Reuters logo
Fitch Rates EPR Properties' Senior Unsecured Bonds Due 2027 'BBB-'
May 16, 2017 / 4:21 PM / 7 months ago

Fitch Rates EPR Properties' Senior Unsecured Bonds Due 2027 'BBB-'

(The following statement was released by the rating agency) NEW YORK, May 16 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to the expected senior unsecured notes due 2027 issued by EPR Properties (NYSE: EPR). Net proceeds are expected to be used to repay the outstanding principal balance on the company's unsecured revolving credit facility with the remaining amount to be used for general business purposes. A full list of current ratings follows at the end of the release. KEY RATING DRIVERS Fitch's ratings reflect EPR's consistent cash flows generated by the company's triple-net leased megaplex movie theatres and other investments across the entertainment, education and recreation segments, resulting in maintenance of strong leverage and fixed-charge coverage metrics for the rating. EPR benefits from generally strong levels of rent coverage across its portfolio and structural protections including cross-collateralization among properties operated by certain tenants. While cinema attendee demand has remained relatively consistent over a long time period thereby supporting the durability of EPR's operating cash flows, other investment segments lack a similar long-term track record. Credit concerns include significant, though improving tenant concentration and concerns about the company's investment in niche asset classes that are less proven and may be less liquid or financeable during periods of potential financial stress and/or have limited alternative uses. CLOSED CNL TRANSACTION EPR's $706.5 million acquisition of CNL Lifestyle Properties (CNL) closed on April 6, 2017. The acquisition diversifies the ski portfolio with a premier asset in Northstar and establishes a relationship with a leading operator in Vail Resorts. Although the company's leverage had increased to the high 5.0x range as of March 31, 2017 in anticipation of the issuance of $647 million of stock to finance the acquisition, leverage was normalized with the stock issuance and Fitch expects it will remain in the low 5.0x range. FAVORABLE DEBT MATURITY PROFILE Debt maturities are manageable with $34.6 million or 1.3% of total debt maturing through 2018. Beyond 2018, with the exception of a $25 million financing, maturities represent solely unsecured debt offerings which are larger in size but mostly well-spaced. Fitch expects the company will continue to effectively ladder its debt maturity profile, which should reduce refinancing risk in any given year. Fitch expects the company to repay all of its upcoming secured debt maturities with unsecured debt, resulting in a fully unencumbered portfolio. However, in certain instances the company may assume secured debt when acquiring assets. MINIMAL LEASE EXPIRATION RISK From 2016 to 2029, no more than 5% of total revenue expires in any single year. EPR's education segment represents 19% of total revenue and all leases expire after 2030, with the exception of two immaterial lease expirations in 2017 and 2018. Historically, most tenants have chosen to exercise their renewal options, which has mitigated re-leasing risk and provided predictability to portfolio-level cash flows. Over the past several years some tenants have given back space, but more recently this trend has subsided. Rent renewal spreads can vary greatly depending on the operating performance of the asset. APPROPRIATE UNENCUMBERED ASSET COVERAGE OF UNSECURED DEBT Fitch expects unencumbered asset coverage of net unsecured debt (UA/UD) to remain above 2.0x when applying a stressed 12% capitalization rate to unencumbered net operating income (NOI). This ratio is adequate for a 'BBB-' Issuer Default Rating. The company has unencumbered megaplex theatre assets, improving the quality of the unencumbered pool as EPR continues to utilize a predominantly unsecured funding model. Nonetheless, EPR's assets are generally less financeable and have fewer potential buyers than more traditional commercial real estate. HIGH TENANT CONCENTRATION EPR's largest tenant, American Multi-Cinema, Inc. (AMC), accounted for 23% of total revenues in the first quarter of 2017; the company's top 10 tenants accounted for 66% of pro forma total revenue in 1Q17. On March 31, 2017, Fitch downgraded AMC's parent company AMC Entertainment to 'B'/Stable Rating. EPR's largest charter school tenant, Imagine Schools, Inc. (Imagine), accounted for 3% of total revenues in 1Q17 with the exposure on the decline. The company has been expanding its relationships with new charter school operators. EPR had 57 operators as of March 31, 2017, compared with just one tenant during the 2010 to 2011 school year. While most of EPR's theater leases and all of its charter school leases are cross-defaulted, a tenant bankruptcy could allow for the rejection of certain non-economic leases. Most of EPR's top tenants are either unrated or have below-investment-grade ratings; thus 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. Operator concentration risk is partially mitigated by the fact that the primary drivers of theater box office consumer demand are location and which movies are showing at a particular theater as opposed to theater operator. NICHE SECTORS 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 theater properties are typically well located and have high-quality amenities, alternative uses of space may be limited or may require significant capital expenditures to attract non-theater tenants. The recreation and education facilities are also high-quality, but the mortgage financeability and depth of the asset transaction market of the assets is uncertain. Going forward, management intends on continuing to focus on its three investment segments, which Fitch views positively. Management has highly specialized knowledge within EPR's investment segments which helps shape the company's longer-term strategy. THEATER DEMAND TRENDS