Mortgage notes and other notes receivable, including related accrued interest receivable, consist of loans originated by the Company and the related accrued and unpaid interest income as of the balance sheet date. Mortgage notes and other notes receivable are initially recorded at the amount advanced to the borrower less allowance for credit loss. Interest income is recognized using the effective interest method over the estimated life of the note. Interest income includes both the stated interest and the amortization or accretion of premiums or discounts (if any).
Share-based compensation to employees of the Company is granted pursuant to the Company's Annual Incentive Program and Long-Term Incentive Plan and share-based compensation to non-employee Trustees of the Company is granted pursuant to the Company's Trustee compensation program. Prior to May 12, 2016, share-based compensation granted to employees and non-employee Trustees were issued under the 2007 Equity Incentive Plan. The 2016 Equity Incentive Plan was approved by shareholders at the May 11, 2016 annual shareholder meeting and this plan replaced the 2007 Equity Incentive Plan. Accordingly, all share-based compensation granted on or after May 12, 2016 has been issued under the 2016 Equity Incentive Plan.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rateforeign currency risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. If hedge accounting is not applied, realized and unrealized gains or losses are reported in earnings.
The Company's policy is to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
restrictions. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017. The Company has determined that the adoption of this ASU will result in the Company including restricted cash and cash and cash equivalents on its Consolidated Statement of Cash Flows.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The ASU better aligns a company's financial reporting for hedging activities with the economic objectives of those activities. ASU No. 2017-12 is effective for fiscal years beginning after December 15, 2018 with early adoption allowed using a modified retrospective transition approach. This adoption method would require the Company to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that the Company adopts the update. The Company is currently reviewing the ASU to assess the potential impact on its consolidated financial statements and related disclosures but does not anticipate that this ASU will have a material impact.
3. Rental PropertiesReal Estate Investments
The following table summarizes the carrying amounts of rental propertiesreal estate investments as of September 30, 20172022 and December 31, 20162021 (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Buildings and improvements | $ | 4,664,228 | | | $ | 4,523,052 | |
Furniture, fixtures & equipment | 118,195 | | | 108,907 | |
Land | 1,238,734 | | | 1,222,149 | |
Leasehold interests | 26,987 | | | 26,717 | |
| 6,048,144 | | | 5,880,825 | |
Accumulated depreciation | (1,278,427) | | | (1,167,734) | |
Total | $ | 4,769,717 | | | $ | 4,713,091 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Buildings and improvements | $ | 4,037,328 |
| | $ | 3,272,865 |
|
Furniture, fixtures & equipment | 86,831 |
| | 40,684 |
|
Land | 1,097,445 |
| | 917,748 |
|
Leasehold interests | 25,774 |
| | — |
|
| 5,247,378 |
| | 4,231,297 |
|
Accumulated depreciation | (711,384 | ) | | (635,535 | ) |
Total | $ | 4,535,994 |
| | $ | 3,595,762 |
|
Depreciation expense on rental properties real estate investments was $93.2$118.7 million and $76.3$119.2 million for the nine months ended September 30, 20172022 and 2016,2021, respectively.
4. Impairment Charges
The Company reviews its properties for changes in circumstances that indicate that the carrying value of a property may not be recoverable based on an estimate of undiscounted future cash flows. During the nine months ended September 30, 2022, the Company received an offer to sell a recently vacated property. As a result, the Company reassessed the expected holding period, and determined that the estimated cash flows were not sufficient to recover the carrying value of the property. The Company estimated the fair value of this property by taking into account the purchase offer. The Company reduced the carrying value of the real estate investment, net to $4.7 million. During the nine months ended September 30, 2022, the Company recognized an impairment charge of $4.4 million on the real estate investment, which is the amount that the carrying value of the asset exceeded the estimated fair value. This property was sold during the nine months ended September 30, 2022.
During the nine months ended September 30, 2022, the Company also recognized $0.6 million in other-than-temporary impairments related to its equity investments in joint ventures in two theatre projects located in China. See Note 9 for further details on these impairments.
5. Investments and Dispositions
The Company's investment spending during the nine months ended September 30, 2017 totaled $1.5 billion,2022 totaled $321.3 million, and included investmentsthe acquisition of two fitness and wellness properties for approximately $63.5 million, the acquisition of two attraction properties located in each of its four operating segments.
Entertainment investment spending during the nine months ended September 30, 2017 totaled $264.9Canada for approximately $142.8 million, including spending on build-to-suit experiential development and redevelopment projects and the acquisition of megaplex theatres, entertainment retail centers and family entertainment centers, as well as $154.1 millioninterests in acquisitions of six megaplex theatres.
Education investment spending during the nine months ended September 30, 2017 totaled $238.7 million, including spending on build-to-suit development and redevelopment of public charter schools, early education centers and private schools, as well as $38.3 million in acquisitions of seven early education centers and two public charter schools and an investment of $95.5 million in mortgage notes receivable.
Recreation investment spending during the nine months ended September 30, 2017 totaled $951.6 million, including the transaction with CNL Lifestyle Properties Inc. (CNL Lifestyle) and funds affiliated with Och-Ziff Real Estate (OZRE) valued at $730.8 million discussed below. Additionally, included in recreation investment spending was build-to-suit development of golf entertainment complexes and attractions, redevelopment of ski areas, $51.9 million in acquisitions of five other recreation facilities, and an investment of $10.7 million in a mortgage note secured by one other recreation facility.
On April 6, 2017, the Company completed a transaction with CNL Lifestyle and OZRE. The Company acquired the Northstar California Resort, 15 attraction properties (waterparks and amusement parks), five small family entertainment
centers and certain related working capital for aggregate consideration valued at $479.8 million, including final purchase price adjustments. Additionally, the Company provided $251.0 million of secured debt financing to OZRE for its purchase of 14 CNL Lifestyle ski properties valued at $374.5 million. Subsequent to the transaction, the Company sold the five family entertainment centersjoint ventures for approximately $6.8 million and one waterpark$50.6 million. See Note 9 for approximately $2.5 million. No gain or loss was recognizedfurther details on these sales.two joint ventures.
The secured debt financing with OZRE has an initial term of five years with three 2.5 year options to extend. The note bears interest fixed at 8.5%. The Company received a $3.0 million origination fee upon closing that will be recognized using the effective interest method.
The Company assumed long-term, triple-net leases on the Northstar California Resort and three of the attractions properties and entered into new long-term, triple-net lease agreements on the remaining attractions properties at closing. Additionally, the Company assumed ground lease agreements on nine of the properties.
The Company’s aggregate investment in this transaction was $730.8 million and was funded with $657.5 million of the Company’s common shares, consisting of 8,851,264 newly issued registered common shares valued at $74.28 per share, $61.2 million of cash and assumed working capital liabilities (net of assumed accounts receivable) of $12.1 million. CNL Lifestyle subsequently distributed the common shares to its stockholders on April 20, 2017. The Company's portion of the cash purchase price was funded with borrowings under its unsecured revolving credit facility.
This transaction was previously announced as a business combination and, accordingly, related expenses were recognized as transaction costs through December 31, 2016. In connection with the adoption of ASU No. 2017-01 on January 1, 2017, this transaction was determined to be an asset acquisition. As such, transaction costs related to this asset acquisition incurred in 2017 have been capitalized.
The aggregate investment of $730.8 million in this transaction was recorded as follows (in thousands):
|
| | | | |
| | April 6, 2017 |
|
Rental properties, net | | $ | 481,006 |
|
Mortgage notes and related accrued interest receivable | | 251,038 |
|
Tradenames (included in other assets) | | 6,355 |
|
Below market leases (included in accounts payable and accrued liabilities) | | (7,611 | ) |
Total investment | | $ | 730,788 |
|
Other investment spending during the nine months ended September 30, 2017 totaled $1.0 million, and was related to the Adelaar casino and resort project in Sullivan County, New York.
During the nine months ended September 30, 2017,2022, the Company completed the sale of four entertainmenttwo vacant theatre properties and a land parcel for net proceeds totaling $72.3 million. In connection with these sales, the Companyof $9.9 million and recognized a combined gain on sale of $19.4$0.3 million.
6. Investment in Mortgage Notes and Notes Receivable
The Company measures expected credit losses on its mortgage notes and notes receivable on an individual basis over the related contractual term as its financial instruments do not have similar risk characteristics. The Company uses a forward-looking commercial real estate loss forecasting tool to estimate its expected credit losses. The loss forecasting tool is comprised of a probability of default model and a loss given default model that utilizes the Company’s loan specific inputs as well as selected forward-looking macroeconomic variables and mean loss rates. Based on certain inputs, such as origination year, balance, interest rate as well as collateral value and borrower operating income, the model produces life of loan expected losses on a loan by loan basis. As of September 30, 2022, the Company did not anticipate any prepayments; therefore, the contractual term of its mortgage notes was used for the calculation of the expected credit losses. The Company updates the model inputs at each reporting
period to reflect, if applicable, any newly originated loans, changes to loan specific information on existing loans and current macroeconomic conditions.
Investment in mortgage notes, including related accrued interest receivable, at September 30, 2022 and December 31, 2021 consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Outstanding principal amount of mortgage | Carrying amount as of | Unfunded commitments |
Description | Year of Origination | Interest Rate | Maturity Date | September 30, 2022 | December 31, 2021 | September 30, 2022 |
Attraction property Powells Point, North Carolina | 2019 | 7.75 | % | 6/30/2025 | $ | 29,206 | | $ | 29,037 | | $ | 28,243 | | $ | — | |
Fitness & wellness property Omaha, Nebraska | 2017 | 7.85 | % | 1/3/2027 | 10,905 | | 10,937 | | 10,940 | | — | |
Fitness & wellness property Merriam, Kansas | 2019 | 7.55 | % | 7/31/2029 | 9,090 | | 9,187 | | 9,159 | | — | |
Ski property Girdwood, Alaska | 2019 | 8.13 | % | 7/31/2032 | 72,000 | | 71,563 | | 45,877 | | 10,000 | |
Fitness & wellness property Omaha, Nebraska | 2016 | 7.85 | % | 6/30/2030 | 10,539 | | 10,563 | | 10,615 | | 379 | |
Experiential lodging property Nashville, Tennessee | 2019 | 6.99 | % | 9/30/2031 | 70,000 | | 70,542 | | 70,896 | | — | |
Eat & play property Austin, Texas | 2012 | 11.31 | % | 6/1/2033 | 10,382 | | 10,382 | | 10,874 | | — | |
Experiential lodging property Breaux Bridge, LA | 2022 | 7.25 | % | 3/8/2034 | 11,305 | | 11,373 | | — | | — | |
Ski property West Dover and Wilmington, Vermont | 2007 | 12.14 | % | 12/1/2034 | 51,050 | | 51,049 | | 51,047 | | — | |
Four ski properties Ohio and Pennsylvania | 2007 | 11.07 | % | 12/1/2034 | 37,562 | | 37,533 | | 37,519 | | — | |
Ski property Chesterland, Ohio | 2012 | 11.55 | % | 12/1/2034 | 4,550 | | 4,533 | | 4,516 | | — | |
Ski property Hunter, New York | 2016 | 8.88 | % | 1/5/2036 | 21,000 | | 21,000 | | 21,000 | | — | |
Eat & play property Midvale, Utah | 2015 | 10.25 | % | 5/31/2036 | 17,505 | | 17,505 | | 17,639 | | — | |
Eat & play property West Chester, Ohio | 2015 | 9.75 | % | 8/1/2036 | 18,068 | | 18,066 | | 18,198 | | — | |
Fitness & wellness property Fort Collins, Colorado | 2018 | 7.85 | % | 1/31/2038 | 10,292 | | 10,069 | | 10,277 | | — | |
Early childhood education center Lake Mary, Florida | 2019 | 8.10 | % | 5/9/2039 | 4,200 | | 4,353 | | 4,329 | | — | |
Eat & play property Eugene, Oregon | 2019 | 8.13 | % | 6/17/2039 | 14,700 | | 7,780 | | 14,996 | | — | |
Early childhood education center Lithia, Florida | 2017 | 8.58 | % | 10/31/2039 | 3,959 | | 4,013 | | 4,034 | | — | |
| | | | $ | 406,313 | | $ | 399,485 | | $ | 370,159 | | $ | 10,379 | |
Investment in notes receivable, including related accrued interest receivable, was $3.5 million and $7.3 million at September 30, 2022 and December 31, 2021, respectively, and is included in "Other assets" in the accompanying consolidated balance sheets.
During the nine months ended September 30, 2017, pursuant to tenant purchase options,2022, the Company completedrecorded an allowance for credit loss of $6.8 million related to one of its mortgage notes receivable secured by an eat & play investment and $3.1 million related to two notes receivable. Although foreclosure was not deemed probable and the principal balance of the mortgage note and notes receivable were not past due at September 30, 2022, based on delays in interest payments and the borrowers' declining financial condition, the Company determined the borrowers are experiencing financial difficulty. The repayments are expected to be provided substantially through the sale or operation of five public charter schools located in Colorado, Arizona and Utah for net proceeds totaling $44.8 million. In connection with these sales,the collateral, therefore, the Company, in each case, elected to apply the collateral dependent practical expedient. Expected credit losses are based on the fair value of the underlying collateral at the reporting date. The mortgage note is secured by the real estate assets of the borrower and the notes receivable are secured by the equipment and personal property of the borrowers. The collateral was appraised during the nine months ended September 30, 2022, which resulted in credit loss expense of $6.8 million for the mortgage note, $1.2 million for one of the notes receivable and $1.9 million for the other note receivable, representing a full reserve for the $1.9 million note receivable. Income from these borrowers is recognized on a gain on sale of $7.2 million. Additionally, the Company completed the sale of two other education facilities for net proceeds of $9.8 million. In connection with these sales, the Company recognized a gain on sale of $1.9 million.
cash basis. During the nine months ended September 30, 2017,2022, the
Company wrote-off $1.5 million in accrued interest receivables and fees to "Mortgage and other financing income" in the accompanying consolidated statements of income related to the mortgage note and notes receivables.
During the year ended December 31, 2020, the Company receivedentered into an amended and restated loan and security agreement with one of its notes receivable borrowers in response to the impacts of the COVID-19 pandemic. Although the borrower was not in default, nor had the borrower declared bankruptcy, the Company determined that these modifications resulted in a partial prepayment of $4.0 million on one mortgagetroubled debt restructuring. At September 30, 2022, this note receivable thatwas considered collateral dependent and expected credit losses are based on the fair value of the underlying collateral at the reporting date. The note is secured by the observation deckworking capital and non-real estate assets of the John Hancock building in Chicago, Illinois. In connectionborrower. The Company assessed the fair value of the collateral as of September 30, 2022 and the note remains fully reserved with an allowance for credit loss totaling $8.4 million, which represents the partial prepaymentoutstanding principal balance of the note as of September 30, 2022. Income for this note,borrower is recognized on a cash basis. During the nine months ended September 30, 2022, the Company received principal payments totaling $0.3 million and $1.2 million in cash basis interest payments on this note receivable.
At September 30, 2022, the Company's investment in this note receivable was a prepayment feevariable interest investment and the underlying entity is a VIE. The Company is not the primary beneficiary of $800 thousand,this VIE because the Company does not individually have the power to direct the activities that are most significant to the entity and accordingly, this investment is not consolidated. The Company's maximum exposure to loss associated with this VIE is limited to the Company's outstanding note receivable in the amount of $8.4 million, which is being recognized overfully reserved in the term ofallowance for credit losses at September 30, 2022.
The following summarizes the remaining note usingactivity within the effective interest method.allowance for credit losses related to mortgage notes, unfunded commitments and notes receivable for the nine months ended September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| Mortgage notes receivable | Unfunded commitments - mortgage notes receivable | Notes receivable | Unfunded commitments - notes receivable | Total |
Allowance for credit losses at December 31, 2021 | $ | 2,124 | | $ | 76 | | $ | 8,686 | | $ | — | | $ | 10,886 | |
Credit loss expense (benefit) | 6,682 | | (12) | | 2,777 | | — | | 9,447 | |
Charge-offs | — | | — | | — | | — | | — | |
Recoveries | — | | — | | — | | — | | — | |
Allowance for credit losses at September 30, 2022 | $ | 8,806 | | $ | 64 | | $ | 11,463 | | $ | — | | $ | 20,333 | |
5.
7. Accounts Receivable Net
The following table summarizes the carrying amounts of accounts receivable net as of September 30, 2017 and December 31, 2016 (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Receivable from tenants | $ | 15,977 |
| | $ | 7,564 |
|
Receivable from non-tenants | 128 |
| | 497 |
|
Receivable from insurance proceeds | 27 |
| | 1,967 |
|
Receivable from Sullivan County Infrastructure Revenue Bonds | 10,808 |
| | 22,164 |
|
Straight-line rent receivable | 73,657 |
| | 67,618 |
|
Allowance for doubtful accounts | (1,384 | ) | | (871 | ) |
Total | $ | 99,213 |
| | $ | 98,939 |
|
The above total includes receivable from tenants of approximately $5.4 million and straight-line rent receivable of approximately $9.0 million from one of the Company's early education tenants at September 30, 2017. This tenant has been negatively impacted by challenges brought on by its rapid expansion and ramp up to stabilization. The Company is negotiating a restructuring which has been complicated by the impact of recent extreme weather events and the tenant having multiple landlords. However, the Company believes it has made significant progress in these negotiations. The receivable from tenant and straight-line rent receivable balances at September 30, 2017 have been recorded at levels that approximate the estimate of the final restructured reduced rent amounts which are expected to be made effective as of the beginning of 2017. In October 2017, the Company terminated nine leases with the tenant, seven of which have completed construction and two of which are unimproved land. There were only $64 thousand outstanding receivables related to these properties and such amounts were fully reserved at September 30, 2017. The tenant continues to operate these properties (other than the two unimproved properties) as a holdover tenant. The Company will continue to consider whether these and other properties should be leased to other operators based on results of the restructuring process.
6. Investment in a Direct Financing Lease
The Company’s investment in a direct financing lease relates to the Company’s master lease of six public charter school properties as of September 30, 2017 and 12 public charter school properties as of December 31, 2016, with affiliates of Imagine Schools, Inc. (Imagine). Investment in a direct financing lease, net represents estimated unguaranteed residual values of leased assets and net unpaid rentals, less related deferred income. The following table summarizes the carrying amounts of investment in a direct financing lease, net as of September 30, 20172022 and December 31, 20162021 (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Receivable from tenants | $ | 8,491 | | | $ | 37,417 | |
Receivable from non-tenants | 2,197 | | | 2,237 | |
| | | |
| | | |
| | | |
Straight-line rent receivable | 42,687 | | | 38,419 | |
| | | |
Total | $ | 53,375 | | | $ | 78,073 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Total minimum lease payments receivable | $ | 113,956 |
| | $ | 215,753 |
|
Estimated unguaranteed residual value of leased assets | 47,000 |
| | 85,247 |
|
Less deferred income (1) | (103,258 | ) | | (198,302 | ) |
Less allowance for lease losses | — |
| | — |
|
Investment in a direct financing lease, net | $ | 57,698 |
| | $ | 102,698 |
|
| | | |
(1) Deferred income is netAs of $0.8 million and $1.3 million of initial direct costs at September 30, 20172022, receivable from tenants includes payments of approximately $7.0 million that were deferred due to the COVID-19 pandemic and December 31, 2016, respectively.
During the three months ended September 30, 2017,determined to be collectible. Additionally, the Company entered into revised lease terms with Imagine which reducedhas amounts due from tenants that were not booked as receivables because the rental payments and term on six properties. Asfull amounts were not deemed probable of collection as a result of the revised lease terms,COVID-19 pandemic. While deferments for this and future periods delay rent payments, these six properties were classified as operating leases duringdeferments do not release tenants from the three months ended September 30, 2017. Dueobligation to lease negotiations duringpay the three months ended June 30, 2017, management evaluated whether it could recover its investment in these leases taking into account the revised lease terms and independent appraisals prepared as of June 30, 2017, and determined the
carrying value of the investmentdeferred amounts in the direct financing leases exceededfuture.
8. Capital Markets and Dividends
During the expected lease payments to be receivedthree and residual values for these six leases. Accordingly, the Company recorded an impairment charge of $9.6 million during the nine months ended September 30, 2017, which included an allowance for lease loss of $7.3 million2022, the Company declared cash dividends totaling $0.825 and a charge of $2.3 million related to estimated unguaranteed residual value. The Company determined that no allowance for losses was necessary at December 31, 2016.
$2.425 per common share, respectively. Additionally, duringduring the three and nine months ended September 30, 2017,2022, the Company performed its annual reviewBoard declared cash dividends of the estimated unguaranteed residual value$0.359375 and $1.078125 per share, respectively, on its other properties leased to Imagine and determined that the residual value on one of these properties was impaired. As such, the Company recorded an impairment charge of the unguaranteed residual value of $0.6 million during the nine months ended September 30, 2017.
The Company’s direct financing lease has expiration dates ranging from approximately 15 to 18 years. Future minimum rentals receivable on this direct financing lease at September 30, 2017 are as follows (in thousands):
|
| | | |
| Amount |
Year: | |
2017 | $ | 1,545 |
|
2018 | 6,301 |
|
2019 | 6,490 |
|
2020 | 6,685 |
|
2021 | 6,885 |
|
Thereafter | 86,050 |
|
Total | $ | 113,956 |
|
7. Debt and Capital Markets
During the nine months ended September 30, 2017, the Company prepaid in full nine mortgage notes payable totaling $73.0 million that were secured by nine theatre properties. In addition, the Company prepaid in full a mortgage note payable of $87.0 million that was secured by 11 theatre properties. In connection with this note payoff, the Company recorded a gain on early extinguishment of debt of $1.0 million for the nine months ended September 30, 2017. The gain represents the difference between the carrying value of the note and the amount due at payoff as the note was recorded at fair value upon acquisition and was not anticipated to be paid off in advance of maturity.
On May 23, 2017, the Company issued $450.0 million in aggregate principal amount of senior notes due on June 1, 2027 pursuant to an underwritten public offering. The notes bear interest at an annual rate of 4.50%. Interest is payable on June 1 and December 1 of each year beginning on December 1, 2017 until the stated maturity date of June 1, 2027. The notes were issued at 99.393% of their face value and are unsecured and guaranteed by certain of the Company's subsidiaries. The notes contain various covenants, including: (i) a limitation on incurrence of any debt which would cause the ratio of the Company’s debt to adjusted total assets to exceed 60%; (ii) a limitation on incurrence of any secured debt which would cause the ratio of the Company’s secured debt to adjusted total assets to exceed 40%; (iii) a limitation on incurrence of any debt which would cause the Company’s debt service coverage ratio to be less than 1.5 times5.75% Series C cumulative convertible preferred shares and (iv) the maintenance at all times of the Company's total unencumbered assets such that they are not less than 150%5.75% Series G cumulative redeemable preferred shares and cash dividends of $0.5625 and $1.6875 per share, respectively, on the Company’s outstanding unsecured debt.Company's 9.00% Series E cumulative convertible preferred shares.
