash generated from operations as defined by GAAP and is not indicative of cash available to fund all cash needs, including distributions. This measure should not be considered as an alternative to net income or any other GAAP measure as a measurement of the results of our operations or cash flows or liquidity as defined by GAAP. Reconciliations of debt, total assets and net income (all reported in accordance with GAAP) to Net Debt, Gross Assets, Net Debt to Gross Assets, EBITDAre and Adjusted EBITDAre (each of which is a non-GAAP financial measure), as applicable, are included in the following tables (unaudited, in thousands): 43 --------------------------------------------------------------------------------
March 31, 2021 2020 Net Debt: Debt$ 3,171,193 $ 3,854,062 Deferred financing costs, net 35,036 35,933 Cash and cash equivalents (538,077) (1,225,122) Net Debt$ 2,668,152 $ 2,664,873 Gross Assets: Total Assets$ 6,208,102 $ 7,255,340 Accumulated depreciation 1,101,727 1,023,993 Cash and cash equivalents (538,077) (1,225,122) Gross Assets$ 6,771,752 $ 7,054,211 Net Debt to Gross Assets 39 % 38 % Three Months Ended March 31, 2021 2020 EBITDAre and Adjusted EBITDAre: Net income$ 3,380 $ 37,118 Interest expense, net 39,194 34,753 Income tax expense (benefit) 407 (751) Depreciation and amortization 40,326 43,810 Gain on sale of real estate (201) (220) Costs associated with loan refinancing or payoff 241 - Allocated share of joint venture depreciation 354 383 Allocated share of joint venture interest expense 789 735 EBITDAre$ 84,490 $ 115,828 Gain on insurance recovery (1) (30) - Transaction costs 548 1,075 Credit loss (benefit) expense (2,762) 1,192 Straight-line receivable write-offs from prior periods (2) - 12,532 Adjusted EBITDAre$ 82,246 $ 130,627
(1) Included in "Other income" in the consolidated statements of (loss) income and comprehensive income for the quarter. Other income includes the following:
Three
Months Ended
2021 2020
Income from settlement of foreign currency swap contracts $ 52
$ 368 Gain on insurance recovery 30 - Operating income from operated properties 295 7,201 Miscellaneous income 301 4 Other income $ 678$ 7,573
(2) Included in "Rental revenue" in the accompanying consolidated statements of (loss) income and comprehensive income. Rental revenue includes the following:
Three
Months Ended
2021 2020 Minimum rent$ 94,190 $ 138,219 Tenant reimbursements 4,822 3,698 Percentage rent 2,030 2,757 Straight-line rental revenue 1,289 2,824 Straight-line receivable write-offs from prior periods - (12,532) Other rental revenue 283 77 Rental revenue$ 102,614 $ 135,043 44
-------------------------------------------------------------------------------- Total Investments Total investments is a non-GAAP financial measure defined as the sum of the carrying values of real estate investments (before accumulated depreciation), land held for development, property under development, mortgage notes receivable (including related accrued interest receivable), investment in joint ventures, intangible assets, gross (before accumulated amortization and included in other assets) and notes receivable and related accrued interest receivable, net (included in other assets). Total investments is a useful measure for management and investors as it illustrates across which asset categories the Company's funds have been invested. Our method of calculating total investments may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. A reconciliation of total investments to total assets (computed in accordance with GAAP) is included in the following table (unaudited, in thousands): December 31, March 31, 2021 2020 Total Investments: Real estate investments, net of accumulated depreciation$ 4,801,106 $ 4,851,302 Add back accumulated depreciation on real estate investments 1,101,727 1,062,087 Land held for development 23,225 23,225 Property under development 94,822 57,630 Mortgage notes and related accrued interest receivable 364,969 365,628 Investment in joint ventures 28,313 28,208 Intangible assets, gross (1) 57,962 57,962 Notes receivable and related accrued interest receivable, net (1) 7,284 7,300 Total investments$ 6,479,408 $ 6,453,342 Total investments$ 6,479,408 $ 6,453,342 Operating lease right-of-use assets 179,113 163,766 Cash and cash equivalents 538,077 1,025,577 Restricted cash 5,928 2,433 Accounts receivable 97,517 116,193 Less: accumulated depreciation on real estate investments (1,101,727) (1,062,087) Less: accumulated amortization on intangible assets (1) (17,379) (16,330) Prepaid expenses and other current assets (1) 27,165 21,291 Total assets $
6,208,102
(1) Included in "Other assets" in the accompanying consolidated balance sheet. Other assets include the following: December 31, March 31, 2021 2020 Intangible assets, gross $ 57,962$ 57,962 Less: accumulated amortization on intangible assets (17,379) (16,330)
Notes receivable and related accrued interest receivable, net
7,284 7,300 Prepaid expenses and other current assets 27,165 21,291 Total other assets $ 75,032$ 70,223
Impact of Recently Issued Accounting Standards
See Note 2 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information on the impact of recently issued accounting standards on our business. 45
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