Fitch Rates EPR Properties' $275MM 5.25% Sr Unsecured Notes 'BBB-'; Outlook
NEW YORK -- June 14, 2013
Fitch Ratings has assigned a 'BBB-' credit rating to the $275 million 5.25%
senior unsecured notes due 2023 issued by EPR Properties (NYSE: EPR). The
notes were priced at 99.546% of par to yield 5.308% to maturity or 312.5 basis
points over the benchmark rate. EPR expects to use net proceeds from the
offering of approximately $270.7 million to repay approximately $146.2 million
of mortgage debt plus associated prepayment penalties; repay the balance on
the unsecured revolving credit facility, and for general business purposes.
Fitch currently rates EPR as follows:
--Issuer Default Rating (IDR) 'BBB-';
--$400 million unsecured revolving line of credit 'BBB-';
--$255 million senior unsecured term loan facility 'BBB-';
--$600 million senior unsecured notes 'BBB-';
--$346.3 million preferred stock 'BB'.
The Rating Outlook is Stable.
KEY RATINGS DRIVERS
The 'BBB-' IDR is underpinned by the consistent cash flows generated by the
company's triple-net leased megaplex movie theatres and other investments
across the entertainment, education and recreation sectors, resulting in good
leverage and coverage metrics. EPR benefits from generally strong levels of
rent coverage across its portfolio and structural protections including
cross-default leases among properties operated by certain tenants.
Offsetting these credit strengths is the niche nature of most of EPR's
investment portfolio. While cinema attendee demand has remained consistent
over a long time period, other investment segments lack as long of a track
record. Credit concerns include significant, though abating, tenant
concentration and concerns about the company's investment in asset classes
that may be less liquid or financeable during periods of potential financial
STRONG FIXED-CHARGE COVERAGE
EPR's fixed-charge coverage is solid for a 'BBB-' IDR. Fixed-charge coverage
was 2.5x for the trailing 12 months (TTM) ended March 31, 2013, flat from 2.5x
in 2012 and 2011. Fitch projects that EPR's fixed-charge coverage ratio will
increase from the mid-2x range toward 3x during 2013-2015, which would be
strong for the 'BBB-' rating. This increase is due to an expected consistent
volume of high-yielding acquisitions, partially offset by increased interest
expense from expected unsecured bond issuances. New investments by segment
will generally target weightings of 40% entertainment, 40% education and 20%
recreation. Fixed-charge coverage is defined as recurring operating EBITDA
less recurring capital expenditures and straight-line rent adjustments,
divided by interest incurred and preferred stock dividends.
MANAGEABLE LEASE EXPIRATION PROFILE
Within the company's megaplex theatre segment, which represents 60% of total
revenue, only 8% of rent revenue will expire over the next five years. Of the
company's charter school segment, which represents 11% of total revenue, all
leases expire after 2030. Historically, most tenants have chosen to exercise
their renewal options, which has mitigated re-leasing risk and provided
predictability to portfolio-level cash flows. In some cases, tenants decided
to renew, but take less space or negotiate a lower rental rate. Rent spreads
can vary greatly depending on the operating performance of the asset.
LOW LEVERAGE FOR 'BBB-'
Leverage, defined as net debt-to-TTM recurring operating EBITDA, was 5.0x as
of March 31, 2013, flat from year-end 2012 and up from 4.4x at year-end 2011.
The company has generally operated in the 4.5x to 5.0x range over the past
five years. Fitch projects leverage will center around 5.0x during 2013-2015,
assuming modest annual increases in NOI and a large volume of acquisitions
funded by unsecured bonds and common equity. This ratio is appropriate for the
'BBB-' rating given EPR's niche property focus.
Fitch calculates that EPR's pro forma liquidity coverage ratio is 6.6x for the
period from April 1, 2013 to Dec. 31, 2014. The liquidity surplus is driven in
large part by an undrawn unsecured revolving credit facility (RCF) pro forma
for the bond offering, and further reflects a lack of upcoming debt maturities
and the relatively low capital-intensive nature of EPR's business. Fitch
defines liquidity coverage as sources of liquidity (unrestricted cash and
availability under EPR's unsecured RCF pro forma for the bond offering, and
expected retained cash flows from operating activities after dividend
payments) divided by uses of liquidity (pro rata debt maturities and expected
APPROPRIATE UNENCUMBERED ASSET COVERAGE OF UNSECURED DEBT
EPR has good contingent liquidity from an unencumbered property pool. Pro
forma unencumbered asset coverage of net unsecured debt (UA/UD) is 1.9x using
a stressed 12% capitalization rate to unencumbered NOI and interest income
from both the owned property and notes receivable portfolios, a ratio that is
good for a 'BBB-' IDR. The company continues to unencumber megaplex theatre
assets, improving the quality of the unencumbered pool as EPR transitions to a
more unsecured funding model.
In addition, the covenants under EPR's credit agreements do not limit
STRAGGERED DEBT MATURITIES
Aside from various unsecured debt maturities in 2017 and beyond, annual debt
maturities do not account for more than 12% of total debt in any given year,
alleviating refinance risk. The majority of the 31% of total debt that matures
over the next four years consists of mortgages that have high debt yields.