Given the limited fungibility of the real estate, Fitch considers the operating environment for EPR's key tenants. North American box office revenue has proven resilient, growing at a compound annual growth rate of nearly 4% over the past 25 years. However, Fitch expects the exhibitor industry's attendance growth will remain challenging, while ticket price growth, which had previously offset attendance declines, has decelerated since 2010. To counter these factors, exhibitors have been improving the customer experience through a variety of amenities such as luxury seating and new beverage concepts within the theaters which has expanded revenue streams and increased the frequency of customer visits. Moreover, EPR's theater portfolio is 100% leased and, since the company's formation in 1997, no theater tenant has missed a lease payment. Despite the lack of lease payment defaults, EPR has realized negative leasing spreads upon renewal from time to time, which partially reflects the limited alternative tenants and uses for the assets. EDUCATION SEGMENT EVOLVING EPR is highly focused on the burgeoning market for education investments. The portfolio is 98.5% leased. EPR has been able to work through issues with Imagine, while reducing exposure to the operator, expanding to 57 operators portfolio-wide. The demand for enhanced education at an early age has begun to outpace the supply within the U.S., and the national waiting list currently holds over 1 million students. The largest investment risk in this segment is the mismatch between the charter renewal cycle (typically every five to 10 years) and the average lease term (15 to 20 years) and the potential for charter renewals to be based on political or budget factors rather than performance factors. Alternative uses for charter school facilities should the school lose its charter and EPR need to seek an alternative tenant is largely unproven. DERIVATION SUMMARY Fitch's ratings reflect EPR's consistent cash flows generated by the company's triple-net leased megaplex movie theaters and other investments across the entertainment, education and recreation segments, resulting in maintenance of strong leverage and fixed-charge coverage metrics for the rating. EPR benefits from generally strong levels of rent coverage across its portfolio and structural protections including cross-collateralization among properties operated by certain tenants. The company's leverage and coverage ratios are stronger than its ratings peer group but account for the company's investment in non-core property types. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for EPR include: --Annual same-store NOI growth of 2% in 2017 to 2018. These increases reflect both contractual rent escalations and participation by way of overage rents; --Annual investments of approximately $700 million to $800 million (net of the CNL transaction) through 2018, with a yield of 9%; --Sufficient unsecured bond issuances for 2017 and 2018; --Annual public equity issuances between $200 million to $300 million from 2017 to 2018, though issuance is at management's discretion; --Approximately $5 million to $10 million of capital expenditures annually through 2018. Capital expenditures are low due to primarily triple-net lease structure and long-term leases; --Annual divestments of between $100 million to 200 million through 2018. RATING SENSITIVITIES The following factors could result in positive momentum in the ratings and/or Outlook: --Fitch's expectation of leverage sustaining below 4.0x (pro forma leverage was in the high 5x range for the quarter ended March 31, 2017, although Fitch expects the company to sustain leverage in the low 5.0x range pro forma for the closing of the CNL transaction; --Fitch's expectation of fixed-charge coverage sustaining above 3.0x (pro form coverage was in the low- to mid-3x range for the quarter ended March 31, 2017). The following factors could result in negative momentum in the ratings and/or Outlook: --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; --Meaningful, operational deterioration in the movie exhibitor and/or charter school segments. LIQUIDITY Fitch expects EPR's liquidity coverage ratio to remain in excess of 1.5x pro forma for the note issuance for the period March 31, 2017 to Dec. 31, 2018. Fitch defines liquidity coverage as sources of liquidity (unrestricted cash, availability under the revolving credit facility, expected retained cash flows from operating activities after dividend payments) divided by uses of liquidity (debt maturities, development expenditures and capital expenditures). EPR paid out 89% of its adjusted funds from operations (AFFO) in dividends in 1Q17, up from the low- to mid-80% range the past two previous years. Fitch expects the company's payout ratio to sustain at around mid-80% on a long-term basis, and that internally generated liquidity will be used in part to fund new investments. FULL LIST OF RATING ACTIONS Fitch currently rates EPR as follows: EPR Properties --Issuer Default Rating 'BBB-'; --Unsecured Revolving Line of Credit 'BBB-'; --Senior Unsecured Term Loan 'BBB-'; --Senior Unsecured Notes 'BBB-'; --Preferred Stock 'BB'. The Rating Outlook is Stable. Contact: Primary Analyst Christopher Pappas Director +1-646-582-4784 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Steven Marks Managing Director +1-212-908-9161 Committee Chairperson Craig Fraser Managing Director +1-212-908-0310 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Date of Relevant Rating Committee: Nov. 3, 2016 Summary of Financial Statement Adjustments -. --Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock-based compensation. --Fitch had adjusted the historical and projected net debt by assuming the issuer requires $5 million of cash for working capital purposes, which is otherwise unavailable to repay debt.. Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis- Effective from 26 February 2016 to 27 April 2017 (pub. 29 Feb 2016) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below