On August 30, 2017, the Company refinanced its variable-rate bonds payable totaling $25.0 million which are secured by three theatre properties. The maturity date was extended from October 1, 2037 to August 1, 2047 and the outstanding principal balance and interest rate were not changed.
On September 27, 2017,January 14, 2022, the Company amended its unsecured consolidated creditthe note purchase agreement which governsgoverning its unsecured revolving credit facility and its unsecured term loan facility.
The amendments to the unsecured revolving portion of the credit facility, among other things, (i) increase the initial maximum available amount from $650.0 million to $1.0 billion, (ii) extend the maturity date from April 24, 2019, to
February 27, 2022 (with the Company having the right to extend the loan for an additional seven months) and (iii) lower the interest rate and facility fee pricing based on a grid related to the Company's senior unsecured credit ratings which at closing was LIBOR plus 1.00% and 0.20%, versus LIBOR plus 1.25% and 0.25%, respectively, under the previous terms. In connection with the amendment, $19 thousand of deferred financing costs (net of accumulated amortization) were written off during the three months ended September 30, 2017 and are included in costs associated with loan refinancing. At September 30, 2017, the Company had $170.0 million outstanding under this portion of the facility.
The amendments to the unsecured term loan portion of the credit facility, among other things, (i) increase the initial amount from $350.0 million to $400.0 million, (ii) extend the maturity date from April 24, 2020, to February 27, 2023 and (iii) lower the interest rate based on a grid related to the Company's senior unsecured credit ratings which at closing was LIBOR plus 1.10% versus LIBOR plus 1.40% under the previous terms. In connection with the amendment, $1.5 million of deferred financing costs (net of accumulated amortization) were written off during the three months ended September 30, 2017 and are included in costs associated with loan refinancing. At closing, the Company borrowed the remaining $50.0 million available on the $400.0 million term loan portion of the facility, which was used to pay down a portion of the Company's unsecured revolving credit facility.
In addition, there is a $1.0 billion accordion feature on the combined unsecured revolving credit and term loan facility that increases the maximum amount available under the combined facility, subject to lender approval, from $1.4 billion to $2.4 billion. If the Company exercises all or any portion of the accordion feature, the resulting increase in the facility may have a shorter or longer maturity date and different pricing terms.
In connection with the amendment to the unsecured consolidated credit agreement, the obligations of the Company’s subsidiaries that were co-borrowers under the Company’s prior senior unsecured revolving credit and term loan facility were released. As a result, simultaneously with the amendment, the guarantees by the Company’s subsidiaries that were guarantors with respect to the Company’s outstanding 4.50% Senior Notes due 2027, 4.75% Senior Notes due 2026, 4.50% Senior Notes due 2025, 5.25% Senior Notes due 2023, 5.75% Senior Notes due 2022, and 7.75% Senior Notes due 2020 were released in accordance with the terms of the applicable indentures governing such notes.
In addition, the guarantees by the Company’s subsidiaries that were guarantors of the Company’s outstanding 4.35% Series A Guaranteed Senior Notes due August 22, 2024 and 4.56% Series B Guaranteed Senior Notes due August 22, 2026 (referred to herein as the "private placement notes") were also released. The foregoing release was effected by the Company entering into an amendment to the Note Purchase Agreement, dated as of September 27, 2017. The amendment to the private placement notes releases the Company’s subsidiary guarantors as described above and(Note Purchase Agreement) to, among other things: (i) amendsamend certain financial and other covenants and provisions in the existing Note Purchase Agreement to conform generally to the changes beneficial to the Company in the corresponding covenants and provisions contained in the amended unsecured consolidated credit agreement;Company's Third Amended, Restated and Consolidated Credit Agreement, dated October 6, 2021, and (ii) provides the investors thereunderamend certain additional guarantyfinancial and lien rights,other covenants and provisions in the event that certain subsequent events occur; (iii) expandsexisting Note Purchase Agreement to reflect the scopeprior termination of the “most favored lender” covenant containedCovenant Relief Period (as defined in the existing Note Purchase Agreement;Agreement) and (iv) imposes restrictions on debtremoval of related provisions.
9. Unconsolidated Real Estate Joint Ventures
The following table summarizes our investment in unconsolidated joint ventures as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Investment as of | | Income (Loss) for the Nine Months Ended |
Property Type | | Location | | Ownership Interest | | September 30, 2022 | December 31, 2021 | | September 30, 2022 | September 30, 2021 |
Experiential lodging | | St. Pete Beach, FL | | 65 | % | (1) | $ | 20,226 | | $ | 25,894 | | | $ | 1,807 | | $ | (2,837) | |
Experiential lodging | | Warrens, WI | | 95 | % | (2) | 11,822 | | 10,068 | | | (92) | | (170) | |
Experiential lodging | | Breaux Bridge, LA | | 85 | % | (3) | 18,076 | | — | | | 233 | | — | |
Theatres | | China | | various | (4) | — | | 708 | | | (61) | | 7 | |
| | | | | | $ | 50,124 | | $ | 36,670 | | | $ | 1,887 | | $ | (3,000) | |
(1) The Company has equity investments in two unconsolidated real estate joint ventures related to two experiential lodging properties located in St. Petersburg Beach, Florida. The Company's investments in these joint ventures were considered to be variable interest investments, however, the underlying entities are not VIEs. There are two separate joint ventures, one that can be incurred by certain subsidiariesholds the investment in the real estate of the Company.
Subsequent to September 30, 2017,experiential lodging properties and the other that holds lodging operations, which are facilitated by a management agreement with an eligible independent contractor. The Company's investment in the operating entity is held in a taxable REIT subsidiary (TRS). The Company entered into three interest rate swap agreements onaccounts for its unsecured term loan. See Note 9 for further details.
Duringinvestment in these joint ventures under the equity method of accounting because control over major decisions is shared. On May 18, 2022, the joint venture that holds the real estate refinanced its secured mortgage loan, the new terms of which are described below. In connection with this refinancing, during the nine months ended September 30, 2017,2022, the Company issued an aggregate of 928,219 common shares underreceived $6.7 million in distributions. In addition, the direct share purchase component of its Dividend Reinvestment and Direct Share Purchase Plan (DSPP) for total net proceeds of $67.9 million. These proceeds were used to pay down a portion of the Company's unsecured revolving credit facility.
DuringCompany received $0.8 million in distributions from operations during the nine months ended September 30, 2017,2022. No distributions were received during the Company issued 8,851,264 common shares in connection withnine months ended September 30, 2021. The Company's accounting policy is to classify the transactions with CNL Lifestyledistribution on its consolidated statement of cash flows using the nature of the distribution approach based on facts and OZRE. See Note 4 for further information.circumstances surrounding the distribution.
8. Variable Interest Entities
The Company’sjoint venture that holds the real property has a secured mortgage loan of $105.0 million at September 30, 2022. The maturity date of this mortgage loan is May 18, 2025. The note can be extended for two additional one-year periods from the original maturity date upon the satisfaction of certain conditions. The mortgage loan bears interest
at SOFR plus 3.65%, with monthly interest payments required. The joint venture has an interest rate cap agreement to limit the variable portion of the interest rate (SOFR) on this note to 3.5% from May 19, 2022 to June 1, 2024.
(2) The Company has equity investments in two unconsolidated real estate joint ventures related to an experiential lodging property located in Warrens, Wisconsin. The Company's investments in these joint ventures were considered to be variable interest in VIEs currentlyinvestments, however, the underlying entities are not VIEs. There are two separate joint ventures, one that holds the investment in the formreal estate of equity ownership and loans provided by the Company to a VIE or other partner. The Company examines specific criteria and uses its judgment when determining if the Company is the primary beneficiary of a VIE. Factors considered in determining whether the Company is the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, and level of economic disproportionality between the Companyexperiential lodging property and the other partner(s).that holds lodging operations, which are facilitated by a management agreement. The Company's investment in the operating entity is held in a TRS. The Company accounts for its investment in these joint ventures under the equity method of accounting because control over major decisions is shared.
Consolidated VIEs
AsThe joint venture that holds the real property has a secured mortgage loan of September 30, 2017, the Company had invested approximately $18.5$16.3 million in one real estate project which is a VIE. This entity does not have any other significant assets or liabilities at September 30, 2017 and was established2022 that provides for additional draws of approximately $8.3 million to facilitatefund renovations. The maturity date of this mortgage loan is September 15, 2031. The loan bears interest at an annual fixed rate of 4.00% with monthly interest payments required. Additionally, the developmentCompany has guaranteed the completion of the renovations in the amount of a theatre project.
Unconsolidated VIE
Atpproximately $14.2 million, with $9.5 million remaining to fund at September 30, 2017, the Company's recorded investment2022.
(3) The Company has equity investments in two unconsolidated VIEs totaled $178.4 million. real estate joint ventures related to an experiential lodging property located in Breaux Bridge, Louisiana. The Company's investments in these joint ventures were considered to be variable interest investments, however, the underlying entities are not VIEs. There are two separate joint ventures, one that holds the investment in the real estate of the experiential lodging property and the other that holds lodging operations, which are facilitated by a management agreement. The Company's maximum exposureinvestment in the operating entity is held in a TRS. The Company accounts for its investment in these joint ventures under the equity method of accounting because control over major decisions is shared.
The joint venture that holds the real estate property has a secured senior mortgage loan of $38.5 million at September 30, 2022. The maturity date of this mortgage loan is March 8, 2034. The mortgage loan bears interest at an annual fixed rate of 3.85% through April 7, 2025 and increases to loss associated with these VIEs is limited4.25% from April 8, 2025 through maturity. Monthly interest payments are required. Additionally, the Company provided a subordinated loan to the Company's outstandingjoint venture for $11.3 million with a maturity date of March 8, 2034. The mortgage notesloan bears interest at an annual fixed rate of 7.25% through the sixth anniversary and related accrued interest receivableincreases to SOFR plus 7.20% with a cap of $178.4 million. These mortgage notes are secured by8.00%, through maturity.
(4) The Company has equity investments in unconsolidated joint ventures for three recreation properties and one public charter school. While these entities are VIEs,theatre projects located in China, with ownership interests ranging from 30% to 49%. During the nine months ended September 30, 2022, the Company hasrecognized $0.6 million in other-than-temporary impairment charges related to these equity investments. The Company determined thatthese investments had no fair value based primarily on discounted cash flow projections. The Company received distributions of $90 thousand from its investment in these joint ventures for the power to directnine months ended September 30, 2021. No distributions were received during the activities of these VIEs that most significantly impact the VIEs' economic performance is not held by the Company.nine months ended September 30, 2022.
9.10. Derivative Instruments
All derivatives are recognized at fair value in the consolidated balance sheets within the line items "Other assets" and "Accounts payable and accrued liabilities" as applicable. The Company's derivatives are subject to a master netting arrangement and the Company has elected not to offset its derivative position for purposes of balance sheet presentation and disclosure. The Company had derivative assets of $14.1 million at September 30, 2022 and no derivative assets at December 31, 2021. The Company had derivative liabilities of $0.2$4.9 million at December 31, 2021 and $2.5 million recorded in “Accounts payable and accrued liabilities” andno derivative assets of $23.3 million and $35.9 million recorded in “Other assets” in the consolidated balance sheetliabilities at September 30, 2017 and December 31, 2016, respectively.2022. The Company hadhas not posted or received collateral with its derivative counterparties as of September 30, 20172022 or December 31, 2016.2021. See Note 1011 for disclosures relating to the fair value of the derivative instruments as of September 30, 2017 and December 31, 2016.instruments.
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions including the effect of changes in foreign currency exchange rates on foreign currency transactions and interest rates on its LIBOR basedLIBOR-based borrowings. The Company manages this risk by following established risk management policies and
procedures including the use of derivatives. The Company’s objective in using derivatives is to add stability to reported earnings and to manage its exposure to foreign exchange and interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps, cross-currency swaps and foreign currency forwards.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements on its LIBOR based borrowings. To accomplish these objectives, the Company currently uses interest rate swaps as its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt or payment of variable-rate amounts from a counterparty which results in exchange for the Company making fixed-rate paymentsrecording net interest expense that is fixed over the life of the agreements without exchange of the underlying notional amount.
AsAt September 30, 2022, the Company had one interest rate swap agreement designated as a cash flow hedge of interest rate risk related to its variable rate secured bonds totaling $25.0 million. The interest rate swap agreement outstanding as of September 30, 2017, the Company had two interest rate swap agreements to fix the interest rate at 2.64% on $300.0 million of the unsecured term loan facility from July 6, 2017 to April 5, 2019.2022 is summarized below:
| | | | | | | | | | | | | | | | | | | | |
Fixed rate | | Notional Amount (in millions) | | Index | | Maturity |
1.3925% | | $ | 25.0 | | | USD LIBOR | | September 30, 2024 |
| | | | | | |
The effective portion of changeschange in the fair value of interest rate derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (AOCI) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Duringearnings within the nine months ended September 30, 2017 and 2016, such derivatives were used to hedgesame income statement line item as the variable cash flows associated with existing variable-rate debt. The
ineffective portionearnings effect of the change in fair value of the derivatives is recognized directly in earnings. No hedge ineffectiveness on cash flow hedges was recognized during the nine months ended September 30, 2017 and 2016.hedged transaction.
Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of September 30, 2017,2022, the Company estimates that during the twelve months endingending September 30, 2018, $0.22023, $0.7 million of gains will be reclassified from AOCI to interest expense.
Subsequent to September 30, 2017, on October 31, 2017, the Company entered into three interest rate swap agreements to fix the interest rate at 3.15% on an additional $50.0 million of its unsecured term loan facility from November 6, 2017 to April 4, 2019 and on $350.0 million of the unsecured term loan facility from April 5, 2019 to February 7, 2022.
Cash Flow Hedges of Foreign Exchange Risk
The Company is exposed to foreign currency exchange risk against its functional currency, USD, on CAD denominated cash flow from its foursix Canadian properties. The Company uses cross currencycross-currency swaps and foreign currency forwards to mitigate its exposure to fluctuations in the USD-CAD exchange rate on its Canadian properties. These foreign currency derivativescash inflows associated with these properties which should hedge a significant portion of the Company's expected CAD denominated cash flow of the Canadian properties as their impact on the Company's cash flow when settled should move in the opposite direction of the exchange rates used to translate revenues and expenses of these properties.
flows. As of September 30, 2017,2022, the Company had USD-CADthe following cross-currency swaps with a fixed original notional value of $100.0 million CAD and $98.1 million USD. swaps:
| | | | | | | | | | | | | | | | | | | | |
Fixed rate | | Notional Amount (in millions, CAD) | | Annual Cash Flow (in millions, CAD) | | Maturity |
$1.26 CAD per USD | | $ | 150.0 | | | $ | 10.8 | | | October 1, 2024 |
$1.28 CAD per USD | | 200.0 | | | 4.5 | | | October 1, 2024 |
$1.30 CAD per USD | | 90.0 | | | 8.1 | | | December 1, 2024 |
| | $ | 440.0 | | | $ | 23.4 | | | |
The net effect of these swaps is to lock in an exchange rate of $1.05 CAD per USD on approximately $13.5 million of annual CAD denominated cash flows on the properties through June 2018. Additionally, on August 30, 2017, the Company entered into a cross-currency swap that will be effective July 1, 2018 with a fixed original notional value of $100.0 million CAD and $79.5 million USD. The net effect of these swaps is to lock in an exchange rate of 1.26 CAD per USD on approximately $13.5 million of annual CAD denominated cash flows on the properties through June 2020.
The effective portion of changeschange in the fair value of foreign currency derivatives designated and that qualify as cash flow hedges of foreign exchange risk is recorded in AOCI and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portionearnings within the same income statement line item as the earnings effect of the change in fair valuehedged transaction. As of the derivative, as well as amounts excluded from the assessment of hedge effectiveness, is recognized directly in earnings. No hedge ineffectiveness on foreign currency derivatives was recognized for the nine months ended September 30, 2017 and 2016. As of September 30, 2017,2022, the Company estimates that during the twelve months ending September 30, 2018, $1.52023, $1.1 million of gains will be reclassified from AOCI to other income.
Net Investment Hedges
As discussed above, theThe Company is exposed to fluctuations in foreignthe USD-CAD exchange ratesrate on its four Canadian properties.net investments in Canada. As such, the Company uses currency forward agreements to hedgemanage its exposure to changes in foreign exchange rates. Currency forward agreements involve fixingrates on certain of its foreign net investments. As of September 30, 2022, the USD-CADCompany had the following foreign currency forwards designated as net investment hedges:
| | | | | | | | | | | | | | |
Fixed rate | | Notional Amount (in millions, CAD) | | Maturity |
$1.28 CAD per USD | | $ | 200.0 | | | October 1, 2024 |
$1.30 CAD per USD | | 90.0 | | | December 2, 2024 |
Total | | $ | 290.0 | | | |
The Company previously also used CAD to USD cross-currency swaps that were designated as net investment hedges. The cross-currency swaps included a monthly settlement feature to lock in an exchange rate for delivery of a specified amountCAD to USD. On April 29, 2022, the Company terminated its CAD to USD cross-currency swaps in conjunction with entering into new agreements. The Company paid $3.8 million in connection with the settlement of foreign currency on a specified date. The currency forwardthe CAD to USD cross-currency swap agreements, are typically cash settledwhich continues to be reported in USD for their fair value at or close to their settlement date. In order to hedgeAOCI until the net investment in four of the Canadian properties, on June 13, 2013, the Company entered into a forward contract with a fixed notional value of $100.0 million CAD and $94.3 million USD with a July 2018 settlement. The exchange rate of this forward contract is approximately $1.06 CAD per USD. Additionally, on February 28, 2014, the Company entered into a forward contract with a fixed notional value of $100.0 million CAD and $88.1 million USD with a July 2018 settlement date. The exchange rate of this forward contract is approximately $1.13 CAD per USD. These forward contracts should hedge a significant portion of the Company’s CAD denominated net investment in these four centers through July 2018 as the impact on AOCI from marking the derivative to market should move in the opposite direction of the translation adjustment on the net assets of these four Canadian properties.sold or liquidated.
For qualifying foreign currency derivatives designated as net investment hedges, the effective portion of changeschange in the fair value of the derivatives are reported in AOCI as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. No hedge ineffectiveness on net investment
hedges was recognized for the nine months ended September 30, 2017 and 2016. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company's accounting policy election. The earnings recognition of excluded components are presented in other income.
Below is a summary of the effect of derivative instruments on the consolidated statements of changes in equity and income for the three and nine months ended September 30, 20172022 and 2016.
2021.
Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and Income for the Three and Nine Months Ended September 30, 2017 and 2016 (Dollars in thousands) |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Description | 2017 | | 2016 | | 2017 | | 2016 |
Interest Rate Swaps | | | | | | | |
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion) | $ | 110 |
| | $ | 1,327 |
| | $ | 317 |
| | $ | (5,299 | ) |
Amount of Expense Reclassified from AOCI into Earnings (Effective Portion) (1) | (263 | ) | | (1,317 | ) | | (2,247 | ) | | (3,970 | ) |
Cross Currency Swaps | | | | | | | |
Amount of (Loss) Gain Recognized in AOCI on Derivative (Effective Portion) | (532 | ) | | 279 |
| | (907 | ) | | (1,159 | ) |
Amount of Income Reclassified from AOCI into Earnings (Effective Portion) (2) | 520 |
| | 643 |
| | 1,879 |
| | 1,957 |
|
Currency Forward Agreements | | | | | | | |
Amount of (Loss) Gain Recognized in AOCI on Derivative (Effective Portion) | (5,417 | ) | | 1,735 |
| | (10,132 | ) | | (5,819 | ) |
Amount of Income Reclassified from AOCI into Earnings (Effective Portion) | — |
| | — |
| | — |
| | — |
|
Total | | | | | | | |
Amount of (Loss) Gain Recognized in AOCI on Derivative (Effective Portion) | $ | (5,839 | ) | | $ | 3,341 |
| | $ | (10,722 | ) | | $ | (12,277 | ) |
Amount of Income (Expense) Reclassified from AOCI into Earnings (Effective Portion) | 257 |
| | (674 | ) | | (368 | ) | | (2,013 | ) |
Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021 (Dollars in thousands) | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Description | 2022 | 2021 | | 2022 | 2021 |
Cash Flow Hedges | | | | | |
Interest Rate Swaps | | | | | |
Amount of Gain (Loss) Recognized in AOCI on Derivative | $ | 527 | | $ | (3,338) | | | $ | 1,577 | | $ | (3,209) | |
Amount of Income (Expense) Reclassified from AOCI into Earnings (1) | 55 | | (4,962) | | | (58) | | (9,074) | |
Cross-Currency Swaps | | | | | |
Amount of Gain (Loss) Recognized in AOCI on Derivative | 2,072 | | 143 | | | 2,245 | | (71) | |
Amount of Income (Expense) Reclassified from AOCI into Earnings (2) | 128 | | (57) | | | 29 | | (205) | |
Net Investment Hedges | | | | | |
Cross-Currency Swaps | | | | | |
Amount of Gain Recognized in AOCI on Derivative | — | | 4,456 | | | 665 | | 356 | |
Amount of Income Recognized in Earnings (2) (3) | — | | 97 | | | 170 | | 270 | |
Currency Forward Agreements | | | | | |
Amount of Gain Recognized in AOCI on Derivative | 9,703 | | — | | | 10,641 | | — | |
| | | | | |
Total | | | | | |
Amount of Gain (Loss) Recognized in AOCI on Derivatives | $ | 12,302 | | $ | 1,261 | | | $ | 15,128 | | $ | (2,924) | |
Amount of Income (Expense) Reclassified from AOCI into Earnings | 183 | | (5,019) | | | (29) | | (9,279) | |
Amount of Income Recognized in Earnings | — | | 97 | | | 170 | | 270 | |
| | | | | |
Interest expense, net in accompanying consolidated statements of income and comprehensive income | $ | 32,747 | | $ | 36,584 | | | $ | 99,296 | | $ | 114,090 | |
Other income in accompanying consolidated statements of income and comprehensive income | $ | 11,360 | | $ | 8,091 | | | $ | 30,626 | | $ | 9,802 | |
| |
(1) | Included in "Interest expense, net" in the accompanying consolidated statements of income for the three and nine months ended September 30, 2017 and 2016. |
| |
(2) | Included in "Other income" in the accompanying consolidated statements of income for the three and nine months ended September 30, 2017 and 2016. |
(1) Included in "Interest expense, net" in the accompanying consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2022 and 2021.