Fitch expects that the majority of secured debt maturing over the next several
years will be refinanced with unsecured debt, which should improve EPR's UA/UD
HIGH TENANT CONCENTRATION IS RECEDING
The company's largest tenant, American Multi-Cinema, Inc. (AMC; (IDR of 'B'
with a Stable Outlook), accounted for 26% of total revenues in the first
quarter of 2013 (1Q'13), down from 33% in 1Q'12. The company's top 10 tenants
accounted for 70% of total revenue in the most recent quarter, down from 80%
in the prior year.
EPR's largest charter school tenant, Imagine Schools, Inc. (Imagine) accounted
for 8% of total revenues in 1Q'13. EPR has remained focused on expanding its
relationships with new charter school operators since 2011, which Fitch views
positively given that Imagine has lost several charters over the last year.
Theatre operator concentration risk is partially mitigated by the fact that
the primary drivers of theatre box office consumer demand are location and
which movies are showing at a particular theatre (as opposed to which theatre
Further, while most of EPR's theatre leases and all of EPR's charter school
leases for a given operator are cross-defaulted, a tenant bankruptcy could
allow for the rejection of certain non-economic leases. Given that most of
EPR's top tenants are either unrated or have below-investment grade ratings,
the potential for corporate default, bankruptcy and lease rejection could
reduce EPR's rental revenues. Mitigating this risk is that on a portfolio and
property-level basis, EBITDAR covers rent payments by a healthy margin for
nearly all of EPR's properties.
STEADY THEATRE BUSINESS
Over a 25-year period, total North American box office revenue has grown at a
compound annual growth rate of 4%, according to Box Office Mojo. Revenue was
up 6% in 2012, although Fitch projects a decline in revenues for 2013 due to a
comparatively weaker film slate. Box office revenues were resilient in the
financial crisis, increasing or staying flat in every year from 2005 to 2010.
Since the company's formation in 1997, no theatre tenant has ever missed a
lease payment, and no tenants on a portfolio-wide basis have EBITDAR coverage
of rent below 1.0x.
The ratings reflect EPR's focus on investing in non-core property types that
are likely less liquid or financeable during periods of market stress. While
the company's theatre properties are typically well located and have
high-quality amenities, alternative uses of space may be limited and may
require significant capital expenditures to attract non-theatre tenants.
EPR has previously made some ill-timed non-core investments. The company began
purchasing wineries during 2006-2007 and has since taken significant losses in
exiting this business. Regarding future portfolio composition, management has
a highly specialized knowledge within EPR's investment segments which helps
shape the company's longer term strategy.
CHARTER SCHOOLS ISSUES ALLEVIATED
EPR's largest charter school tenant (second largest overall) Imagine closed
nine schools in two states due to poor academic performance. Of the $72
million of investments in troubled schools, approximately $60 million or 83%
of the issues have already been resolved or are expected to be resolved soon
through swaps or subleases. EPR expects to address the remaining 17% in the
next school year through swaps, subleases or sales. Due to the structural
protections with Imagine including a master lease structure and a $16.4
million letter of credit, Fitch does not expect any rent payment shortfalls.
EPR has been actively adding new charter school operators to reduce the tenant
concentration risk. Subsequent to these school closings, the company has
expanded its criteria and screening process for evaluating new charter school
operators, which Fitch views positively.
PREFERRED STOCK NOTCHING
The two-notch differential between EPR's IDR and its preferred stock rating is
consistent with the 'Treatment and Notching of Hybrids in Nonfinancial
Corporate and REIT Credit Analysis' criteria report dated Dec. 13, 2012, as
EPR's preferred securities have cumulative coupon deferral options exercisable
by EPR and thus have readily triggered loss absorption provisions in a going
The Stable Outlook reflects that leverage centering around 5.0x and coverage
sustaining in the 2.5x to 3.0x range are solid, offset by the unique risks to
EPR's specialty property types such as liquidity and alternative use. The
Stable Outlook further reflects EPR's strong liquidity coverage and minimal
The following factors may have a positive impact on the ratings and/or
--Fitch's expectation of leverage sustaining below 4.0x (leverage was 5.0x as
of March 31, 2013);
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x (coverage
was 2.5x for the 12 months ended March 31, 2013);
--Growth in the unencumbered portfolio, particularly megaplex movie theatres.
The following factors may have a negative impact on the ratings and/or
--Fitch's expectation of leverage sustaining above 5.5x;
--Fitch's expectation of fixed-charge coverage sustaining below 2.2x;
--Liquidity coverage sustaining below 1.25x, coupled with a strained unsecured
debt financing environment.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Criteria for Rating U.S. Equity REITs and REOCs, Feb. 26, 2013;
--Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis, Dec. 13, 2012;
--Recovery Rating and Notching Criteria for Equity REITs, Nov. 12, 2012;
--Corporate Rating Methodology, Aug. 8, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Rating and Notching Criteria for Equity REITs -- Effective May 12,
2011 to May 3, 2012
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Criteria for Rating U.S. Equity REITs and REOCs
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