(2) Included in "Other income" in the accompanying consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2022 and 2021.
(3) Amounts represent derivative gains excluded from the effectiveness testing.
Credit-risk-related Contingent Features
The Company has agreementsan agreement with each of its interest rate derivative counterpartiescounterparty that containcontains a provision where if the Company defaults on any of its obligations for borrowed money or credit in an amount exceeding $25.0$50.0 million and such default is not waived or cured within a specified period of time, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its interest rate derivative obligations.agreements.
As of September 30, 2017,2022, the fair value of the Company’sCompany had no derivatives in a liability position related to these derivative agreements was $0.2 million. If. As of September 30, 2022, the Company breachedhad not posted any collateral related to these agreements and was not in breach of the contractualany provisions ofin these derivative contracts, it would be required to settle its obligations under the agreements at their termination value, after considering the right of offset, the Company would have no obligation.agreements.
10.11. Fair Value Disclosures
The Company has certain financial instruments that are required to be measured under the FASB’s Fair Value Measurement guidance. The Company currently does not have any non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis.
As a basis for considering market participant assumptions in fair value measurements, the FASB’s Fair Value Measurement guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Derivative Financial Instruments
The Company uses interest rate swaps, foreign currency forwards and cross-currencycross currency swaps to manage its interest rate and foreign currency risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The fair valuesvalue of interest rate swaps areis determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the FASB's Fair Value Measurementfair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Although the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives also use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of September 30, 2017,2022, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives and therefore, classified its derivatives as Level 2 within the fair value reporting hierarchy.
The table below presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 20172022 and December 31, 20162021 aggregated by the level in the fair value hierarchy within which those measurements are classified and by derivative type.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2017 and December 31, 2016 (Dollars in thousands) |
| | | | | | | | | | | | | | | |
Description | Quoted Prices in Active Markets for Identical Assets (Level I) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Assets (Liabilities) Balance at end of period |
September 30, 2017 | | | | | | | |
Cross-Currency Swaps* | $ | — |
| | $ | 1,372 |
| | $ | — |
| | $ | 1,372 |
|
Currency Forward Agreements* | $ | — |
| | $ | 21,650 |
| | $ | — |
| | $ | 21,650 |
|
Interest Rate Swap Agreements* | $ | — |
| | $ | 83 |
| | $ | — |
| | $ | 83 |
|
December 31, 2016: | | | | | | | |
Cross-Currency Swaps* | $ | — |
| | $ | 4,158 |
| | $ | — |
| | $ | 4,158 |
|
Currency Forward Agreements* | $ | — |
| | $ | 31,782 |
| | $ | — |
| | $ | 31,782 |
|
Interest Rate Swap Agreements** | $ | — |
| | $ | (2,482 | ) | | $ | — |
| | $ | (2,482 | ) |
September 30, 2022 and December 31, 2021*(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Quoted Prices in Active Markets for Identical Assets (Level I) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at end of period |
September 30, 2022 | | | | | | | | |
| | | | | | | | |
Cross-Currency Swaps (1) | | $ | — | | | $ | 2,118 | | | $ | — | | | $ | 2,118 | |
| | | | | | | | |
Currency Forward Agreements (1) | | — | | | 10,641 | | | — | | | 10,641 | |
Interest Rate Swap Agreements (1) | | — | | | 1,374 | | | — | | | 1,374 | |
December 31, 2021 | | | | | | | | |
| | | | | | | | |
Cross-Currency Swaps (2) | | $ | — | | | $ | (4,626) | | | $ | — | | | $ | (4,626) | |
| | | | | | | | |
| | | | | | | | |
Interest Rate Swap Agreements (2) | | — | | | (262) | | | — | | | (262) | |
(1) Included in "Other assets" in the accompanying consolidated balance sheets.
**(2) Included in "Accounts payable and accrued liabilities" in the accompanying consolidated balance sheets.
Non-recurring fair value measurements
The table below presents the Company's assets measured at fair value on a non-recurring basis during the nine months endedas of September 30, 20172022, aggregated by the level in the fair value hierarchy within which those measurements fall.
are classified.
Assets Measured at Fair Value on a Non-Recurring Basis During the Nine Months Endedat September 30, 20172022 and December 31, 2021
(Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | |
Description | Quoted Prices in Active Markets for Identical Assets (Level I) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at end of period |
September 30, 2022 | | | | | | | |
Real estate investments, net | $ | — | | | $ | 4,700 | | | $ | — | | | $ | 4,700 | |
Mortgage notes and related accrued interest receivable | — | | | — | | | 7,780 | | | 7,780 | |
Investment in joint ventures | — | | | — | | | — | | | — | |
Other assets (1) | — | | | — | | | 1,316 | | | 1,316 | |
December 31, 2021 | | | | | | | |
Real estate investments, net | $ | — | | | $ | 6,956 | | | $ | — | | | $ | 6,956 | |
Other assets (1) | — | | | — | | | — | | | — | |
(1) Includes collateral dependent notes receivable, which are presented within "Other assets" in the accompanying consolidated balance sheets. |
| | | | | | | | | | | | | | | |
Description | Quoted Prices in Active Markets for Identical Assets (Level I) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at end of period |
| | | | | | | |
Investment in a direct financing lease, net | $ | — |
| | $ | — |
| | $ | 35,807 |
| | $ | 35,807 |
|
As further discussed in Note 4, during the nine months ended September 30, 2022, the Company recorded an impairment charge of $4.4 million related to real estate investments, net on one of its properties. Additionally, during the year ended December 31, 2021, the Company recorded impairment charges of $2.7 million related to real estate investments, net on two of its properties. Management estimated the fair values of these investments taking into account various factors including purchase offers, shortened hold periods and market conditions. The Company determined, based on the inputs, that the valuation of these properties with purchase offers were classified within Level 2 of the fair value hierarchy and were measured at fair value.
As further discussed further in Note 6, during the nine months ended September 30, 2017,2022, the Company recorded an allowance for credit losses of $6.8 million related to one mortgage note and $1.2 million related to one note receivable, as a result of recent changes in the borrower's financial status. Management valued the mortgage note and note receivable based on the fair value of the underlying collateral determined using independent appraisals
which used discounted cash flow models. The significant inputs and assumptions used in the real estate appraisals included market rents of approximately $20 per square foot and a discount rate of 6.75%. These measurements were classified within Level 3 of the fair value hierarchy as many of the assumptions were not observable. Additionally, during the nine months ended September 30, 2022, the Company recorded an allowance for credit losses totaling $1.9 million related to one note receivable to fully reserve the outstanding principal balance of $1.9 million, as a result of recent changes in the borrower's financial status. Management valued the note receivable based on the fair value of the underlying collateral which was determined taking into account various factors including implied asset value changes based on current market conditions and review of the financial statements of the borrower, and was classified within Level 3 of the fair value hierarchy.
Additionally, as further discussed in Note9, during the nine months ended September 30, 2022, the Company recorded impairment charges totaling $10.2of $0.6 million related to its investment in a direct financing lease, net.joint ventures. Management estimated the fair valuesvalue of this investmentthese investments, taking into account various factors including independent appraisals, input from an outside brokerimplied asset value changes based on discounted cash flow projections and current market conditions. The Company determined, based on the inputs, that its valuation of the investment in joint ventures was classified within Level 3 of the fair value hierarchy as many of the assumptions arewere not observable. During the three months ended September 30, 2017, the Company entered into revised lease terms on these properties and as a result, these properties were classified as operating leases and moved to rental properties, net during the three months ended September 30, 2017.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments at September 30, 20172022 and December 31, 2016:2021:
Mortgage notes receivable and related accrued interest receivable:
The fair value of the Company’s mortgage notes and related accrued interest receivable is estimated by discounting the future cash flows of each instrument using current market rates. At September 30, 2017,2022, the Company had a carrying value of $399.5 million in fixed rate mortgage notes receivable outstanding, including related accrued interest and allowance for credit losses, with a weighted average interest rate of approximately 8.96%. The fixed rate mortgage notes bear interest at rates of 6.99% to 12.14%. Discounting the future cash flows for fixed rate mortgage notes receivable using rates of 7.25% to 9.25%, management estimates the fair value of the fixed rate mortgage notes receivable to be approximately $436.6 million with an estimated weighted average market rate of 7.79% at September 30, 2022.
At December 31, 2021, the Company had a carrying value of $972.4$370.2 million in fixed rate mortgage notes receivable outstanding, including related accrued interest, with a weighted average interest rate of approximately 8.40%9.04%. The fixed rate mortgage notes bear interest at rates of 7.00%7.01% to 11.31%11.96%. Discounting the future cash flows for fixed rate mortgage notes receivable using rates of 7.00%7.50% to 12.00%9.25%, management estimates the fair value of the fixed rate mortgage notes receivable to be approximately $1.0 billion$400.1 million with an estimated weighted average market rate of 8.53% at September 30, 2017.
At December 31, 2016, the Company had a carrying value of $614.0 million in fixed rate mortgage notes receivable outstanding, including related accrued interest, with a weighted average interest rate of approximately 8.77%. The fixed rate mortgage notes bear interest at rates of 7.00% to 11.31%. Discounting the future cash flows for fixed rate mortgage notes receivable using rates of 7.00% to 12.00%, management estimates the fair value of the fixed rate mortgage notes receivable to be $648.5 million with an estimated weighted average market rate of 8.48%8.05% at December 31, 2016.2021.
Investment in a direct financing lease, net:
At September 30, 2017, the Company had an investment in a direct financing lease with a carrying value of $57.7 million, and with a weighted average effective interest rate of 11.98%. At September 30, 2017, the investment in a direct financing lease bears interest at effective rates of 11.90% to 12.38%. The carrying value of the $57.7 million investment in a direct financing lease approximated the fair market value at September 30, 2017.
At December 31, 2016, the Company had an investment in a direct financing lease with a carrying value of $102.7 million, and a weighted average effective interest rate of 12.00%. At December 31, 2016, the investment in a direct financing lease bears interest at effective interest rates of 11.79% to 12.38%. The carrying value of the investment in a direct financing lease approximated the fair market value at December 31, 2016.
Derivative instruments:
Derivative instruments are carried at their fair market value.
Debt instruments:
The fair value of the Company's debt is estimated by discounting the future cash flows of each instrument using current market rates. At September 30, 2017,2022, the Company had a carrying value of $25.0 million in variable rate debt outstanding with an average interest rate of approximately 3.27%. The carrying value of the variable rate debt outstanding approximated the fair value at September 30, 2022.
At December 31, 2021, the Company had a carrying value of $595.0$25.0 million in variable rate debt outstanding with a weighted average interest rate of approximately 2.42%0.15%. The carrying value of the variable rate debt outstanding approximated the fair market value at September 30, 2017.
At December 31, 2016, the Company had a carrying value of $375.0 million in variable rate debt outstanding with a weighted average interest rate of approximately 3.23%. The carrying value of the variable rate debt outstanding approximated the fair market value at December 31, 2016.2021.
At both September 30, 20172022 and December 31, 2016, $300.02021, the $25.0 million of variable rate debt outstanding, under the Company's unsecured term loan facilitydiscussed above, had been effectively converted to a fixed rate through April 5, 2019 by interest rate swap agreements. See Note 10 for additional information related to the Company's interest rate swap agreement.
At September 30, 2017,2022, the Company had a carrying value of $2.43$2.82 billion in fixed rate long-term debt outstanding with a weighted average interest rate of approximately 5.15%4.34%. Discounting the future cash flows for fixed rate debt using September 30, 20172022 market rates of 2.89%7.29% to 8.14%, management estimates the fair value of the fixed rate debt to be approximately $2.37 billion with an estimated weighted average market rate of 7.97% at September 30, 2022.
At December 31, 2021, the Company had a carrying value of $2.82 billion in fixed rate long-term debt outstanding with an average weighted interest rate of approximately 4.34%. Discounting the future cash flows for fixed rate debt using December 31, 2021 market rates of 2.25% to 4.56%, management estimates the fair value of the fixed rate debt to be approximately $2.54$2.93 billion with an estimated weighted average market rate of 3.96% at September 30, 2017.
At December 31, 2016, the Company had a carrying value of $2.14 billion in fixed rate long-term debt outstanding with an average weighted interest rate of approximately 5.27%. Discounting the future cash flows for fixed rate debt using December 31, 2016 market rates of 2.97% to 4.75%, management estimates the fair value of the fixed rate debt to be approximately $2.21 billion with an estimated weighted average market rate of 4.26%3.43% at December 31, 2016.2021.
11.
12. Earnings Per Share
The following table summarizes the Company’s computation of basic and diluted earnings per share (EPS) for the three and nine months ended September 30, 20172022 and 20162021 (amounts in thousands except per share information):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| Income (numerator) | | Shares (denominator) | | Per Share Amount | | Income (numerator) | | Shares (denominator) | | Per Share Amount |
Basic EPS: | | | | | | | | | | | |
Net income | $ | 50,799 | | | | | | | $ | 133,900 | | | | | |
Less: preferred dividend requirements | (6,033) | | | | | | | (18,099) | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income available to common shareholders | $ | 44,766 | | | 75,016 | | | $ | 0.60 | | | $ | 115,801 | | | 74,949 | | | $ | 1.55 | |
Diluted EPS: | | | | | | | | | | | |
Net income available to common shareholders | $ | 44,766 | | | 75,016 | | | | | $ | 115,801 | | | 74,949 | | | |
Effect of dilutive securities: | | | | | | | | | | | |
Share options and performance shares | — | | | 167 | | | | | — | | | 153 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income available to common shareholders | $ | 44,766 | | | 75,183 | | | $ | 0.60 | | | $ | 115,801 | | | 75,102 | | | $ | 1.54 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
| Income (numerator) | | Shares (denominator) | | Per Share Amount | | Income (numerator) | | Shares (denominator) | | Per Share Amount |
Basic EPS: | | | | | | | | | | | |
Net income | $ | 32,117 | | | | | | | $ | 54,049 | | | | | |
Less: preferred dividend requirements | (6,033) | | | | | | | (18,100) | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income available to common shareholders | $ | 26,084 | | | 74,804 | | | $ | 0.35 | | | $ | 35,949 | | | 74,738 | | | $ | 0.48 | |
Diluted EPS: | | | | | | | | | | | |
Net income available to common shareholders | $ | 26,084 | | | 74,804 | | | | | $ | 35,949 | | | 74,738 | | | |
Effect of dilutive securities: | | | | | | | | | | | |
Share options and performance shares | — | | | 107 | | | | | — | | | 81 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income available to common shareholders | $ | 26,084 | | | 74,911 | | | $ | 0.35 | | | $ | 35,949 | | | 74,819 | | | $ | 0.48 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| Income (numerator) | | Shares (denominator) | | Per Share Amount | | Income (numerator) | | Shares (denominator) | | Per Share Amount |
Basic EPS: | | | | | | | | | | | |
Income from continuing operations | $ | 62,954 |
| | | | | | $ | 197,405 |
| | | | |
Less: preferred dividend requirements | (5,951 | ) | | | | | | (17,855 | ) | | | | |
Net income available to common shareholders | $ | 57,003 |
| | 73,663 |
| | $ | 0.77 |
| | $ | 179,550 |
| | 70,320 |
| | $ | 2.55 |
|
Diluted EPS: | | | | | | | | | | | |
Net income available to common shareholders | $ | 57,003 |
| | 73,663 |
| | | | $ | 179,550 |
| | 70,320 |
| | |
Effect of dilutive securities: | | | | | | | | | | | |
Share options | — |
| | 61 |
| | | | — |
| | 65 |
| | |
Net income available to common shareholders | $ | 57,003 |
| | 73,724 |
| | $ | 0.77 |
| | $ | 179,550 |
| | 70,385 |
| | $ | 2.55 |
|
The effect of the potential common shares from the conversion of the Company’s convertible preferred shares and from the exercise of share options are included in diluted earnings per share if the effect is dilutive. Potential common shares from the performance shares are included in diluted earnings per share upon the satisfaction of certain performance and market conditions. These conditions are evaluated at each reporting period and if the conditions have been satisfied during the reporting period, the number of contingently issuable shares are included in the computation of diluted earnings per share.
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 |
| Income (numerator) | | Shares (denominator) | | Per Share Amount | | Income (numerator) | | Shares (denominator) | | Per Share Amount |
Basic EPS: | | | | | | | | | | | |
Income from continuing operations | $ | 57,526 |
| | | | | | $ | 166,841 |
| | | | |
Less: preferred dividend requirements | (5,951 | ) | | | | | | (17,855 | ) | | | | |
Net income available to common shareholders | $ | 51,575 |
| | 63,627 |
| | $ | 0.81 |
| | $ | 148,986 |
| | 63,296 |
| | $ | 2.35 |
|
Diluted EPS: | | | | | | | | | | | |
Net income available to common shareholders | $ | 51,575 |
| | 63,627 |
| | | | $ | 148,986 |
| | 63,296 |
| | |
Effect of dilutive securities: | | | | | | | | | | | |
Share options | — |
| | 120 |
| | | | — |
| | 97 |
| | |
Net income available to common shareholders | $ | 51,575 |
| | 63,747 |
| | $ | 0.81 |
| | $ | 148,986 |
| | 63,393 |
| | $ | 2.35 |
|
The following shares have been excluded from the calculation of diluted earnings per share, either because they are anti-dilutive or, in the case of contingently issuable performance shares, are not probable:
•The additional 2.1 million and 2.02.2 million common shares that would result from the conversion of the Company’s 5.75% Series C cumulative convertible preferred shares and the corresponding add-back of the preferred dividends declared on those shares for both the three and nine months ended September 30, 2022 and 2021.
•The additional 1.61.7 million common shares that would result from the conversion of the Company’s 9.0% Series E cumulative convertible preferred shares and the corresponding add-back of the preferred dividends declared on those shares are not included infor both the calculation of diluted earningsthree and nine months ended September 30, 2022 and 2021.
•Outstanding options to purchase 95 thousand and 89 thousand common shares at per share prices ranging from $44.44 to $76.63 for the three and nine months ended September 30, 2017 and 2016, respectively, because the effect is anti-dilutive.2022, respectively.
The dilutive effect of potential•Outstanding options to purchase 89 thousand common shares from the exercise of share options is included in diluted earningsat per share prices ranging from $44.44 to $76.63 for both the three and nine months ended September 30, 2017 and 2016. However, options to purchase 72021.
•The effect of 99 thousand contingently issuable performance shares of common shares at per share prices ranging from $61.79 to $76.63, were outstandinggranted during 2022 for both the three months ended September 30, 2017, but were not included in the computation of diluted earnings per share because they were anti-dilutive. For the three months ended September 30, 2016, there were no anti-dilutive options. Options to purchase 5 thousand and 84 thousand shares of common shares, respectively at per share prices ranging from $61.79 to $76.63 and $61.79 were outstanding for the nine months ended September 30, 20172022.
•The effect of 56 thousand contingently issuable performance shares granted during 2020 for both the three and 2016, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.nine months ended September 30, 2022 and 2021.
12.
13. Equity Incentive PlanPlans
All grants of common shares and options to purchase common shares were issued under the Company's 2007 Equity Incentive Plan prior to May 12, 2016 and under the 2016 Equity Incentive Plan on and after May 12, 2016. Under the 2016 Equity Incentive Plan, an aggregate of 1,950,0003,950,000 common shares, options to purchase common shares and restricted share units, subject to adjustment in the event of certain capital events, may be granted. Additionally, the 2020 Long Term Incentive Plan (2020 LTIP) is a sub-plan under the Company's 2016 Equity Incentive Plan. Under the 2020 LTIP, the Company awards performance shares and restricted shares to the Company's executive officers. At September 30, 2017,2022, there were 1,633,001were 1,983,595 shares available for grant under the 2016 Equity Incentive Plan.
Share Options
Share options granted under the 2007 Equity Incentive Plan and the 2016 Equity Incentive Plan have exercise prices equal to the fair market value of a common share at the date of grant. The options may be granted for any reasonable term, not to exceed 10 years, and for employees typically become exercisable at a rate of 25% per year over a four-year period.years. The Company generally issues new common shares upon option exercise. A summary of the Company’s share option activity and related information is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of options | | Option price per share | | Weighted avg. exercise price |
Outstanding at December 31, 2021 | 108,671 | | | $ | 44.44 | | | — | | | $ | 76.63 | | | $ | 56.79 | |
Exercised | (12,559) | | | 44.62 | | | — | | | 47.15 | | | 46.43 | |
| | | | | | | | | |
| | | | | | | | | |
Outstanding at September 30, 2022 | 96,112 | | | $ | 44.44 | | | — | | | $ | 76.63 | | | $ | 58.15 | |
|
| | | | | | | | | | | | | | | | | |
| Number of options | | Option price per share | | Weighted avg. exercise price |
Outstanding at December 31, 2016 | 285,986 |
| | $ | 19.02 |
| | — |
| | $ | 61.79 |
| | $ | 51.93 |
|
Exercised | (28,281 | ) | | 46.86 |
| | — |
| | 61.79 |
| | 54.72 |
|
Granted | 2,215 |
| | 76.63 |
| | — |
| | 76.63 |
| | 76.63 |
|
Forfeited/Expired | (1,342 | ) | | 51.64 |
| | — |
| | 61.79 |
| | 59.52 |
|
Outstanding at September 30, 2017 | 258,578 |
| | $ | 19.02 |
| | — |
| | $ | 76.63 |
| | $ | 51.80 |
|
The weighted average fair value of options granted was $7.91 $20.34 during the nine months ended September 30, 2017. There2021. No options were no options granted during the nine months ended September 30, 2016.2022. The intrinsic value of stockshare options exercised was $0.5 million and $3.4 million$62 thousand and $7 thousand for the nine months ended September 30, 20172022 and 2016,2021, respectively. Additionally, the Company repurchased 21,260 shares into treasury shares in conjunction with the stock options exercised during the nine months ended September 30, 2017 with a total value of $1.5 million. At September 30, 2017, stock-option expense to be recognized in future periods was $0.5 million.
The expense related to share options included in the determination of net income for the nine months ended September 30, 2017 and 2016 was $0.5 million and $0.7 million, respectively. The following assumptions were used in applying the Black-Scholes option pricing model at the grant dates for the nine months ended September 30, 2017: risk-free interest rate of 2.1%, dividend yield of 5.4%, volatility factors in the expected market price of the Company’s common shares of 22.0%, 0.74% expected forfeiture rate and an expected life of approximately six years. The Company uses historical data to estimate the expected life of the option and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Additionally, expected volatility is computed based on the average historical volatility of the Company’s publicly traded shares.
The following table summarizes outstanding options at September 30, 2017:
|
| | | | | | | | | | | | | | |
Exercise price range | | Options outstanding | | Weighted avg. life remaining | | Weighted avg. exercise price | | Aggregate intrinsic value (in thousands) |
$ 19.02 - 19.99 | | 11,097 |
| | 1.6 |
| | | | |
20.00 - 29.99 | | — |
| | — |
| | | | |
30.00 - 39.99 | | 1,428 |
| | 2.3 |
| | | | |
40.00 - 49.99 | | 86,863 |
| | 4.3 |
| | | | |
50.00 - 59.99 | | 75,939 |
| | 6.1 |
| | | | |
60.00 - 69.99 | | 81,036 |
| | 7.4 |
| | | | |
70.00 - 76.63 | | 2,215 |
| | 9.4 |
| | | | |
| | 258,578 |
| | 5.7 |
| | $ | 51.80 |
| | $ | 4,654 |
|
The following table summarizesand exercisable options at September 30, 2017:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options outstanding | | Options exercisable |
Exercise price range | | Options outstanding | Weighted avg. life remaining | Weighted avg. exercise price | Aggregate intrinsic value (in thousands) | | Options exercisable | Weighted avg. life remaining | Weighted avg. exercise price | Aggregate intrinsic value (in thousands) |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
$44.44 - 49.99 | | 8,750 | | 5.9 | | | | 7,372 | | 1.9 | | |
50.00 - 59.99 | | 31,008 | | 1.8 | | | | 31,008 | | 1.8 | | |
60.00 - 69.99 | | 52,198 | | 3.8 | | | | 50,754 | | 3.1 | | |
70.00 - 76.63 | | 4,156 | | 5.3 | | | | 3,671 | | 5.2 | | |
| | 96,112 | | 3.4 | $ | 58.15 | | $ | — | | | 92,805 | | 2.6 | $ | 58.10 | | $ | — | |
|
| | | | | | | | | | | | | | |
Exercise price range | | Options outstanding | | Weighted avg. life remaining | | Weighted avg. exercise price | | Aggregate intrinsic value (in thousands) |
$ 19.02 - 19.99 | | 11,097 |
| | 1.6 |
| | | | |
20.00 - 29.99 | | — |
| | — |
| | | | |
30.00 - 39.99 | | 1,428 |
| | 2.3 |
| | | | |
40.00 - 49.99 | | 86,863 |
| | 4.3 |
| | | | |
50.00 - 59.99 | | 51,276 |
| | 6.0 |
| | | | |
60.00 - 69.99 | | 38,375 |
| | 7.4 |
| | | | |
70.00 - 76.63 | | — |
| | — |
| | | | |
| | 189,039 |
| | 5.2 |
| | $ | 49.28 |
| | $ | 3,868 |
|
Nonvested Shares
A summary of the Company’s nonvested share activity and related information is as follows:
| | | | | | | | | | | | | | | | | |
| Number of shares | | Weighted avg. grant date fair value | | Weighted avg. life remaining |
Outstanding at December 31, 2021 | 478,554 | | | $ | 56.57 | | | |
Granted | 243,286 | | | 46.65 | | | |
Vested | (215,727) | | | 59.94 | | | |
Forfeited | (2,176) | | | 46.98 | | | |
Outstanding at September 30, 2022 | 503,937 | | | $ | 50.38 | | | 1.11 |
|
| | | | | | | | |
| Number of shares | | Weighted avg. grant date fair value | | Weighted avg. life remaining |
Outstanding at December 31, 2016 | 534,317 |
| | $ | 59.22 |
| | |
Granted | 295,754 |
| | 76.53 |
| | |
Vested | (208,822 | ) | | 57.43 |
| | |
Forfeited | (1,342 | ) | | 66.88 |
| | |
Outstanding at September 30, 2017 | 619,907 |
| | $ | 68.07 |
| | 1.21 |
The holders of nonvested shares have voting rights and receive dividends from the date of grant. These shares vest ratably over a period of three to four years. The fair value of the nonvested shares that vested was $15.0$10.2 million and $9.2$6.6 million for the nine months ended September 30, 20172022 and 2016,2021, respectively. At September 30, 2017,2022, unamortized share-based compensation expense related to nonvested shares was $24.2$11.4 million.
Nonvested Performance Shares
A summary of the Company's nonvested performance share activity and related information is as follows:
| | | | | |
| Target Number of Performance Shares |
Outstanding at December 31, 2021 | 158,776 | |
Granted | 98,610 | |
| |
| |
Outstanding at September 30, 2022 | 257,386 | |
The number of common shares issuable upon settlement of the performance shares granted during the nine months ended September 30, 2022, 2021 and 2020 will be based upon the Company's achievement level relative to the following performance measures at December 31, 2024, 2023 and 2022, respectively: 50% based upon the Company's Total Shareholder Return (TSR) relative to the TSRs of the Company's peer group companies, 25% based upon the Company's TSR relative to the TSRs of companies in the MSCI US REIT Index and 25% based upon the Company's Compounded Annual Growth Rate (CAGR) in AFFO per share over the three-year performance period. The Company's achievement level relative to the performance measures is assigned a specific payout percentage which is multiplied by a target number of performance shares.
The performance shares based on relative TSR performance have market conditions and are valued using a Monte Carlo simulation model on the grant date, which resulted in a grant date fair value of approximately $6.0 million and $6.6 million for the nine months ended September 30, 2022 and 2021, respectively. The estimated fair value is amortized to expense over the three-year performance periods, which end on December 31, 2024, 2023 and 2022 for performance shares granted in 2022, 2021 and 2020, respectively. The following assumptions were used in the Monte Carlo simulation for computing the grant date fair value of the performance shares with a market condition for the nine months ended September 30, 2022: risk-free interest rate of 1.7%, volatility factors in the expected market price of the Company's common shares of 71% and an expected life of approximately three years.
The performance shares based on growth in AFFO per share have a performance condition. The probability of achieving the performance condition is assessed at each reporting period. If it is deemed probable that the performance condition will be met, compensation cost will be recognized based on the closing price per share of the Company's common stock on the date of the grant multiplied by the number of awards expected to be earned. If it is deemed that it is not probable that the performance condition will be met, the Company will discontinue the recognition of compensation cost and any compensation cost previously recorded will be reversed. At September 30, 2022, achievement of the performance condition was deemed probable for the performance shares granted during the nine months ended September 30, 2022 and 2021 with an expected payout percentage of 200%, which resulted in a grant date fair value of approximately $2.3 million for each period. Achievement of the minimum performance condition for the performance shares granted during the nine months ended September 30, 2020 was deemed not probable at September 30, 2022, resulting in no expected payout.
At September 30, 2022, unamortized share-based compensation expense related to nonvested performance shares was $10.2 million.
The performance shares accrue dividend equivalents which are paid only if common shares are issued upon settlement of the performance shares. During the nine months ended September 30, 2022 and 2021, the Company accrued dividend equivalents expected to be paid on earned awards of $587 thousand and $65 thousand, respectively.
Restricted Share Units
A summary of the Company’s restricted share unit activity and related information is as follows:
| | | | | | | | | | | | | | | | | |
| Number of shares | | Weighted avg. grant date fair value | | Weighted avg. life remaining |
Outstanding at December 31, 2021 | 43,306 | | | $ | 49.15 | | | |
Granted | 41,399 | | | 50.49 | | | |
Vested | (46,100) | | | 49.00 | | | |
Outstanding at September 30, 2022 | 38,605 | | | $ | 50.77 | | | 0.67 |
|
| | | | | | | | |
| Number of shares | | Weighted avg. grant date fair value | | Weighted avg. life remaining |
Outstanding at December 31, 2016 | 15,805 |
| | $ | 70.93 |
| | |
Granted | 19,030 |
| | 70.91 |
| | |
Vested | (15,805 | ) | | 70.93 |
| | |
Outstanding at September 30, 2017 | 19,030 |
| | $ | 70.91 |
| | 0.58 |
The holders of restricted share units receive dividend equivalents from the date of grant. The share units vest upon the earlier of the day preceding the next annual meeting of shareholders or a change of control. The settlement date for the shares is selected by the non-employee Trustee, and ranges from one year from the grant date to upon termination of service. At September 30, 2017,2022, unamortized share-based compensation expense related to restrictedrestricted share units was $0.8$1.3 million.
13.
14. Operating Leases
The Company’s real estate investments are leased under operating leases. In addition to its lessor arrangements on its real estate investments, as of September 30, 2022 and December 31, 2021, the Company was lessee in 52 and 51 operating ground leases, respectively. The Company's tenants, who are generally sub-tenants under these ground leases, are responsible for paying the rent under these ground leases. As of September 30, 2022, rental revenue from several of the Company's tenants, who are also sub-tenants under the ground leases, is being recognized on a cash basis. In most cases, the ground lease sub-tenants have continued to pay the rent under these ground leases. In addition, two of these properties do not currently have sub-tenants. In the event the tenant fails to pay the ground lease rent or if the property does not have sub-tenants, the Company is primarily responsible for the payment, assuming the Company does not sell or re-tenant the property. The Company is also the lessee in an operating lease of its executive office.
The following table summarizes rental revenue, including sublease arrangements and lease costs, for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Classification | | 2022 | | 2021 | | 2022 | | 2021 |
Operating leases | Rental revenue | | $ | 134,316 | | | $ | 117,408 | | | $ | 405,062 | | | $ | 325,429 | |
Sublease income - operating ground leases | Rental revenue | | 6,155 | | | 5,632 | | | $ | 17,887 | | | $ | 16,108 | |
| | | | | | | | | |
Lease costs | | | | | | | | | |
Operating ground lease cost | Property operating expense | | $ | 6,602 | | | $ | 5,827 | | | $ | 18,707 | | | $ | 17,051 | |
Operating office lease cost | General and administrative expense | | 226 | | | 226 | | | 678 | | | 678 | |
| | | | | | | | | |
15. Segment Information
The Company groups its investments into two reportable operating segments: Experiential and Education.
The financial information summarized below is presented by reportable operating segment (in thousands):
| | | | | | | | | | | | | | |
Balance Sheet Data: |
| As of September 30, 2022 |
| Experiential | Education | Corporate/Unallocated | Consolidated |
Total Assets | $ | 5,122,466 | | $ | 493,550 | | $ | 176,743 | | $ | 5,792,759 | |
| | | | |
| As of December 31, 2021 |
| Experiential | Education | Corporate/Unallocated | Consolidated |
Total Assets | $ | 4,995,241 | | $ | 505,086 | | $ | 300,823 | | $ | 5,801,150 | |
| | | | | | | | | | | | | | |
Operating Data: | | | | |
| Three Months Ended September 30, 2022 |
| Experiential | Education | Corporate/Unallocated | Consolidated |
Rental revenue | $ | 130,588 | | $ | 9,883 | | $ | — | | $ | 140,471 | |
Other income | 11,200 | | — | | 160 | | 11,360 | |
Mortgage and other financing income | 9,353 | | 226 | | — | | 9,579 | |
Total revenue | 151,141 | | 10,109 | | 160 | | 161,410 | |
| | | | |
Property operating expense | 14,707 | | — | | — | | 14,707 | |
Other expense | 9,135 | | — | | — | | 9,135 | |
Total investment expenses | 23,842 | | — | | — | | 23,842 | |
Net operating income - before unallocated items | 127,299 | | 10,109 | | 160 | | 137,568 | |
| | | | |
Reconciliation to Consolidated Statements of Income and Comprehensive Income: |
General and administrative expense | | | (12,582) | |
| | | |
| | | |
| | | |
| | | |
Transaction costs | | | | (148) | |
Credit loss expense | | | | (241) | |
| | | | |
Depreciation and amortization | | | (41,539) | |
Gain on sale of real estate | | | 304 | |
Interest expense, net | | | | (32,747) | |
Equity in income from joint ventures | | | 572 | |
| | | |
| | | |
Income tax expense | | | (388) | |
| | | |
| | | |
| | | |
| | | |
Net income | | | 50,799 | |
| | | | |
Preferred dividend requirements | | | (6,033) | |
Net income available to common shareholders of EPR Properties | $ | 44,766 | |
| | | | | | | | | | | | | | |
Operating Data: | | | | |
| Three Months Ended September 30, 2021 |
| Experiential | Education | Corporate/Unallocated | Consolidated |
Rental revenue | $ | 113,589 | | $ | 9,451 | | $ | — | | $ | 123,040 | |
Other income | 8,052 | | — | | 39 | | 8,091 | |
Mortgage and other financing income | 8,283 | | 233 | | — | | 8,516 | |
Total revenue | 129,924 | | 9,684 | | 39 | | 139,647 | |
| | | | |
Property operating expense | 13,572 | | 16 | | 227 | | 13,815 | |
Other expense | 7,851 | | — | | — | | 7,851 | |
Total investment expenses | 21,423 | | 16 | | 227 | | 21,666 | |
Net operating income - before unallocated items | 108,501 | | 9,668 | | (188) | | 117,981 | |
| | | | |
Reconciliation to Consolidated Statements of Income and Comprehensive Income: |
General and administrative expense | | | (11,154) | |
| | | |
| | | |
| | | |
Transaction costs | | | | (2,132) | |
Credit loss benefit | | | | 14,096 | |
Impairment charges | | | | (2,711) | |
Depreciation and amortization | | | (42,612) | |
Gain on sale of real estate | | | 787 | |
Costs associated with loan refinancing or payoff | | | (4,741) | |
Interest expense, net | | | | (36,584) | |
Equity in loss from joint ventures | | | (418) | |
| | | | |
| | |
Income tax expense | | | | (395) | |
| | | | |
| | | |
| | |
Net income | | | 32,117 | |
Preferred dividend requirements | | (6,033) | |
Net income available to common shareholders of EPR Properties | $ | 26,084 | |
| | | | | | | | | | | | | | |
Operating Data: | | | | |
| Nine Months Ended September 30, 2022 |
| Experiential | Education | Corporate/Unallocated | Consolidated |
Rental revenue | $ | 392,622 | | $ | 30,327 | | $ | — | | $ | 422,949 | |
Other income | 28,095 | | — | | 2,531 | | 30,626 | |
Mortgage and other financing income | 25,069 | | 684 | | — | | 25,753 | |
Total revenue | 445,786 | | 31,011 | | 2,531 | | 479,328 | |
| | | | |
Property operating expense | 41,758 | | (7) | | 487 | | 42,238 | |
Other expense | 26,104 | | — | | — | | 26,104 | |
Total investment expenses | 67,862 | | (7) | | 487 | | 68,342 | |
Net operating income - before unallocated items | 377,924 | | 31,018 | | 2,044 | | 410,986 | |
| | | | |
Reconciliation to Consolidated Statements of Income and Comprehensive Income: |
General and administrative expense | | | (38,497) | |
| | | |
| | | |
| | | |
Transaction costs | | | | (3,540) | |
Credit loss expense | | | | (9,447) | |
Impairment charges | | | | (4,351) | |
Depreciation and amortization | | | (122,349) | |
Gain on sale of real estate | | | 304 | |
Interest expense, net | | | | (99,296) | |
Equity in income from joint ventures | | | 1,887 | |
Impairment charges on joint ventures | | | | (647) | |
| | |
Income tax expense | | | | (1,150) | |
| | | | |
| | | |
Net income | | | 133,900 | |
Preferred dividend requirements | | (18,099) | |
Net income available to common shareholders of EPR Properties | $ | 115,801 | |
| | | | | | | | | | | | | | |
Operating Data: | | | | |
| Nine Months Ended September 30, 2021 |
| Experiential | Education | Corporate/Unallocated | Consolidated |
Rental revenue | $ | 313,424 | | $ | 28,113 | | $ | — | | $ | 341,537 | |
Other income | 9,442 | | — | | 360 | | 9,802 | |
Mortgage and other financing income | 24,663 | | 772 | | — | | 25,435 | |
Total revenue | 347,529 | | 28,885 | | 360 | | 376,774 | |
| | | | |
Property operating expense | 42,985 | | 113 | | 708 | | 43,806 | |
Other expense | 13,428 | | — | | — | | 13,428 | |
Total investment expenses | 56,413 | | 113 | | 708 | | 57,234 | |
Net operating income - before unallocated items | 291,116 | | 28,772 | | (348) | | 319,540 | |
| | | | |
Reconciliation to Consolidated Statements of Income and Comprehensive Income: |
General and administrative expense | | | (33,866) | |
| | | |
| | | |
Transaction costs | | | | (3,342) | |
Credit loss benefit | | | | 19,677 | |
Impairment charges | | | | (2,711) | |
Depreciation and amortization | | | (123,476) | |
Gain on sale of real estate | | | 1,499 | |
Costs associated with loan refinancing or payoff | | | (4,982) | |
Interest expense, net | | | | (114,090) | |
Equity in loss from joint ventures | | | (3,000) | |
| | | | |
| | |
Income tax expense | | | | (1,200) | |
| | | | |
| | | |
Net income | | | 54,049 | |
Preferred dividend requirements | | (18,100) | |
Net income available to common shareholders of EPR Properties | $ | 35,949 | |
16. Other Commitments and Contingencies
As of September 30, 2017,2022, the Company had 17 development projects with commitments to fund an aggregate of approximately $202.4 million of commitments to fund development projects including 34 entertainment development projects for which it had commitments to fund approximately $97.0 million, nine education development projects for which it had commitments to fund approximately $40.9 million, and six recreation development projects for which it had commitments to fund approximately $64.5$161.6 million. Development costs are advanced by the Company in periodic draws. If the Company determines that construction is not being completed in accordance with the terms of the development agreement, it can discontinue funding construction draws. The Company has agreed to lease the properties to the operators at pre-determined rates upon completion of construction.
Additionally as of September 30, 2017, the Company had a commitment to fund approximately $155.0 million over the next three years, of which $22.3 million had been funded, to complete an indoor waterpark hotel and adventure park at the Adelaar casino and resort project in Sullivan County, New York. The Company is also responsible for the construction of the casino and resort project common infrastructure. In June 2016, the Sullivan County Infrastructure Local Development Corporation issued $110.0 million of Series 2016 Revenue Bonds which is expected to fund a substantial portion of such construction costs. The Company received an initial reimbursement of $43.4 million of construction costs during the year ended December 31, 2016 and an additional reimbursement of $23.9 million during the nine months ended September 30, 2017. The Company expects to receive an additional $21.0 million of reimbursements over the balance of the construction period. Construction of infrastructure improvements is currently expected to be completed in 2018.
The Company has certain commitments related to its mortgage notenotes and notes receivable investments that it may be required to fund in the future. The Company is generally obligated to fund these commitments at the request of the borrower or upon the occurrence of events outside of its direct control. As of September 30, 2017,2022, the Company had eighttwo mortgage notes receivable with commitments totaling approximately $25.7$10.4 million. If commitments are funded in the future, interest will be charged at rates consistent with the existing investments.
The Company has provided guarantees of the payment of certain economic development revenue bonds totaling $24.9 million related to two theatres in Louisiana for which the Company earns a fee at annual rates of 2.88% to 4.00% over the 30-year terms of the related bonds. The Company recorded $10.4 million as a deferred asset included in other assets and $10.4 million included in other liabilities in the accompanying consolidated balance sheet as of September 30, 2017 related to these guarantees. No amounts have been accrued as a loss contingency related to these guarantees because payment by the Company is not probable.
In connection with construction of itsthe Company's development projects and related infrastructure, certain public agencies require posting of surety bonds to guarantee that the Company's obligations are satisfied. These bonds expire upon the completion of the improvements or infrastructure. As of September 30, 2017,2022, the Company had sixthree surety bonds outstanding totaling $24.3$3.3 million.
Prior proposed casino and resort developers Concord Associates, L.P., Concord Resort, LLC and Concord Kiamesha LLC, which are affiliates of Louis Cappelli and from whom the Company acquired the Adelaar resort property (the Cappelli Group), commenced litigation against the Company beginning in 2011 regarding matters relating to the acquisition of that property and the Company's relationship with the Empire Resorts, Inc. and certain of its subsidiaries. This litigation involves three separate cases filed in state and federal court. Two of the cases, a state and the federal case, are closed and resulted in no liability by the Company.
The remaining case was filed on October 20, 2011 by the Cappelli Group against the Company and two of its affiliates in the Supreme Court of the State of New York, County of Westchester (the Westchester Action), asserting a claim for breach of contract and the implied covenant of good faith, and seeking damages of at least $800 million, based on allegations that the Company had breached an agreement (the Casino Development Agreement), dated June 18, 2010. The Company moved to dismiss the complaint in the Westchester Action based on a decision issued by the Sullivan County Supreme Court (one of the two closed cases referenced above) on June 30, 2014, as affirmed by the Appellate Division, Third Department (the Sullivan Action). On January 26, 2016, the Westchester County Supreme Court denied
the Company's motion to dismiss but ordered the Cappelli Group to amend its pleading and remove all claims and allegations previously determined by the Sullivan Action. On February 18, 2016, the Cappelli Group filed an amended complaint asserting a single cause of action for breach of the covenant of good faith and fair dealing based upon allegations the Company had interfered with plaintiffs’ ability to obtain financing which complied with the Casino Development Agreement. On March 23, 2016, the Company filed a motion to dismiss the Cappelli Group’s revised amended complaint. On January 5, 2017, the Westchester County Supreme Court denied the Company’s second motion to dismiss. Discovery is ongoing.
The Company has not determined that losses related to the remaining Westchester Action are probable. In light of the inherent difficulty of predicting the outcome of litigation generally, the Company does not have sufficient information to determine the amount or range of reasonably possible loss with respect to these matters. The Company’s assessments are based on estimates and assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. The Company intends to vigorously defend the claims asserted against the Company and certain of its subsidiaries by the Cappelli Group and its affiliates, for which the Company believes it has meritorious defenses, but there can be no assurances as to the outcome of the claims and related litigation.
14. Segment Information
The Company groups investments into four reportable operating segments: Entertainment, Education, Recreation and Other. The financial information summarized below is presented by reportable operating segment:
|
| | | | | | | | | | | | | | | | | | | |
Balance Sheet Data: |
| | As of September 30, 2017 |
| | Entertainment | Education | Recreation | Other | Corporate/Unallocated | Consolidated |
Total Assets | | $ | 2,343,778 |
| $ | 1,489,459 |
| $ | 2,057,172 |
| $ | 193,766 |
| $ | 48,835 |
| $ | 6,133,010 |
|
| | | | | | | |
| | As of December 31, 2016 |
| | Entertainment | Education | Recreation | Other | Corporate/Unallocated | Consolidated |
Total Assets | | $ | 2,168,669 |
| $ | 1,308,288 |
| $ | 1,120,498 |
| $ | 202,394 |
| $ | 65,173 |
| $ | 4,865,022 |
|
|
| | | | | | | | | | | | | | | | | | | |
Operating Data: | | | | | | | |
| | Three Months Ended September 30, 2017 |
| | Entertainment | Education | Recreation | Other | Corporate/Unallocated | Consolidated |
Rental revenue | | $ | 66,888 |
| $ | 21,478 |
| $ | 32,171 |
| $ | 2,290 |
| $ | — |
| $ | 122,827 |
|
Tenant reimbursements | | 3,733 |
| 1 |
| — |
| — |
| — |
| 3,734 |
|
Other income | | 2 |
| — |
| — |
| — |
| 520 |
| 522 |
|
Mortgage and other financing income | | 1,151 |
| 9,023 |
| 14,140 |
| — |
| — |
| 24,314 |
|
Total revenue | | 71,774 |
| 30,502 |
| 46,311 |
| 2,290 |
| 520 |
| 151,397 |
|
| | | | | | | |
Property operating expense | | 5,680 |
| 119 |
| 29 |
| 327 |
| 185 |
| 6,340 |
|
Total investment expenses | | 5,680 |
| 119 |
| 29 |
| 327 |
| 185 |
| 6,340 |
|
Net operating income - before unallocated items | | 66,094 |
| 30,383 |
| 46,282 |
| 1,963 |
| 335 |
| 145,057 |
|
| | | | | | | |
Reconciliation to Consolidated Statements of Income: | | | | |
General and administrative expense | | | | | (12,070 | ) |
Costs associated with loan refinancing or payoff | | | | (1,477 | ) |
Interest expense, net | | | | | | | (34,194 | ) |
Transaction costs | | | | | | | (113 | ) |
Depreciation and amortization | | | | (34,694 | ) |
Equity in income from joint ventures | | | | | 35 |
|
Gain on sale of real estate | | | | 997 |
|
Income tax expense | | | | (587 | ) |
Net income | | | | 62,954 |
|
Preferred dividend requirements | | | | (5,951 | ) |
Net income available to common shareholders of EPR Properties | $ | 57,003 |
|
|
| | | | | | | | | | | | | | | | | | | |
Operating Data: | | | | | | | |
| | Three Months Ended September 30, 2016 |
| | Entertainment | Education | Recreation | Other | Corporate/Unallocated | Consolidated |
Rental revenue | | $ | 64,134 |
| $ | 19,900 |
| $ | 15,958 |
| $ | 2,290 |
| $ | — |
| $ | 102,282 |
|
Tenant reimbursements | | 3,816 |
| 5 |
| — |
| — |
| — |
| 3,821 |
|
Other income | | 8 |
| — |
| 1,825 |
| — |
| 643 |
| 2,476 |
|
Mortgage and other financing income | | 1,294 |
| 7,319 |
| 8,384 |
| 34 |
| — |
| 17,031 |
|
Total revenue | | 69,252 |
| 27,224 |
| 26,167 |
| 2,324 |
| 643 |
| 125,610 |
|
| | | | | | | |
Property operating expense | | 5,228 |
| — |
| — |
| 233 |
| 165 |
| 5,626 |
|
Total investment expenses | | 5,228 |
| — |
| — |
| 233 |
| 165 |
| 5,626 |
|
Net operating income - before unallocated items | | 64,024 |
| 27,224 |
| 26,167 |
| 2,091 |
| 478 |
| 119,984 |
|
| | | | | | | |
Reconciliation to Consolidated Statements of Income: | | | | |
General and administrative expense | | | | | (9,091 | ) |
Costs associated with loan refinancing or payoff | | | | (14 | ) |
Interest expense, net | | | | | | | (24,265 | ) |
Transaction costs | | | | | | | (2,947 | ) |
Depreciation and amortization | | | | | (27,601 | ) |
Equity in income from joint ventures | | | | 203 |
|
Gain on sale of real estate | | | | 1,615 |
|
Income tax expense | | | | | | | (358 | ) |
Net income | | | | 57,526 |
|
Preferred dividend requirements | | | (5,951 | ) |
Net income available to common shareholders of EPR Properties | $ | 51,575 |
|
|
| | | | | | | | | | | | | | | | | | | |
Operating Data: | | | | | | | |
| | Nine Months Ended September 30, 2017 |
| | Entertainment | Education | Recreation | Other | Corporate/Unallocated | Consolidated |
Rental revenue | | $ | 197,441 |
| $ | 66,168 |
| $ | 78,854 |
| $ | 6,870 |
| $ | — |
| $ | 349,333 |
|
Tenant reimbursements | | 11,423 |
| 1 |
| — |
| — |
| — |
| 11,424 |
|
Other income | | 614 |
| 1 |
| — |
| — |
| 1,903 |
| 2,518 |
|
Mortgage and other financing income | | 3,426 |
| 26,440 |
| 35,150 |
| — |
| — |
| 65,016 |
|
Total revenue | | 212,904 |
| 92,610 |
| 114,004 |
| 6,870 |
| 1,903 |
| 428,291 |
|
| | | | | | | |
Property operating expense | | 17,060 |
| 151 |
| 86 |
| 1,020 |
| 445 |
| 18,762 |
|
Total investment expenses | | 17,060 |
| 151 |
| 86 |
| 1,020 |
| 445 |
| 18,762 |
|
Net operating income - before unallocated items | | 195,844 |
| 92,459 |
| 113,918 |
| 5,850 |
| 1,458 |
| 409,529 |
|
| | | | | | | |
Reconciliation to Consolidated Statements of Income: | | | | |
General and administrative expense | | | | | (33,787 | ) |
Costs associated with loan refinancing or payoff | | | | (1,491 | ) |
Gain on early extinguishment of debt | | | | 977 |
|
Interest expense, net | | | | | | | (97,853 | ) |
Transaction costs | | | | | | | (388 | ) |
Impairment charges | | | | (10,195 | ) |
Depreciation and amortization | | | | | (95,919 | ) |
Equity in income from joint ventures | | | | 86 |
|
Gain on sale of real estate | | | | | 28,462 |
|
Income tax expense | | | | | | | (2,016 | ) |
Net income | | | | 197,405 |
|
Preferred dividend requirements | | | | | (17,855 | ) |
Net income available to common shareholders of EPR Properties | $ | 179,550 |
|
|
| | | | | | | | | | | | | | | | | | | |
Operating Data: | | | | | | | |
| | Nine Months Ended September 30, 2016 |
| | Entertainment | Education | Recreation | Other | Corporate/Unallocated | Consolidated |
Rental revenue | | $ | 185,530 |
| $ | 54,797 |
| $ | 45,443 |
| $ | 6,345 |
| $ | — |
| $ | 292,115 |
|
Tenant reimbursements | | 11,570 |
| 7 |
| — |
| — |
| — |
| 11,577 |
|
Other income | | 222 |
| — |
| 3,635 |
| — |
| 1,955 |
| 5,812 |
|
Mortgage and other financing income | | 4,927 |
| 25,228 |
| 22,650 |
| 102 |
| — |
| 52,907 |
|
Total revenue | | 202,249 |
| 80,032 |
| 71,728 |
| 6,447 |
| 1,955 |
| 362,411 |
|
| | | | | | | |
Property operating expense | | 15,815 |
| — |
| 8 |
| 419 |
| 445 |
| 16,687 |
|
Other expense | | — |
| — |
| — |
| 5 |
| — |
| 5 |
|
Total investment expenses | | 15,815 |
| — |
| 8 |
| 424 |
| 445 |
| 16,692 |
|
Net operating income - before unallocated items | | 186,434 |
| 80,032 |
| 71,720 |
| 6,023 |
| 1,510 |
| 345,719 |
|
| | | | | | | |
Reconciliation to Consolidated Statements of Income: | | | | |
General and administrative expense | | | | | (27,309 | ) |
Costs associated with loan refinancing or payoff | | | | (905 | ) |
Interest expense, net | | | | | | | (70,310 | ) |
Transaction costs | | | | | | | (4,881 | ) |
Depreciation and amortization | | | | | (79,222 | ) |
Equity in income from joint ventures | | | | 501 |
|
Gain on sale of real estate | | | | | 3,885 |
|
Income tax expense | | | | | | | (637 | ) |
Net income | | | | 166,841 |
|
Preferred dividend requirements | | | | | (17,855 | ) |
Net income available to common shareholders of EPR Properties | $ | 148,986 |
|
15. Condensed Consolidating Financial Statements
A portion of the Company's subsidiaries have guaranteed the Company’s indebtedness under the Company's unsecured credit facilities and existing senior unsecured notes. The guarantees are joint and several, full and unconditional and subject to customary release provisions. The following summarizes the Company’s condensed consolidating information as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016 (in thousands):
Condensed Consolidating Balance Sheet As of September 30, 2017 |
| | | | | | | | | | | | | | | | | | | |
| EPR Properties (Issuer) | | Wholly Owned Subsidiary Guarantors | | Non- Guarantor Subsidiaries | | Consolidated Elimination | | Consolidated |
Assets | | | | | | | | | |
Rental properties, net | $ | — |
| | $ | 3,640,225 |
| | $ | 895,769 |
| | $ | — |
| | $ | 4,535,994 |
|
Land held for development | — |
| | 12,402 |
| | 21,272 |
| | — |
| | 33,674 |
|
Property under development | — |
| | 236,916 |
| | 47,295 |
| | — |
| | 284,211 |
|
Mortgage notes and related accrued interest receivable | — |
| | 963,738 |
| | 8,633 |
| | — |
| | 972,371 |
|
Investment in a direct financing lease, net | — |
| | 57,698 |
| | — |
| | — |
| | 57,698 |
|
Investment in joint ventures | — |
| | — |
| | 5,616 |
| | — |
| | 5,616 |
|
Cash and cash equivalents | 8,788 |
| | 1,472 |
| | 1,152 |
| | — |
| | 11,412 |
|
Restricted cash | 395 |
| | 23,599 |
| | 329 |
| | — |
| | 24,323 |
|
Accounts receivable, net | 675 |
| | 89,230 |
| | 9,308 |
| | — |
| | 99,213 |
|
Intercompany notes receivable | — |
| | 179,589 |
| | — |
| | (179,589 | ) | | — |
|
Investments in subsidiaries | 5,892,529 |
| | — |
| | — |
| | (5,892,529 | ) | | — |
|
Other assets | 26,485 |
| | 32,417 |
| | 49,596 |
| | — |
| | 108,498 |
|
Total assets | $ | 5,928,872 |
| | $ | 5,237,286 |
| | $ | 1,038,970 |
| | $ | (6,072,118 | ) | | $ | 6,133,010 |
|
Liabilities and Equity | | | | | | | | | |
Liabilities: | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 58,308 |
| | $ | 65,910 |
| | $ | 16,364 |
| | $ | — |
| | $ | 140,582 |
|
Dividends payable | 30,997 |
| | — |
| | — |
| | — |
| | 30,997 |
|
Unearned rents and interest | — |
| | 69,615 |
| | 15,583 |
| | — |
| | 85,198 |
|
Intercompany notes payable | — |
| | — |
| | 179,589 |
| | (179,589 | ) | | — |
|
Debt | 2,951,259 |
| | — |
| | 36,666 |
| | — |
| | 2,987,925 |
|
Total liabilities | 3,040,564 |
| | 135,525 |
| | 248,202 |
| | (179,589 | ) | | 3,244,702 |
|
Total equity | 2,888,308 |
| | 5,101,761 |
| | 790,768 |
| | (5,892,529 | ) | | 2,888,308 |
|
Total liabilities and equity | $ | 5,928,872 |
| | $ | 5,237,286 |
| | $ | 1,038,970 |
| | $ | (6,072,118 | ) | | $ | 6,133,010 |
|
Condensed Consolidating Balance Sheet As of December 31, 2016 |
| | | | | | | | | | | | | | | | | | | |
| EPR Properties (Issuer) | | Wholly Owned Subsidiary Guarantors | | Non- Guarantor Subsidiaries | | Consolidated Elimination | | Consolidated |
Assets | | | | | | | | | |
Rental properties, net | $ | — |
| | $ | 3,164,622 |
| | $ | 431,140 |
| | $ | — |
| | $ | 3,595,762 |
|
Land held for development | — |
| | 1,258 |
| | 21,272 |
| | — |
| | 22,530 |
|
Property under development | 1,010 |
| | 247,239 |
| | 48,861 |
| | — |
| | 297,110 |
|
Mortgage notes and related accrued interest receivable | — |
| | 612,141 |
| | 1,837 |
| | — |
| | 613,978 |
|
Investment in a direct financing lease, net | — |
| | 102,698 |
| | — |
| | — |
| | 102,698 |
|
Investment in joint ventures | — |
| | — |
| | 5,972 |
| | — |
| | 5,972 |
|
Cash and cash equivalents | 16,586 |
| | 1,157 |
| | 1,592 |
| | — |
| | 19,335 |
|
Restricted cash | 365 |
| | 8,352 |
| | 1,027 |
| | — |
| | 9,744 |
|
Accounts receivable, net | 556 |
| | 89,145 |
| | 9,238 |
| | — |
| | 98,939 |
|
Intercompany notes receivable | — |
| | 179,589 |
| | — |
| | (179,589 | ) | | — |
|
Investments in subsidiaries | 4,521,095 |
| | — |
| | — |
| | (4,521,095 | ) | | — |
|
Other assets | 21,768 |
| | 23,068 |
| | 54,118 |
| | — |
| | 98,954 |
|
Total assets | $ | 4,561,380 |
| | $ | 4,429,269 |
| | $ | 575,057 |
| | $ | (4,700,684 | ) | | $ | 4,865,022 |
|
Liabilities and Equity | | | | | | | | | |
Liabilities: | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 63,431 |
| | $ | 52,061 |
| | $ | 4,266 |
| | $ | — |
| | $ | 119,758 |
|
Dividends payable | 26,318 |
| | — |
| | — |
| | — |
| | 26,318 |
|
Unearned rents and interest | — |
| | 46,647 |
| | 773 |
| | — |
| | 47,420 |
|
Intercompany notes payable | — |
| | — |
| | 179,589 |
| | (179,589 | ) | | — |
|
Debt | 2,285,730 |
| | — |
| | 199,895 |
| | — |
| | 2,485,625 |
|
Total liabilities | 2,375,479 |
| | 98,708 |
| | 384,523 |
| | (179,589 | ) | | 2,679,121 |
|
Total equity | 2,185,901 |
| | 4,330,561 |
| | 190,534 |
| | (4,521,095 | ) | | 2,185,901 |
|
Total liabilities and equity | $ | 4,561,380 |
| | $ | 4,429,269 |
| | $ | 575,057 |
| | $ | (4,700,684 | ) | | $ | 4,865,022 |
|
Condensed Consolidating Statement of Income Three Months Ended September 30, 2017 |
| | | | | | | | | | | | | | | | | | | |
| EPR Properties (Issuer) | | Wholly Owned Subsidiary Guarantors | | Non- Guarantor Subsidiaries | | Consolidated Elimination | | Consolidated |
Rental revenue | $ | — |
| | $ | 97,398 |
| | $ | 25,429 |
| | $ | — |
| | $ | 122,827 |
|
Tenant reimbursements | — |
| | 1,274 |
| | 2,460 |
| | — |
| | 3,734 |
|
Other income | — |
| | 1 |
| | 521 |
| | — |
| | 522 |
|
Mortgage and other financing income | 232 |
| | 23,960 |
| | 122 |
| | — |
| | 24,314 |
|
Intercompany fee income | 732 |
| | — |
| | — |
| | (732 | ) | | — |
|
Interest income on intercompany notes receivable | — |
| | 2,580 |
| | — |
| | (2,580 | ) | | — |
|
Total revenue | 964 |
| | 125,213 |
| | 28,532 |
| | (3,312 | ) | | 151,397 |
|
Equity in subsidiaries’ earnings | 100,527 |
| | — |
| | — |
| | (100,527 | ) | | — |
|
Property operating expense | — |
| | 3,434 |
| | 2,906 |
| | — |
| | 6,340 |
|
Intercompany fee expense | — |
| | — |
| | 732 |
| | (732 | ) | | — |
|
General and administrative expense | — |
| | 9,830 |
| | 2,240 |
| | — |
| | 12,070 |
|
Costs associated with loan refinancing or payoff | 1,474 |
| | — |
| | 3 |
| | — |
| | 1,477 |
|
Interest expense, net | 36,364 |
| | (2,368 | ) | | 198 |
| | — |
| | 34,194 |
|
Interest expense on intercompany notes payable | — |
| | — |
| | 2,580 |
| | (2,580 | ) | | — |
|
Transaction costs | 113 |
| | — |
| | — |
| | — |
| | 113 |
|
Depreciation and amortization | 232 |
| | 26,633 |
| | 7,829 |
| | — |
| | 34,694 |
|
Income before equity in income from joint ventures and other items | 63,308 |
| | 87,684 |
| | 12,044 |
| | (100,527 | ) | | 62,509 |
|
Equity in income from joint ventures | — |
| | — |
| | 35 |
| | — |
| | 35 |
|
Gain on sale of real estate | — |
| | 997 |
| | — |
| | — |
| | 997 |
|
Income before income taxes | 63,308 |
| | 88,681 |
| | 12,079 |
| | (100,527 | ) | | 63,541 |
|
Income tax expense | (354 | ) | | — |
| | (233 | ) | | — |
| | (587 | ) |
Net income | 62,954 |
| | 88,681 |
| | 11,846 |
| | (100,527 | ) | | 62,954 |
|
Preferred dividend requirements | (5,951 | ) | | — |
| | — |
| | — |
| | (5,951 | ) |
Net income available to common shareholders of EPR Properties | $ | 57,003 |
| | $ | 88,681 |
| | $ | 11,846 |
| | $ | (100,527 | ) | | $ | 57,003 |
|
Comprehensive income | $ | 64,175 |
| | $ | 88,681 |
| | $ | 12,694 |
| | $ | (101,375 | ) | | $ | 64,175 |
|
Condensed Consolidating Statement of Income Three Months Ended September 30, 2016 |
| | | | | | | | | | | | | | | | | | | |
| EPR Properties (Issuer) | | Wholly Owned Subsidiary Guarantors | | Non- Guarantor Subsidiaries | | Consolidated Elimination | | Consolidated |
Rental revenue | $ | — |
| | $ | 89,178 |
| | $ | 13,104 |
| | $ | — |
| | $ | 102,282 |
|
Tenant reimbursements | — |
| | 1,338 |
| | 2,483 |
| | — |
| | 3,821 |
|
Other income | — |
| | 1,829 |
| | 647 |
| | — |
| | 2,476 |
|
Mortgage and other financing income | 286 |
| | 16,692 |
| | 53 |
| | — |
| | 17,031 |
|
Intercompany fee income | 677 |
| | — |
| | — |
| | (677 | ) | | — |
|
Interest income on intercompany notes receivable | — |
| | 2,460 |
| | — |
| | (2,460 | ) | | — |
|
Total revenue | 963 |
| | 111,497 |
| | 16,287 |
| | (3,137 | ) | | 125,610 |
|
Equity in subsidiaries’ earnings | 84,755 |
| | — |
| | — |
| | (84,755 | ) | | — |
|
Property operating expense | — |
| | 2,916 |
| | 2,710 |
| | — |
| | 5,626 |
|
Intercompany fee expense | — |
| | — |
| | 677 |
| | (677 | ) | | — |
|
General and administrative expense | — |
| | 7,927 |
| | 1,164 |
| | — |
| | 9,091 |
|
Costs associated with loan refinancing or payoff | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
Interest expense, net | 24,414 |
| | (2,395 | ) | | 2,246 |
| | — |
| | 24,265 |
|
Interest expense on intercompany notes payable | — |
| | — |
| | 2,460 |
| | (2,460 | ) | | — |
|
Transaction costs | 2,947 |
| | — |
| | — |
| | — |
| | 2,947 |
|
Depreciation and amortization | 449 |
| | 23,768 |
| | 3,384 |
| | — |
| | 27,601 |
|
Income before equity in income from joint ventures and other items | 57,908 |
| | 79,267 |
| | 3,646 |
| | (84,755 | ) | | 56,066 |
|
Equity in income from joint ventures | — |
| | — |
| | 203 |
| | — |
| | 203 |
|
Gain on sale of real estate | — |
| | 1,615 |
| | — |
| | — |
| | 1,615 |
|
Income before income taxes | 57,908 |
| | 80,882 |
| | 3,849 |
| | (84,755 | ) | | 57,884 |
|
Income tax (expense) benefit | (382 | ) | | — |
| | 24 |
| | — |
| | (358 | ) |
Income from continuing operations | 57,526 |
| | 80,882 |
| | 3,873 |
| | (84,755 | ) | | 57,526 |
|
Net income | 57,526 |
| | 80,882 |
| | 3,873 |
| | (84,755 | ) | | 57,526 |
|
Preferred dividend requirements | (5,951 | ) | | — |
| | — |
| | — |
| | (5,951 | ) |
Net income available to common shareholders of EPR Properties | $ | 51,575 |
| | $ | 80,882 |
| | $ | 3,873 |
| | $ | (84,755 | ) | | $ | 51,575 |
|
Comprehensive income | $ | 58,739 |
| | $ | 80,882 |
| | $ | 2,440 |
| | $ | (83,322 | ) | | $ | 58,739 |
|
Condensed Consolidating Statement of Income
Nine Months Ended September 30, 2017
|
| | | | | | | | | | | | | | | | | | | |
| EPR Properties (Issuer) | | Wholly Owned Subsidiary Guarantors | | Non- Guarantor Subsidiaries | | Consolidated Elimination | | Consolidated |
Rental revenue | $ | — |
| | $ | 285,977 |
| | $ | 63,356 |
| | $ | — |
| | $ | 349,333 |
|
Tenant reimbursements | — |
| | 3,955 |
| | 7,469 |
| | — |
| | 11,424 |
|
Other income | — |
| | 614 |
| | 1,904 |
| | — |
| | 2,518 |
|
Mortgage and other financing income | 696 |
| | 64,103 |
| | 217 |
| | — |
| | 65,016 |
|
Intercompany fee income | 2,094 |
| | — |
| | — |
| | (2,094 | ) | | — |
|
Interest income on intercompany notes receivable | — |
| | 7,435 |
| | — |
| | (7,435 | ) | | — |
|
Total revenue | 2,790 |
| | 362,084 |
| | 72,946 |
| | (9,529 | ) | | 428,291 |
|
Equity in subsidiaries’ earnings | 300,631 |
| | — |
| | — |
| | (300,631 | ) | | — |
|
Property operating expense | — |
| | 9,756 |
| | 9,006 |
| | — |
| | 18,762 |
|
Intercompany fee expense | — |
| | — |
| | 2,094 |
| | (2,094 | ) | | — |
|
General and administrative expense | — |
| | 28,112 |
| | 5,675 |
| | — |
| | 33,787 |
|
Costs associated with loan refinancing or payoff | 1,474 |
| | — |
| | 17 |
| | — |
| | 1,491 |
|
Gain on early extinguishment of debt | — |
| | — |
| | (977 | ) | | — |
| | (977 | ) |
Interest expense, net | 102,424 |
| | (7,482 | ) | | 2,911 |
| | — |
| | 97,853 |
|
Interest expense on intercompany notes payable | — |
| | — |
| | 7,435 |
| | (7,435 | ) | | — |
|
Transaction costs | 388 |
| | — |
| | — |
| | — |
| | 388 |
|
Impairment charges | — |
| | 10,195 |
| | — |
| | — |
| | 10,195 |
|
Depreciation and amortization | 662 |
| | 76,594 |
| | 18,663 |
| | — |
| | 95,919 |
|
Income before equity in income from joint ventures and other items | 198,473 |
| | 244,909 |
| | 28,122 |
| | (300,631 | ) | | 170,873 |
|
Equity in income from joint ventures | — |
| | — |
| | 86 |
| | — |
| | 86 |
|
Gain on sale of real estate | — |
| | 27,344 |
| | 1,118 |
| | — |
| | 28,462 |
|
Income before income taxes | 198,473 |
| | 272,253 |
| | 29,326 |
| | (300,631 | ) | | 199,421 |
|
Income tax expense | (1,068 | ) | | — |
| | (948 | ) | | — |
| | (2,016 | ) |
Net income | 197,405 |
| | 272,253 |
| | 28,378 |
| | (300,631 | ) | | 197,405 |
|
Preferred dividend requirements | (17,855 | ) | | — |
| | — |
| | — |
| | (17,855 | ) |
Net income available to common shareholders of EPR Properties | $ | 179,550 |
| | $ | 272,253 |
| | $ | 28,378 |
| | $ | (300,631 | ) | | $ | 179,550 |
|
Comprehensive income | $ | 200,590 |
| | $ | 272,253 |
| | $ | 28,998 |
| | $ | (301,251 | ) | | $ | 200,590 |
|
Condensed Consolidating Statement of Income
Nine Months Ended September 30, 2016
|
| | | | | | | | | | | | | | | | | | | |
| EPR Properties (Issuer) | | Wholly Owned Subsidiary Guarantors | | Non- Guarantor Subsidiaries | | Consolidated Elimination | | Consolidated |
Rental revenue | $ | — |
| | $ | 251,900 |
| | $ | 40,215 |
| | $ | — |
| | $ | 292,115 |
|
Tenant reimbursements | — |
| | 4,059 |
| | 7,518 |
| | — |
| | 11,577 |
|
Other income | — |
| | 3,648 |
| | 2,164 |
| | — |
| | 5,812 |
|
Mortgage and other financing income | 710 |
| | 48,370 |
| | 3,827 |
| | — |
| | 52,907 |
|
Intercompany fee income | 2,018 |
| | — |
| | — |
| | (2,018 | ) | | — |
|
Interest income on intercompany notes receivable | — |
| | 7,297 |
| | — |
| | (7,297 | ) | | — |
|
Total revenue | 2,728 |
| | 315,274 |
| | 53,724 |
| | (9,315 | ) | | 362,411 |
|
Equity in subsidiaries’ earnings | 240,420 |
| | — |
| | — |
| | (240,420 | ) | | — |
|
Property operating expense | — |
| | 8,135 |
| | 8,552 |
| | — |
| | 16,687 |
|
Intercompany fee expense | — |
| | — |
| | 2,018 |
| | (2,018 | ) | | — |
|
Other expense | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
General and administrative expense | — |
| | 23,318 |
| | 3,991 |
| | — |
| | 27,309 |
|
Costs associated with loan refinancing or payoff | — |
| | 353 |
| | 552 |
| | — |
| | 905 |
|
Interest expense, net | 69,042 |
| | (5,596 | ) | | 6,864 |
| | — |
| | 70,310 |
|
Interest expense on intercompany notes payable | — |
| | — |
| | 7,297 |
| | (7,297 | ) | | — |
|
Transaction costs | 4,778 |
| | — |
| | 103 |
| | — |
| | 4,881 |
|
Depreciation and amortization | 1,338 |
| | 67,516 |
| | 10,368 |
| | — |
| | 79,222 |
|
Income before equity in income from joint ventures and other items | 167,990 |
| | 221,548 |
| | 13,974 |
| | (240,420 | ) | | 163,092 |
|
Equity in income from joint ventures | — |
| | — |
| | 501 |
| | — |
| | 501 |
|
Gain on sale of real estate | — |
| | 3,885 |
| | — |
| | — |
| | 3,885 |
|
Income before income taxes | 167,990 |
| | 225,433 |
| | 14,475 |
| | (240,420 | ) | | 167,478 |
|
Income tax (expense) benefit | (1,149 | ) | | — |
| | 512 |
| | — |
| | (637 | ) |
Net income | 166,841 |
| | 225,433 |
| | 14,987 |
| | (240,420 | ) | | 166,841 |
|
Preferred dividend requirements | (17,855 | ) | | — |
| | — |
| | — |
| | (17,855 | ) |
Net income available to common shareholders of EPR Properties | $ | 148,986 |
| | $ | 225,433 |
| | $ | 14,987 |
| | $ | (240,420 | ) | | $ | 148,986 |
|
Comprehensive income | $ | 165,917 |
| | $ | 225,433 |
| | $ | 15,391 |
| | $ | (240,824 | ) | | $ | 165,917 |
|
Condensed Consolidating Statement of Cash Flows Nine Months Ended September 30, 2017 |
| | | | | | | | | | | | | | | |
| EPR Properties (Issuer) | | Wholly Owned Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Consolidated |
Intercompany fee income (expense) | $ | 2,094 |
| | $ | — |
| | $ | (2,094 | ) | | $ | — |
|
Interest income (expense) on intercompany receivable/payable | — |
| | 7,435 |
| | (7,435 | ) | | — |
|
Net cash (used) provided by other operating activities | (95,174 | ) | | 332,846 |
| | 62,636 |
| | 300,308 |
|
Net cash (used) provided by operating activities | (93,080 | ) | | 340,281 |
| | 53,107 |
| | 300,308 |
|
Investing activities: | | | | | | |
|
Acquisition of rental properties and other assets | (1,012 | ) | | (297,658 | ) | | (55,607 | ) | | (354,277 | ) |
Proceeds from sale of real estate | 203 |
| | 107,022 |
| | 29,242 |
| | 136,467 |
|
Investment in mortgage notes receivable | — |
| | (123,060 | ) | | (7,016 | ) | | (130,076 | ) |
Proceeds from mortgage note receivable paydown | — |
| | 16,608 |
| | — |
| | 16,608 |
|
Investment in promissory notes receivable | — |
| | (1,868 | ) | | — |
| | (1,868 | ) |
Proceeds from promissory notes receivable paydown | — |
| | 1,599 |
| | — |
| | 1,599 |
|
Proceeds from insurance recovery | — |
| | 579 |
| | — |
| | 579 |
|
Additions to property under development | (725 | ) | | (289,810 | ) | | (13,549 | ) | | (304,084 | ) |
Advances to subsidiaries, net | (402,145 | ) | | 246,622 |
| | 155,523 |
| | — |
|
Net cash (used) provided by investing activities | (403,679 | ) | | (339,966 | ) | | 108,593 |
| | (635,052 | ) |
Financing activities: | | | | | | | |
Proceeds from debt facilities and senior unsecured notes | 1,175,000 |
| | — |
| | — |
| | 1,175,000 |
|
Principal payments on debt | (505,000 | ) | | — |
| | (162,091 | ) | | (667,091 | ) |
Deferred financing fees paid | (14,001 | ) | | — |
| | (206 | ) | | (14,207 | ) |
Costs associated with loan refinancing or payoff (cash portion) | — |
| | — |
| | (7 | ) | | (7 | ) |
Net proceeds from issuance of common shares | 68,552 |
| | — |
| | — |
| | 68,552 |
|
Purchase of common shares for treasury for vesting | (6,729 | ) | | — |
| | — |
| | (6,729 | ) |
Dividends paid to shareholders | (228,861 | ) | | — |
| | — |
| | (228,861 | ) |
Net cash provided (used) by financing activities | 488,961 |
| | — |
| | (162,304 | ) | | 326,657 |
|
Effect of exchange rate changes on cash | — |
| | — |
| | 164 |
| | 164 |
|
Net (decrease) increase in cash and cash equivalents | (7,798 | ) | | 315 |
| | (440 | ) | | (7,923 | ) |
Cash and cash equivalents at beginning of the period | 16,586 |
| | 1,157 |
| | 1,592 |
| | 19,335 |
|
Cash and cash equivalents at end of the period | $ | 8,788 |
| | $ | 1,472 |
| | $ | 1,152 |
| | $ | 11,412 |
|
Condensed Consolidating Statement of Cash Flows Nine Months Ended September 30, 2016 |
| | | | | | | | | | | | | | | |
| EPR Properties (Issuer) | | Wholly Owned Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Consolidated |
Intercompany fee income (expense) | $ | 2,018 |
| | $ | — |
| | $ | (2,018 | ) | | $ | — |
|
Interest income (expense) on intercompany receivable/payable | — |
| | 7,297 |
| | (7,297 | ) | | — |
|
Net cash (used) provided by other operating activities | (74,550 | ) | | 254,721 |
| | 35,602 |
| | 215,773 |
|
Net cash (used) provided by operating activities | (72,532 | ) | | 262,018 |
| | 26,287 |
| | 215,773 |
|
Investing activities: | | | | | | |
|
Acquisition of rental properties and other assets | (180 | ) | | (175,075 | ) | | (2,107 | ) | | (177,362 | ) |
Proceeds from sale of real estate | — |
| | 19,175 |
| | 1,476 |
| | 20,651 |
|
Investment in mortgage note receivable | — |
| | (80,786 | ) | | — |
| | (80,786 | ) |
Proceeds from mortgage note receivable paydown | — |
| | 44,556 |
| | 19,320 |
| | 63,876 |
|
Investment in promissory notes receivable | — |
| | (66 | ) | | — |
| | (66 | ) |
Proceeds from sale of infrastructure related to issuance of revenue bonds | — |
| | 43,462 |
| | — |
| | 43,462 |
|
Proceeds from insurance recovery | — |
| | 2,635 |
| | 401 |
| | 3,036 |
|
Proceeds from sale of investments in a direct financing lease, net | — |
| | 825 |
| | — |
| | 825 |
|
Additions to property under development | (181 | ) | | (282,554 | ) | | (6,152 | ) | | (288,887 | ) |
Investment in (repayment of) intercompany notes payable | — |
| | (2,063 | ) | | 2,063 |
| | — |
|
Advances to subsidiaries, net | (203,471 | ) | | 231,048 |
| | (27,577 | ) | | — |
|
Net cash used by investing activities | (203,832 | ) | | (198,843 | ) | | (12,576 | ) | | (415,251 | ) |
Financing activities: | | | | | | | |
Proceeds from debt facilities | 840,000 |
| | — |
| | 14,360 |
| | 854,360 |
|
Principal payments on debt | (496,000 | ) | | (63,727 | ) | | (27,382 | ) | | (587,109 | ) |
Deferred financing fees paid | (3,020 | ) | | — |
| | (27 | ) | | (3,047 | ) |
Costs associated with loan refinancing or payoff (cash portion) | — |
| | — |
| | (482 | ) | | (482 | ) |
Net proceeds from issuance of common shares | 142,452 |
| | — |
| | — |
| | 142,452 |
|
Impact of stock option exercises, net | (717 | ) | | — |
| | — |
| | (717 | ) |
Purchase of common shares for treasury for vesting | (4,211 | ) | | — |
| | — |
| | (4,211 | ) |
Dividends paid to shareholders | (198,678 | ) | | — |
| | — |
| | (198,678 | ) |
Net cash provided (used) by financing activities | 279,826 |
| | (63,727 | ) | | (13,531 | ) | | 202,568 |
|
Effect of exchange rate changes on cash | — |
| | — |
| | (62 | ) | | (62 | ) |
Net increase (decrease) in cash and cash equivalents | 3,462 |
| | (552 | ) | | 118 |
| | 3,028 |
|
Cash and cash equivalents at beginning of the period | 1,089 |
| | 1,289 |
| | 1,905 |
| | 4,283 |
|
Cash and cash equivalents at end of the period | $ | 4,551 |
| | $ | 737 |
| | $ | 2,023 |
| | $ | 7,311 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statementsconsolidated financial statements and Notesnotes thereto included in this Quarterly Report on Form 10-Q of EPR 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 Part II,Item 1A - "Risk Factors" in our 2021 Annual Report, as supplemented by Item 1A - "Risk Factors" in this Quarterly Report on Form 10-Q and Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 1, 2017.10-Q.
Overview
Business
Our principal business objective is to enhance shareholder value by achieving predictable and increasing Funds From Operations As Adjusted ("FFO"FFOAA") and dividends per share. Our prevailing strategy is to focus on long-term investments in a limited number of categories inthe Experiential sector which we maintain abenefit from our depth of knowledge and relationships, and which we believe offer sustained performance throughout allmost economic cycles.
Our investment portfolio includes ownership of and long-term mortgages on entertainment, educationExperiential and recreationEducation properties. Substantially all of our owned single-tenant properties are leased pursuant to long-term, triple nettriple-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.
Historically, our primary challenges have 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. In the near term, we intend to be more selective in making investments and acquisitions in light of the current uncertain economic environment and the increasing costs of capital. Our business is subject to a number of risks and uncertainties, including those described in Part II,Item 1A - “Risk Factors” in our 2021 Annual Report, as supplemented by Item 1A - "Risk Factors" in this Quarterly Report on Form 10-Q and Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 1, 2017.10-Q.
We group our investments into four reportable operating segments: Entertainment, Education, Recreation and Other. As of September 30, 2017,2022, our total assets were approximately $6.1approximately $5.8 billion (after accumulated depreciation of approximately $0.7$1.3 billion) which included investments in each of our four operating segments with properties located in 4344 states, the District of ColumbiaOntario and Ontario,Quebec, Canada.
Our Entertainment segment included investments in 147 megaplex theatre properties, seven entertainment retail centers (which include seven additional megaplex theatre properties) and nine family entertainment centers. Our portfolio of owned entertainment properties consisted of 12.8 million square feet and was 99% leased, including megaplex theatres that were 100% leased.
Our Education segment included investments in 69 public charter school properties, 15 private schools and 63 early education centers. Our portfolio of owned education properties consisted of 4.3 million square feet and was 98% leased.
Our Recreation segment included investments in 26 ski areas, 20 attractions, 28 golf entertainment complexes and seven other recreation facilities. Our portfolio of owned recreation properties was 100% leased.
Our Other segment consisted primarily of land under ground lease, property under development and land held for development related to the Adelaar casino and resort project in Sullivan County, New York.
The combined owned portfolio consisted of 20.0 million square feet and was 99% leased. As of September 30, 2017, we had a total of approximately $284.2 million invested in property under development.
Our total investments (a non-GAAP financial measure) were approximately $6.7$6.6 billion at September 30, 2017. We define total investments as the sum of the carrying values of rental properties and rental properties held for sale (before accumulated depreciation), land held for development, property under development, mortgage notes receivable (including related accrued interest receivable), investment in a direct financing lease, net, investment in joint ventures, intangible assets, gross (before accumulated amortization and included in other assets) and notes receivable and related accrued interest receivable (included in other assets). Total investments is a non-GAAP financial measure.2022. See "Non-GAAP Financial Measures" for the calculation of total investments and reconciliation of total investments to "Total assets" in the consolidated balance sheet at September 30, 20172022 and December 31, 2016.
Of2021. We group our investments into two reportable segments, Experiential and Education. As of September 30, 2022, our Experiential investments comprised $6.0 billion, or 91%, and our Education investments comprised $0.6 billion, or 9%, of our total investmentsinvestments.
As of $6.7 billion at September 30, 2017, $2.9 billion2022, our Experiential segment (excluding property under development and undeveloped land inventory) consisted of the following property types (owned or 43% related tofinanced):
•173 theatre properties;
•57 eat & play properties (including seven theatres located in entertainment districts);
•22 attraction properties;
•11 ski properties;
•six experiential lodging properties;
•nine fitness & wellness properties;
•one gaming property; and
•three cultural properties.
As of September 30, 2022, our Entertainment segment, $1.5 billion or 22% related toowned Experiential real estate portfolio consisted of approximately 20.1 million square feet, which was 97% leased and included $56.3 million in property under development and $20.2 million in undeveloped land inventory.
As of September 30, 2022, our Education segment $2.1 billionconsisted of the following property types (owned or 32% relatedfinanced):
•65 early childhood education center properties; and
•nine private school properties.
As of September 30, 2022, our owned Education real estate portfolio consisted of approximately 1.4 million square feet, which was 100% leased.
The combined owned portfolio consisted of 21.5 million square feet and was 97% leased.
COVID-19 Update
We continue to be subject to risks and uncertainties resulting from the COVID-19 pandemic. The COVID-19 pandemic severely impacted global economic activity and caused significant volatility and negative pressure in financial markets beginning in 2020. In response to the COVID-19 pandemic, many jurisdictions within the United States and abroad instituted health and safety measures, including quarantines, mandated business and school closures and travel restrictions. As a result, the COVID-19 pandemic severely impacted experiential real estate properties, given that such properties involve congregate social activity and discretionary consumer spending. Although many of these health and safety measures have been lifted, the extent of the impact of the COVID-19 pandemic on our business still remains highly uncertain and difficult to predict.
As of September 30, 2022, we had no properties closed due to COVID-19 restrictions. The continuing impact of the COVID-19 pandemic on our business will depend on several factors, including, but not limited to, the scope, severity and duration or any resurgence of the pandemic (including COVID-19 variants), the actions taken to contain the outbreak or any resurgence or mitigate their impacts, the distribution and efficacy of vaccines and therapeutics, the public’s confidence in the health and safety measures implemented by our tenants and borrowers, the continuing direct and indirect economic effects of the outbreak and containment measures, and the ability of our tenants and borrowers to recover from the negative economic impacts of the pandemic as it subsides and, in many cases, service elevated levels of debt resulting from the pandemic, all of which are uncertain and cannot be predicted. The COVID-19 pandemic has 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, and recovery from, the COVID-19 pandemic on the assumptions and estimates used in determining our financial condition and results of operations for the nine months ended September 30, 2022.
The following were impacts to our Recreation segmentfinancial statements during the nine months ended September 30, 2022 arising out of or relating to the COVID-19 pandemic:
•We continued to recognize revenue on a cash basis for certain tenants including American-Multi Cinema, Inc. ("AMC") and $179.0Regal Cinemas ("Regal"), a subsidiary of Cineworld Group. As further described below, on September 7, 2022, Cineworld Group filed for Chapter 11 bankruptcy protection. We have not yet received contractual rent or deferral payments from Regal for September 2022, but received payment of rent and deferral payments from Regal for October and November 2022.
•As of September 30, 2022, we have deferred amounts due from tenants of approximately $7.0 million that are booked as receivables. Additionally, as of September 30, 2022, we have amounts due from customers that were not booked as receivables totaling approximately $123.0 million 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 customers and will be recognized as revenue when any such amounts are received. During the nine months ended September 30, 2022, we collected $10.9 million in deferred rent and $1.1 million of deferred interest from cash basis customers and from customers for which the deferred payments were not previously recognized as revenue. In addition, during the nine months ended September 30, 2022, we collected $19.2 million of deferred rent and $0.4 million of deferred interest from accrual basis customers that reduced related accounts and interest receivable. The repayment terms for all of these deferments vary by customer.
While deferments for this and future periods delay rent or 3%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 the Financial 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.
Negative Economic Environment
REITS are generally experiencing heightened risks and uncertainties resulting from current challenging economic conditions, including significant volatility and negative pressure in financial and capital markets, increasing cost of capital, high inflation and other risks and uncertainties associated with a recessionary environment. Our business has been more acutely affected by these risks and uncertainties because one of our Other segment.major theatre tenants has recently filed for bankruptcy protection, as discussed further below. Although we intend to continue making future investments, we expect that our levels of investment spending will be reduced in the near term due to elevated costs of capital, and that these investments will be funded primarily from cash from operations and borrowing availability under our unsecured revolving credit facility, subject to maintaining our leverage levels consistent with past practice. As a result, we intend to be more selective in making future investments and acquisitions until such time as economic conditions improve and our cost of capital returns to historical levels, which may depend, in part, upon the ultimate outcome of our tenant's bankruptcy proceedings.
Operating Results
Our total revenue, net 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 and nine months ended September 30, 20172022 and 20162021 (in millions, except per share information):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| 2022 | 2021 | Change | | 2022 | 2021 | Change |
Total revenue | $ | 161.4 | | $ | 139.6 | | 16 | % | | $ | 479.3 | | $ | 376.8 | | 27 | % |
Net income available to common shareholders per diluted share | $ | 0.60 | | $ | 0.35 | | 71 | % | | $ | 1.54 | | $ | 0.48 | | 221 | % |
FFOAA per diluted share | $ | 1.16 | | $ | 0.86 | | 35 | % | | $ | 3.44 | | $ | 2.01 | | 71 | % |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| 2017 | 2016 | Increase | | 2017 | 2016 | Increase |
Total revenue (1) | $ | 151.4 |
| $ | 125.6 |
| 21 | % | | $ | 428.3 |
| $ | 362.4 |
| 18 | % |
Net income available to common shareholders per diluted share (2) | 0.77 |
| 0.81 |
| -5 | % | | 2.55 |
| 2.35 |
| 9 | % |
FFOAA per diluted share (3) | 1.26 |
| 1.23 |
| 2 | % | | 3.73 |
| 3.56 |
| 5 | % |
(1) Total revenueThe major factors impacting our results for the three and nine months ended September 30, 2017 versus2022, as compared to the three and nine months ended September 30, 2016 was favorably impacted by the2021 were as follows:
•The increase in rental revenue due to an increase in contractual rental payments from cash basis tenants and from tenants which were previously receiving abatements;
•The effect of investment spending, including our transaction with CNL Lifestyle Properties Inc. ("CNL Lifestyle") and funds affiliated with Och-Ziff Real estate ("OZRE") which closed on April 6, 2017. Total revenue for the three and nine months ended September 30, 2017 versus the three and nine months ended September 30, 2016 was unfavorably impacted by property acquisitions as well as dispositions and note payoffs that occurred in 20172022 and 2016,2021;
•The change in other income and other expenses primarily due to the government-required closure of the Kartrite Resort and Indoor Waterpark in Sullivan County, New York due to the COVID-19 pandemic in mid-March of 2020 and the re-opening of this property in July of 2021;
•The decrease in interest expense due to the repayment of our unsecured term loan facility and revolving credit facility as well as lower gains related to insurance claims. Total revenue forexiting the nine months ended September 30, 2016 was favorably impacted by a $3.6 million prepayment fee from the early payoffcovenant relief period in July of a mortgage note secured by a public charter school property.2021 which had caused higher interest rates on certain debt;
(2) Net income available to common shareholders per diluted share for the three and nine months ended September 30, 2017 versus the three and nine months ended September 30, 2016 was also impacted by the items affecting total revenue as described above. Additionally, net income available to common shareholders per diluted share for the three and nine months ended September 30, 2017 versus the three and nine months ended September 30, 2016 was favorably impacted by lower transaction costs. Net income available to common shareholders per diluted share for the three and nine months ended September 30, 2017 versus the three and nine months ended September 30, 2016 was unfavorably impacted by increases•The decrease in interest expense, costs associated with loan refinancing or payoff,payoff;
•Improved earnings from investments in joint ventures; and
•The increase in general and administrative expense bad debt expense and common shares outstanding primarily due to shares issued in connection withcredit loss expense.
For further detail on items impacting our operating results, see the transactions with CNL Lifestyle and OZRE. Additionally, net income available to common shareholders per diluted share for the nine months ended September 30, 2017 versus the nine months ended September 30, 2016 was favorably impacted by higher gains on salesection below titled "Results of real estate and a gain on early extinguishment of debt recognized in 2017. Net
income available to common shareholders per diluted share for the nine months ended September 30, 2017 versus the nine months ended September 30, 2016 was unfavorably impacted by a $10.2 million impairment charge recognized in 2017 and an increase in income tax expense.
(3) FFOAA per diluted share for the three and nine months ended September 30, 2017 versus the three and nine months ended September 30, 2016 was favorably impacted by the effect of investment spending in 2017 and 2016, including our transaction with CNL Lifestyle and OZRE which closed on April 6, 2017, and termination fees recognized with the exercise of tenant purchase options. FFOAA per diluted share for the three and nine months ended September 30, 2017 versus the three and nine months ended September 30, 2016 was unfavorably impacted by increases in interest expense, general and administrative expense, bad debt expense and common shares outstanding, primarily due to shares issued in connection with the transactions with CNL Lifestyle and OZRE, as well as property dispositions and note payoffs that occurred in 2017 and 2016. FFOAA per diluted share for the nine months ended September 30, 2016 was favorably impacted by a $3.6 million prepayment fee from the early payoff of a mortgage note secured by a public charter school property.
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 in the 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.liabilities and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions and estimates relate to consolidation, revenue recognition, depreciable lives of the real estate, the valuation of real estate, accounting for real estate acquisitions, estimating reserves for uncollectibleassessing the collectibility of receivables and the accounting forcredit loss related to mortgage and other notes receivable, all of which are described as our critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2016.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 and estimates is included in our 2021 Annual Report. For the nine months ended September 30, 2017,2022, there were no changes to critical accounting policies except as noted below.policies.
Accounting for Acquisitions
Upon acquisition of real estate properties, we evaluate the acquisition to determine if it is a business combination or an asset acquisition. In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether acquisitions should be accounted for as business combinations or asset acquisitions. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early application of the guidance permitted. We have elected to early adopt ASU 2017-01as of January 1, 2017. As a result, we expect that fewer of our real estate acquisitions will be accounted for as business combinations.
Costs incurred for asset acquisitions and development properties, including transaction costs, are capitalized. For asset acquisitions, we allocate the purchase price and other related costs incurred to the real estate assets acquired based on recent independent appraisals or methods similar to those used by independent appraisers and management judgment. Acquisition-related costs in connection with business combinations are expensed as incurred. Costs related to such transactions, as well as costs associated with terminated transactions, are included in the accompanying consolidated statements of income as transaction costs.
Recent Developments
Debt Financing
During the nine months ended September 30, 2017, we prepaid in full nine mortgage notes payable totaling $73.0 million that were secured by nine theatre properties. In addition, we prepaid in full a mortgage note payable of $87.0 million that was secured by 11 theatre properties. In connection with this note payoff, we recorded a gain on early extinguishment of debt of $1.0 million for the nine months ended September 30, 2017. The gain represents the difference between the carrying value of the note and the amount due at payoff as the note was recorded at fair value upon acquisition and was not anticipated to be paid off in advance of maturity.
On May 23, 2017, we issued $450.0 million in aggregate principal amount of senior notes due on June 1, 2027 pursuant to an underwritten public offering. The notes bear interest at an annual rate of 4.50%. Interest is payable on June 1 and December 1 of each year beginning on December 1, 2017 until the stated maturity date of June 1, 2027. The notes were issued at 99.393% of their face value and are unsecured. We used the net proceeds from the note offering to pay down our unsecured revolving credit facility, invest in mortgage notes secured by education properties and for general business purposes.
On August 30, 2017, we refinanced our variable-rate bonds payable totaling $25.0 million which are secured by three theatre properties. The maturity date was extended from October 1, 2037 to August 1, 2047 and the outstanding principal balance and interest rate were not changed.
On September 27, 2017, we amended our unsecured consolidated credit agreement which governs our unsecured revolving credit facility and our unsecured term loan facility.
The amendments to the unsecured revolving portion of the credit facility, among other things, (i) increase the initial maximum available amount from $650.0 million to $1.0 billion, (ii) extend the maturity date from April 24, 2019, to February 27, 2022 (with us having the right to extend the loan for an additional seven months) and (iii) lower the interest rate and facility fee pricing based on a grid related to our senior unsecured credit ratings which at closing was LIBOR plus 1.00% and 0.20%, versus LIBOR plus 1.25% and 0.25%, respectively, under the previous terms. In connection with the amendment, $19 thousand of deferred financing costs (net of accumulated amortization) were written off during the three months ended September 30, 2017 and are included in costs associated with loan refinancing. At September 30, 2017, the we had $170.0 million outstanding under this portion of the facility.
The amendments to the unsecured term loan portion of the credit facility, among other things, (i) increase the initial amount from $350.0 million to $400.0 million, (ii) extend the maturity date from April 24, 2020, to February 27, 2023 and (iii) lower the interest rate based on a grid related to our senior unsecured credit ratings which at closing was LIBOR plus 1.10% versus LIBOR plus 1.40% under the previous terms. In connection with the amendment, $1.5 million of deferred financing costs (net of accumulated amortization) were written off during the three months ended September 30, 2017 and are included in costs associated with loan refinancing. At closing, we borrowed the remaining $50.0 million available on the $400.0 million term loan portion of the facility, which was used to pay down a portion of our unsecured revolving credit facility.
In addition, there is a $1.0 billion accordion feature on the combined unsecured revolving credit and term loan facility that increases the maximum amount available under the combined facility, subject to lender approval, from $1.4 billion to $2.4 billion. If we exercise all or any portion of the accordion feature, the resulting increase in the facility may have a shorter or longer maturity date and different pricing terms.
In connection with the amendment to the unsecured consolidated credit agreement, the obligations of our subsidiaries that were co-borrowers under our prior senior unsecured revolving credit and term loan facility were released. As a result, simultaneously with the amendment, the guarantees by our subsidiaries that were guarantors with respect to our outstanding 4.500% Senior Notes due 2027, 4.750% Senior Notes due 2026, 4.500% Senior Notes due 2025, 5.250% Senior Notes due 2023, 5.750% Senior Notes due 2022, and 7.750% Senior Notes due 2020 were released in accordance with the terms of the applicable indentures governing such notes.
In addition, the guarantees by our subsidiaries that were guarantors of our outstanding 4.35% Series A Guaranteed Senior Notes due August 22, 2024 and 4.56% Series B Guaranteed Senior Notes due August 22, 2026 (referred to herein as the "private placement notes") were also released. The foregoing release was effected by us entering into an amendment to the Note Purchase Agreement, dated as of September 27, 2017. The amendment to the private placement notes releases our subsidiary guarantors as described above and among other things: (i) amends certain financial and other covenants and provisions in the Note Purchase Agreement to conform generally to the corresponding covenants and provisions contained in the amended unsecured consolidated credit agreement; (ii) provides the investors thereunder certain additional guaranty and lien rights, in the event that certain subsequent events occur; (iii) expands the scope of the “most favored lender” covenant contained in the Note Purchase Agreement; and (iv) imposes restrictions on debt that can be incurred by certain of our subsidiaries.
On October 31, 2017, we entered into three interest rate swap agreements to fix the interest rate at 3.15% on an additional $50.0 million of our unsecured term loan facility from November 6, 2017 to April 4, 2019 and on $350.0 million of the unsecured term loan facility from April 5, 2019 to February 7, 2022.
Issuance of Common Shares
During the nine months ended September 30, 2017, we issued an aggregate of 928,219 common shares under the direct share purchase component of our Dividend Reinvestment and Direct Share Purchase Plan ("DSPP") for total net proceeds of $67.9 million. These proceeds were used to pay down a portion of our unsecured revolving credit facility.
During the nine months ended September 30, 2017, we also issued 8,851,264 common shares in connection with our transaction with CNL Lifestyle and OZRE.
Investment Spending
Our investment spending during the nine months ended September 30, 2017 totaled $1.5 billion,2022 and included investments2021 totaled $321.3 million and $107.9 million, respectively, and is detailed below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2022 |
Operating Segment | | Total Investment Spending | New Development | Re-development | Asset Acquisition | Mortgage Notes or Notes Receivable | Investment in Joint Ventures |
Experiential: | | | | | | | |
Theatres | | $ | 622 | | $ | 5 | | $ | 617 | | $ | — | | $ | — | | $ | — | |
Eat & Play | | 17,412 | | 16,787 | | 625 | | — | | — | | — | |
Attractions | | 144,324 | | — | | 1,559 | | 142,765 | | — | | — | |
Ski | | 26,400 | | — | | — | | — | | 26,400 | | — | |
Experiential Lodging | | 68,722 | | 4,354 | | — | | — | | 11,305 | | 53,063 | |
Fitness & Wellness | | 63,760 | | 43,557 | | 345 | | 19,858 | | — | | — | |
| | | | | | | |
Cultural | | 23 | | — | | 23 | | — | | — | | — | |
Total Experiential | | 321,263 | | 64,703 | | 3,169 | | 162,623 | | 37,705 | | 53,063 | |
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Education: | | | | | | | |
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Total Education | | — | | — | | — | | — | | — | | — | |
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Total Investment Spending | | $ | 321,263 | | $ | 64,703 | | $ | 3,169 | | $ | 162,623 | | $ | 37,705 | | $ | 53,063 | |
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Nine Months Ended September 30, 2021 |
Operating Segment | | Total Investment Spending | New Development | Re-development | Asset Acquisition | Mortgage Notes or Notes Receivable | Investment in Joint Ventures |
Experiential: | | | | | | | |
Theatres | | $ | 4,190 | | $ | 3,785 | | $ | 405 | | $ | — | | $ | — | | $ | — | |
Eat & Play | | 36,414 | | 9,347 | | 315 | | 26,752 | | — | | — | |
Attractions | | 46 | | — | | 46 | | — | | — | | — | |
Ski | | 5,546 | | — | | — | | — | | 5,546 | | — | |
Experiential Lodging | | 55,193 | | 16,300 | | 11,070 | | — | | — | | 27,823 | |
Fitness & Wellness | | 4,394 | | — | | 15 | | — | | 4,379 | | — | |
| | | | | | | |
Cultural | | 2,124 | | — | | — | | — | | 2,124 | | — | |
Total Experiential | | 107,907 | | 29,432 | | 11,851 | | 26,752 | | 12,049 | | 27,823 | |
| | | | | | | |
Education: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total Education | | — | | — | | — | | — | | — | | — | |
| | | | | | | |
Total Investment Spending | | $ | 107,907 | | $ | 29,432 | | $ | 11,851 | | $ | 26,752 | | $ | 12,049 | | $ | 27,823 | |
The above amounts include $0.6 million and $1.3 million in each of our four operating segments.
Entertainment investment spending duringcapitalized interest for the nine months ended September 30, 2017 totaled $264.9 million, including spending on build-to-suit development2022 and redevelopment of megaplex theatres, entertainment retail centers2021, respectively, and family entertainment centers, as well as $154.1 million in acquisitions of six megaplex theatres.
Education investment spending during the nine months ended September 30, 2017 totaled $238.7 million, including spending on build-to-suit development and redevelopment of public charter schools, early education centers and private schools, as well as $38.3 million in acquisitions of seven early education centers and two public charter schools and an investment of $95.5 million in mortgage notes receivable.
Recreation investment spending during the nine months ended September 30, 2017 totaled $951.6 million, including the transaction with CNL Lifestyle and OZRE valued at $730.8 million discussed below. Additionally, included in recreation investment spending was build-to-suit development of golf entertainment complexes and attractions, redevelopment of ski areas, $51.9 million in acquisitions of five other recreation facilities, and an investment of $10.7 million in a mortgage note secured by one other recreation facility.
On April 6, 2017, we completed a transaction with CNL Lifestyle and OZRE. We acquired the Northstar California Resort, 15 attraction properties (waterparks and amusement parks), five small family entertainment centers and certain related working capital for aggregate consideration valued at $479.8 million, including final purchase price adjustments. Additionally, we provided $251.0 million of secured debt financing to OZRE for its purchase of 14 CNL Lifestyle ski properties valued at $374.5 million. Subsequent to the transaction, we sold the five family entertainment centers for approximately $6.8 million and one waterpark for approximately $2.5 million. No gain or loss was recognized on these sales. See Note 4 for further information.
Other investment spending during the nine months ended September 30, 2017 totaled $1.0 million, and was related to the Adelaar casino and resort project in Sullivan County, New York.
The following table details our investment spending by category during the nine months ended September 30, 2017 and 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2017 |
Operating Segment | | Total Investment Spending | | New Development | | Re-development | | Asset Acquisition | | Mortgage Notes or Notes Receivable |
Entertainment | | $ | 264,889 |
| | $ | 48,180 |
| | $ | 55,549 |
| | $ | 154,144 |
| | $ | 7,016 |
|
Education | | 238,667 |
| | 104,842 |
| | — |
| | 38,293 |
| | 95,532 |
|
Recreation | | 951,574 |
| | 146,530 |
| | 585 |
| | 531,638 |
| | 272,821 |
|
Other | | 1,002 |
| | 1,002 |
| | — |
| | — |
| | — |
|
Total Investment Spending | | $ | 1,456,132 |
| | $ | 300,554 |
| | $ | 56,134 |
| | $ | 724,075 |
| | $ | 375,369 |
|
| | | | | | | | | | |
Nine Months Ended September 30, 2016 |
Operating Segment | | Total Investment Spending | | New Development | | Re-development | | Asset Acquisition | | Mortgage Notes or Notes Receivable |
Entertainment | | $ | 198,228 |
| | $ | 24,512 |
| | $ | 25,710 |
| | $ | 126,006 |
| | $ | 22,000 |
|
Education | | 187,305 |
| | 167,747 |
| | — |
| | 8,379 |
| | 11,179 |
|
Recreation | | 140,017 |
| | 90,505 |
| | 1,836 |
| | — |
| | 47,676 |
|
Other | | 1,313 |
| | 1,313 |
| | — |
| | — |
| | — |
|
Total Investment Spending | | $ | 526,863 |
| | $ | 284,077 |
| | $ | 27,546 |
| | $ | 134,385 |
| | $ | 80,855 |
|
The above amounts include $110 thousand and $129 thousand in capitalized payroll, $7.8 million and $8.0 million in capitalized interest and $3.2 million and $1.2$0.3 million in capitalized other general and administrative direct project costs for both the nine months ended September 30, 20172022 and 2016, respectively.2021. Excluded from the table above is approximately $3.7$1.8 million and $3.1$2.8 million of maintenance capital expenditures and other spending for the nine months ended September 30, 20172022 and 2016,2021, respectively. In addition, excluded from the table above is $17.1 million of infrastructure spending for the Adelaar casino and resort project for
Impairment Charges
During the nine months ended September 30, 2016.2022, we received an offer to purchase a recently vacated property. As a result, we reassessed the expected holding period of the property and determined that the estimated cash flows were not sufficient to recover the carrying value of the property. Accordingly, we recognized an impairment charge of $4.4 million on the real estate investment of this property. This property was sold during the nine months ended September 30, 2022.
Property DispositionsDuring the nine months ended September 30, 2022, we recognized other-than-temporary impairment charges of $0.6 million on our equity investments in two theatre projects located in China. See Note9 to the consolidated financial statements in this Quarterly Report on Form 10-Q for additional information related to these impairments.
Dispositions
During the nine months ended September 30, 2017,2022, we completed the sale of four entertainmenttwo vacant theatre properties and a land parcel for net proceeds totaling $72.3$9.9 million. In connection with these sales, we recognized a combined gain on sale of $19.4$0.3 million.
Mortgage Note and Notes Receivable Updates
During the nine months ended September 30, 2017, pursuant2022, we recorded an allowance for credit loss of $6.8 million related to tenant purchase options,one of our mortgage notes receivable secured by an eat & play investment and $3.1 million related to two notes receivable. Although foreclosure was not deemed probable and the principal balance of the mortgage note and notes receivable were not past due at September 30, 2022, based on delays in interest payments and each borrower's declining financial condition, we completeddetermined the borrowers are experiencing financial difficulty. The repayments are expected to be provided substantially through the sale or operation of five public charter schools located in Colorado, Arizona and Utah for net proceeds totaling $44.8 million. In connection with these sales,the collateral, therefore, we recognized a gainelected to apply the collateral dependent practical expedient. Expected credit losses are based on salethe fair value of $7.2 million. Additionally, we completed the sale of two other education facilities for net proceeds of $9.8 million. In connection with these sales, we recognized a gain on sale of $1.9 million.
Mortgage Notes Receivable
underlying collateral at the reporting date. During the nine months ended September 30, 2017,2022, we received a partial prepayment of $4.0wrote-off $1.5 million on onein accrued interest receivables and fees to mortgage and other financing income related to the mortgage note receivable that is secured byand notes receivables. See Note 6 to the observation deckconsolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
Regal Update
Cineworld Group, plc, Regal Entertainment Group and our other Regal theatre tenants (collectively, “Regal”) filed for protection under Chapter 11 of the John Hancock buildingU.S. Bankruptcy Code (the “Code”) on September 7, 2022. Regal leases 57 theatres from us pursuant to two master leases and 28 single property leases (the “Regal Leases”). As a result of the filing, Regal did not pay its rent or monthly deferral payment for September 2022. Regal resumed payment of rent and deferral payments for all Regal Leases in Chicago, Illinois. In connectionOctober and November 2022. However, there can be no assurance that subsequent payments will be made in a timely and complete manner. Regal is entitled to certain rights under the Code regarding the assumption or rejection of the Regal Leases and we are currently in negotiations with Regal regarding the partial prepaymentproperties Regal will continue to operate and the terms and conditions of this note, we receivedleases for these properties. There can be no assurance that these negotiations will be successful and which Regal leases, if any, will be assumed under the Code.
At September 30, 2022, Regal owed us approximately $91.9 million pursuant to a prepayment feePromissory Note for rent deferred during the COVID-19 pandemic and approximately $7.2 million for September 2022 rent, of $800.0 thousand,which $1.4 million represents pre-petition rent and $5.8 million represents post-petition rent under the Code. Because revenue derived from Regal is recognized on a cash-basis, all receivables from Regal are not reflected as assets in our financial statements. Substantially all of our claims under the Promissory Note are unsecured and subject to the provisions of the Code, including those provisions regarding assumption and rejection of leases. Regal has substantial secured debt which is being recognized oversenior to the termPromissory Note, as well as other unsecured debt. As a result, there is significant uncertainty regarding the collection of the remaining note usingamounts due under the effective interest method.Promissory Note.
Results of Operations
Three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021
Analysis of Revenue
The following table summarizes our total revenue (dollars in a Direct Financing Leasethousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2022 | 2021 | | Change | | 2022 | 2021 | | Change |
Minimum rent (1) | $ | 131,642 | | $ | 114,375 | | | $ | 17,267 | | | $ | 396,834 | | $ | 315,665 | | | $ | 81,169 | |
Percentage rent (2) | 1,453 | | 3,149 | | | (1,696) | | | 5,415 | | 7,195 | | | (1,780) | |
Straight-line rent (3) | 2,374 | | 981 | | | 1,393 | | | 4,702 | | 3,690 | | | 1,012 | |
Tenant reimbursements | 4,652 | | 4,187 | | | 465 | | | 15,001 | | 14,009 | | | 992 | |
Other rental revenue | 350 | | 348 | | | 2 | | | 997 | | 978 | | | 19 | |
Total Rental Revenue | $ | 140,471 | | $ | 123,040 | | | $ | 17,431 | | | $ | 422,949 | | $ | 341,537 | | | $ | 81,412 | |
| | | | | | | | | |
Other income (4) | 11,360 | | 8,091 | | | 3,269 | | | 30,626 | | 9,802 | | | 20,824 | |
Mortgage and other financing income (5) | 9,579 | | 8,516 | | | 1,063 | | | 25,753 | | 25,435 | | | 318 | |
Total revenue | $ | 161,410 | | $ | 139,647 | | | $ | 21,763 | | | $ | 479,328 | | $ | 376,774 | | | $ | 102,554 | |
As previously discussed, we are committed to increasing the tenant diversity of our public charter school portfolio and reducing the concentration with Imagine Schools, Inc. ("Imagine"). As part of this effort, we have engaged various brokers to help in this process and part of their feedback included the need for additional lease term on these assets. During
(1) For the three months ended September 30, 2017, we entered into revised lease terms with Imagine which reduced rental payments and the lease term on six properties. In exchange for lowering the existing annual cash payments by approximately $0.5 million and reducing the remaining lease term to 10 years, Imagine agreed that upon the sale of these properties, they would enter into new 20-year leases with the buyer(s). While we believe the restructure will aid in the disposition of these assets, the changes resulted in the lease structure no longer being classified as a direct financing lease. Accordingly, we recorded an impairment charge of $9.6 million during the nine months ended September 30, 2017, which included an allowance for lease loss of $7.3 million and an impairment charge of $2.3 million related to the estimated unguaranteed residual value.
Additionally, during the nine months ended September 30, 2017, we performed our annual review of the estimated unguaranteed residual value on our other properties leased to Imagine and determined that the residual value on one of these properties was impaired. As such, we recorded an impairment of the unguaranteed residual value of $0.6 million during the nine months ended September 30, 2017.
Early Childhood Education Tenant Update
As previously disclosed, the cash flow of one of our early childhood education tenants has been negatively impacted by challenges brought on by its rapid expansion and related ramp up to stabilization. We are currently negotiating a restructuring which has been complicated by the impact of recent extreme weather events and the tenant having multiple landlords. However, we believe we have made significant progress. We have accrued rent for this tenant during 2017 at levels that approximate our estimate of the final restructured reduced rent amounts which are expected to be made effective as of the beginning of 2017. Accrued rent and property taxes, less rent payments received, resulted in accounts receivable of approximately $5.4 million at September 30, 2017. Additionally, we have accrued straight-line rent receivable related to this tenant of approximately $9.0 million at September 30, 2017. In October 2017, we terminated nine leases with the tenant, seven of which have completed construction and two of which are unimproved land. There were only $64 thousand outstanding receivables related to these properties and such amounts were fully reserved at September 30, 2017. The tenant continues to operate these properties (other than the two unimproved properties) as a holdover tenant. We will continue to consider whether these and other properties should be leased to other operators based on results of the restructuring process.
Results of Operations
Three months ended September 30, 20172022 compared to three months ended September 30, 2016
Rental revenue was $122.8 million for the three months ended September 30, 2017 compared to $102.3 million for2021, the three months ended September 30, 2016. This increase in minimum rent resulted primarily from $23.5an increase of $13.5 million ofrelated to rental revenue on existing properties including improved collections of rent being recognized on a cash basis. In addition, there was an increase in minimum rent of $5.1 million related to property acquisitions and developments completed in 20172022 and 2016, including our transaction with CNL Lifestyle which closed on April 6, 2017,2021. This was partially offset by a decrease of $3.0 million in rental revenue due primarily toof $1.3 million from property dispositions. Percentage rents of $2.2 million and $1.7 million were recognized during
For the threenine months ended September 30, 2017 and 2016, respectively. Straight-line rents of $2.4 million and $4.6 million were recognized during2022 compared to the threenine months ended September 30, 20172021, the increase in minimum rent resulted primarily from an increase of $75.6 million related to rental revenue on existing properties including improved collections of rent being recognized on a cash basis. In addition, there was an increase in minimum rent of $9.8 million related to property acquisitions and 2016, respectively.developments completed in 2022 and 2021. This was partially offset by a decrease in rental revenue of $4.2 million from property dispositions.
During the three months ended September 30, 2017,2022, we renewed 19three lease agreements on approximately 1.6 million127 thousand square feet and funded or agreed to fund an average of $22.58$55.05 per square foot in tenant improvements. We experienced an increase of approximately 16.43%7.5% in rental rates and paid no leasing commissions with respect to these lease renewals.
Other income was $0.5 million for the three months ended September 30, 2017 compared to $2.5 million for the three months ended September 30, 2016. The $2.0 million decrease was primarily due to a gain from an insurance claim recognized during the three months ended September 30, 2016.
Mortgage and other financing income for the three months ended September 30, 2017 was $24.3 million compared to $17.0 million for the three months ended September 30, 2016. The $7.3 million increase was primarily due to additional real estate lending activities during 2017 and 2016, including our investment in a mortgage note receivable with OZRE secured by 14 ski properties which closed on April 6, 2017. This increase was partially offset by the sale of nine public charter school properties that were accounted for as direct financing leases during 2016.
Our property operating expenses totaled $6.3 million for the three months ended September 30, 2017 compared to $5.6 million for the three months ended September 30, 2016. These property operating expenses arise from the operations of our retail centers and other specialty properties. The $0.7 million increase resulted primarily from an increase in bad debt expense, as well as higher property operating expenses at our multi-tenant properties.
Our general and administrative expense totaled $12.1 million for the three months ended September 30, 2017 compared to $9.1 million for the three months ended September 30, 2016. The increase of $3.0 million primarily related to an increase in payroll and benefits costs, including share based compensation, as well as an increase in professional fees.
Costs associated with loan refinancing or payoff for the three months ended September 30, 2017 was $1.5 million and were related to the amendment to our unsecured revolving credit facility and term loan. Costs associated with loan refinancing or payoff for the three months ended September 30, 2016 was $14 thousand and related to fees associated with the repayment of secured fixed rate mortgage notes payable.
Our net interest expense increased by $9.9 million to $34.2 million for the three months ended September 30, 2017 from $24.3 million for the three months ended September 30, 2016. This increase resulted from an increase in average borrowings used to finance our real estate acquisitions and fund our mortgage notes receivable.
Transaction costs totaled $0.1 million for the three months ended September 30, 2017 compared to $2.9 million for the three months ended September 30, 2016. The decrease of $2.8 million was due to a decrease in potential and terminated transactions as well as our early adoption of ASU 2017-01.
Depreciation and amortization expense totaled $34.7 million for the three months ended September 30, 2017 compared to $27.6 million for the three months ended September 30, 2016. The $7.1 million increase resulted primarily from acquisitions and developments completed in 2017 and 2016, including our transaction with CNL Lifestyle which closed on April 6, 2017. This increase was partially offset by property dispositions.
Gain on sale of real estate was $1.0 million for the three months ended September 30, 2017 and related to the exercise of a tenant purchase option on a public charter school property. Gain on sale of real estate was $1.6 million for the three months ended September 30, 2016 and related to the exercise of a tenant purchase option on one of our public charter school properties and the sale of a parcel of land adjacent to one of our megaplex theatres.
Nine Months Ended September 30, 2017 compared to nine months ended September 30, 2016
Rental revenue was $349.3 million for the nine months ended September 30, 2017 compared to $292.1 million for the nine months ended September 30, 2016. This increase resulted primarily from $58.4 million of rental revenue related to property acquisitions and developments completed in 2017 and 2016, including our transaction with CNL Lifestyle which closed on April 6, 2017, partially offset by a decrease of $1.2 million in rental revenue due primarily to property dispositions. Percentage rents of $4.7 million and $2.7 million were recognized during the nine months ended September 30, 2017 and 2016, respectively. Straight-line rents of $11.4 million and $10.9 million were recognized during the nine months ended September 30, 2017 and 2016, respectively.
During the nine months ended September 30, 2017,2022, we renewed 26four lease agreements on approximately 2.2 million206 thousand square feet and funded or agreed to fund an average of $27.20$33.87 per square foot in tenant improvements. We experienced an increasea decrease of approximately 15.23%2.2% in rental rates and paid no leasing commissions with respect to these lease renewals.
Other income
(2) The decrease in percentage rent (amounts above base rent) for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 was $2.5 million fordue primarily to lower percentage rent recognized from one early childhood education center tenant due to the restructured lease having higher base rents in 2022. For the three months ended September 30, 2022, this decrease was partially offset by higher percentage rent recognized from our golf entertainment tenant. For the nine months ended September 30, 20172022, this decrease was partially offset by higher percentage rent recognized from our gaming and golf entertainment tenants and one ski property tenant.
(3) The increase in straight-line rent for the three and nine months ended September 30, 2022 compared to $5.8 millionthe three and nine months ended September 30, 2021 was due primarily to property acquisitions and developments completed in 2022 and 2021.
(4) The increase in other income for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 related primarily to an increase in operating income as a result of the re-opening of the Kartrite Resort, which was previously closed due to the COVID-19 pandemic. Additionally, during the three and nine months ended September 30, 2022 the increase in other income was the result of increased operating income from two theatre properties.
(5) The increase in mortgage and other financing income during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 related to interest payments received from a cash basis borrower, as well as income from additional investments made on an existing mortgage. This was offset by less interest income from a borrower that was moved to cash basis during the nine months ended September 30, 2016. 2022.
Analysis of Expenses and Other Line Items
The $3.3 millionfollowing table summarizes our expenses and other line items (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2022 | 2021 | | Change | | 2022 | 2021 | | Change |
Property operating expense | $ | 14,707 | | $ | 13,815 | | | $ | 892 | | | $ | 42,238 | | $ | 43,806 | | | $ | (1,568) | |
Other expense (1) | 9,135 | | 7,851 | | | 1,284 | | | 26,104 | | 13,428 | | | 12,676 | |
General and administrative expense (2) | 12,582 | | 11,154 | | | 1,428 | | | 38,497 | | 33,866 | | | 4,631 | |
| | | | | | | | | |
| | | | | | | | | |
Transaction costs (3) | 148 | | 2,132 | | | (1,984) | | | 3,540 | | 3,342 | | | 198 | |
Credit loss expense (benefit) (4) | 241 | | (14,096) | | | 14,337 | | | 9,447 | | (19,677) | | | 29,124 | |
Impairment charges (5) | — | | 2,711 | | | (2,711) | | | 4,351 | | 2,711 | | | 1,640 | |
Depreciation and amortization | 41,539 | | 42,612 | | | (1,073) | | | 122,349 | | 123,476 | | | (1,127) | |
Gain on sale of real estate | 304 | | 787 | | | (483) | | | 304 | | 1,499 | | | (1,195) | |
Costs associated with loan refinancing or payoff (6) | — | | 4,741 | | | (4,741) | | | — | | 4,982 | | | (4,982) | |
Interest expense, net (7) | 32,747 | | 36,584 | | | (3,837) | | | 99,296 | | 114,090 | | | (14,794) | |
Equity in (income) loss from joint ventures (8) | (572) | | 418 | | | (990) | | | (1,887) | | 3,000 | | | (4,887) | |
Impairment charges on joint ventures | — | | — | | | — | | | 647 | | — | | | 647 | |
Income tax expense | 388 | | 395 | | | (7) | | | 1,150 | | 1,200 | | | (50) | |
| | | | | | | | | |
| | | | | | | | | |
Preferred dividend requirements | 6,033 | | 6,033 | | | — | | | 18,099 | | 18,100 | | | (1) | |
(1) The increase in other expense for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 related primarily to an increase in operating expenses as a result of the re-opening of the Kartrite Resort, which was previously closed due to the COVID-19 pandemic as well as increases in operating expenses from two theatre properties.
(2) The increase in general and administrative expense for the three and nine months ended September 30, 2022 related primarily to an increase in payroll and benefit costs as well as an increase in travel expenses and professional fees.
(3) The decrease in transaction costs during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was due primarily to fewer terminated transactions.
(4) During the three and nine months ended September 30, 2021, credit loss benefit was primarily due to repayments of $6.8 million from a higher gainborrower on a previously fully-reserved note receivable and the release from an insurance claimadditional $8.5 million in funding commitments. During the nine months ended September 30, 2022, we recognized credit loss expense of $6.8 million related to one mortgage note receivable and $3.1 million related to two notes receivable. The remaining change in credit loss expense (benefit) for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 was due to the results of the credit loss model that was impacted by the expected timing of the economic recovery from the impacts of the COVID-19 pandemic.
(5) Impairment charges recognized during the nine months ended September 30, 2016.
Mortgage and other financing income for2022 related to a vacant property that we determined the nine months ended September 30, 2017cash flows were not sufficient to recover the carrying value. This property was $65.0 million compared to $52.9 million for the nine months ended September 30, 2016. The $12.1 million increase was primarily due to additional real estate lending activities during 2017 and 2016, including our investment in a mortgage note receivable with OZRE secured by 14 ski properties which closed on April 6, 2017. This increase was offset by a $3.6 million prepayment fee we received in conjunction with the full prepayment of one mortgage note receivablesold during the nine months ended September 30, 2016, as well as2022. Impairment charges recognized during the sale of nine public charter school properties that were accounted for as direct financing leases during 2016.
Our property operating expenses totaled $18.8 million for thethree and nine months ended September 30, 2017 compared to $16.7 million for the nine months ended September 30, 2016. These property operating expenses arise from the operations of our retail centers and other specialty properties. The $2.1 million increase resulted primarily from an increase in bad debt expense, as well as higher property operating expenses at our multi-tenant properties.
Our general and administrative expense totaled $33.8 million for the nine months ended September 30, 2017 compared to $27.3 million for the nine months ended September 30, 2016. The increase of $6.5 million primarily2021 related to an increase in payroll and benefits costs, including share based compensation, as well as an increase in professional fees.two vacant properties that we determined the cash flows were not sufficient to recover the carrying value.
(6) Costs associated with loan refinancing or payoff for the three and nine months ended September 30, 2017 was $1.5 million and2021 related to the amendment topay-off of our unsecured revolving creditterm loan facility and term loanthe termination of related interest rate swaps.
(7) The decrease in interest expense, net for the three and nine months ended September 30, 2022 compared to the prepayment of secured fixedthree and nine months ended September 30, 2021, resulted primarily from a decrease in average borrowings and a decrease in the weighted average interest rate mortgage notes payable. Costs associated with loan refinancing or payoffon outstanding debt.
(8) The increase in equity in (income) loss from joint ventures for the nine months ended September 30, 2016 was $0.9 million and related2022 compared to fees associated with the repayment of secured fixed rate mortgage notes payable and the write off of prepaid mortgage fees in conjunction with our borrowers' prepayment of two mortgage notes receivable.
Gain on early extinguishment of debt for the nine months ended September 30, 2017 was $1.0 million and2021 related primarily to a note payoffmore income recognized at two experiential lodging properties located in advance of maturity that was initially recorded at fair value upon acquisition. There was no gain on early extinguishment of debt for the nine months ended September 30, 2016.
Our net interest expense increased by $27.6 million to $97.9 million for the nine months ended September 30, 2017 from $70.3 million for the nine months ended September 30, 2016. This increase resulted from an increase in average borrowingsSt. Petersburg, Florida as well as an increase in the weighted average interest rate used to financeincome recognized at our real estate acquisitions and fund our mortgage notes receivable.
Transaction costs totaled $0.4 million for the nine months ended September 30, 2017 compared to $4.9 million for the nine months ended September 30, 2016. The decrease of $4.5 million was due to a decrease in potential and terminated transactions as well as our early adoption of ASU 2017-01.
Impairment charges for the nine months ended September 30, 2017 totaled $10.2 million and related to six charter school properties previously included in our investment in a direct financing lease. There were no impairment charges for the nine months ended September 30, 2016. See Note 6 for further information.
Depreciation and amortization expense totaled $95.9 million for the nine months ended September 30, 2017 compared to $79.2 million for the nine months ended September 30, 2016. The $16.7 million increase resulted primarily from acquisitions and developments completed in 2017 and 2016, including our transaction with CNL Lifestyle which closed on April 6, 2017. This increase was partially offset byexperiential lodging property dispositions.
Gain on sale of real estate was $28.5 million for the nine months ended September 30, 2017 and related to the sale of four entertainment properties, the exercise of five tenant purchase options on public charter school properties and the sale of two other education properties. Gain on sale of real estate was $3.9 million for the nine months ended September 30, 2016 and related to the exercise of two tenant purchase options on public charter school properties and the sale of a parcel of land adjacent to a megaplex theatre.
Income tax expense was $2.0 million for the nine months ended September 30, 2017 compared to $0.6 million for the nine months ended September 30, 2016 and related primarily to Canadian income taxes on our Canadian trust and Federal income taxes on our taxable REIT subsidiaries, as well as state income taxes and withholding tax for distributions related to our unconsolidated joint venture projected located in China. The $1.4 million increaseBreaux Bridge, Louisiana, which was acquired in expense related primarily to the reversal of a valuation allowance associated with the taxable REIT subsidiaries, deferred tax assets recorded in the nine months ended September 30, 2016, as well as higher deferred tax expense in 2017 related to our Canadian trust.May 2022.
Liquidity and Capital Resources
Cash and cash equivalentsequivalents were $11.4$160.8 million at September 30, 2017.2022. In addition, we had restricted cash of $24.3$5.3 million at September 30, 2017.2022. Of the restricted cash at September 30, 2017, $20.62022, $3.0 million related to cash held for our borrowers’ debt service reserves for mortgage notes receivable or tenants' off-season rent reserves and $3.6$2.3 million related to escrow deposits required for property management agreements or held for potential acquisitions and redevelopments. The remaining $0.1 million was required in connection with our debt outstanding and related to debt service, payment of real estate taxes and capital improvements.
Mortgage Debt, Senior Notes and Unsecured Revolving Credit Term Loan Facility and Equity Issuances
At September 30, 2017,2022, we had total debt outstandingoutstanding of $3.0$2.8 billion, of which 99% was unsecured.unsecured.
At September 30, 2017,2022, we had outstanding $2.1outstanding $2.5 billion in aggregateaggregate principal amount of unsecured senior notes (excluding the private placement notes discussed below) ranging in interest rates from 4.50%3.60% to 7.75%4.95%. The notes contain various covenants, including: (i) a limitation on incurrence of any debt whichthat would cause the ratio of our debt to adjusted total assets to exceed 60%; (ii) a limitation on incurrence of any secured debt whichthat would cause the ratio of secured debt to adjusted total assets to exceed 40%; (iii) a limitation on incurrence of any debt whichthat 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.
OnAt September 27, 2017,30, 2022, we amended and restatedhad no outstanding balance under our $1.0 billion unsecured revolving credit and term loan facilities. We also amended our private placement notes. See "Recent Developments" for further discussion.
At September 30, 2017, we had $170.0 million outstanding under ourfacility. Our unsecured revolving credit facility is governed by the terms of a Third Amended, Restated and Consolidated Credit Agreement, dated as of October 6, 2021 (the "Third Consolidated Credit Agreement"). The facility will mature on October 6, 2025. We have two options to extend the maturity date of the facility by an additional six months each (for a total of 12 months), subject to paying additional fees and the absence of any default. The facility provides for an initial maximum principal amount of borrowing availability of $1.0 billion with $830.0 millionan "accordion" feature under which we may increase the total maximum principal amount available by $1.0 billion, to a total of availability and with$2.0 billion, subject to lender consent. The unsecured revolving credit facility bears interest at a floating rate of LIBOR plus 100 basis points,1.20% (based on our unsecured debt ratings and with a LIBOR floor of zero), which was 2.24%4.34% at September 30, 2017.2022. Additionally, the facility fee on the revolving credit facility is 0.25%.
At September 30, 2017, the unsecured term loan facility had a balance of $400.0 million with interest at a floating rate of LIBOR plus 110 basis points, which was 2.34% at September 30, 2017, and $300.0 million of this LIBOR-based debt has been fixed with interest rate swaps at a blended rate of 2.64% through April 5, 2019. The loan matures on February 27, 2023.
On October 31, 2017, we entered into three interest rate swap agreements to fix the interest rate at 3.15% on an additional $50.0 million of the unsecured term loan facility from November 6, 2017 to April 4, 2019 and on $350.0 million of the unsecured facility from April 5, 2019 to February 27, 2022.
At September 30, 2017,2022, we had outstanding $340.0$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 bearing interest at 4.35% and due August 22, 2024, and $192.0 million bearing interest at 4.56% and due August 22, 2026. At September 30, 2022, the interest rates for the private placement notes were 4.35% and 4.56% for the Series A notes due 2024 and the Series B notes due 2026, respectively.
On January 14, 2022, we amended the note purchase agreement governing our private placement notes (the "Note Purchase Agreement") to, among other things: (i) amend certain financial and other covenants and provisions in the Note Purchase Agreement to conform generally to the changes beneficial to us in the corresponding covenants and provisions contained in the Third Consolidated Credit Agreement, and (ii) amend certain financial and other covenants and provisions in the existing Note Purchase Agreement to reflect the prior termination of the Covenant Relief Period (as defined in the existing Note Purchase Agreement) and removal of related provisions.
Our unsecured revolving credit facilitiesfacility and the private placement notes contain financial covenants or restrictions that limit our levels of consolidated debt, secured debt, investment levelsinvestments outside certain categories, stock repurchases and dividend distributions;distributions and require us to maintain a minimum consolidated tangible net worth and meet certain coverage levels for fixed charges and debt service. Additionally, these debt instruments contain cross-default provisions if we default under other indebtedness exceeding certain amounts. Those cross-default thresholds vary from $25.0$50.0 million to in$75.0 million, depending upon the case of the note purchase agreement governing the private placement notes, $75.0 million.debt instrument. We were in compliance with all financial and other covenants under our debt instruments at September 30, 2017.2022.
Our principal investing activities are acquiring, developing and financing entertainment, education and recreationExperiential properties. These investing activities have generally been financed with mortgage debt and 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.acquisitions or incur new mortgage debt on existing properties. We may also issue equity securities in connection with acquisitions. Continued growth of our rental propertyreal 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.
Certain of As discussed above, we intend to fund our other long-term debt agreements contain customary restrictive covenants related to financialinvestments in the near term primarily from cash from operations and operating performance as well as certain cross-default provisions. We were in compliance with all financial covenants at September 30, 2017.
During the nine months ended September 30, 2017, we issued an aggregate of 928,219 common sharesborrowing availability under the direct share purchase component of our DSPP for total net proceeds of $67.9 million. These proceeds were used to pay down a portion of our unsecured revolving credit facility.facility, subject to maintaining our leverage levels consistent with past practice, due to our current elevated cost of capital.
During the nine months ended September 30, 2017, we issued 8,851,264 common shares in connection with the transactions with CNL Lifestyle and OZRE. See Note 4 for further information.
Liquidity Requirements
Short-term liquidity requirements consist primarily of normal recurring corporate operating expenses, debt service requirements and distributions to shareholders. We meethave historically met these requirements primarily through cash provided by operating activities. Net The table below summarizes our cash provided by operating activities was $300.3 millionflows (dollars in thousands):
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
Net cash provided by operating activities | | $ | 349,675 | | | $ | 236,424 | |
Net cash used by investing activities | | (271,665) | | | (39,477) | |
Net cash used by financing activities | | (201,715) | | | (1,075,273) | |
| | | | |
| | | | |
| | | | |
| | | | |
As previously disclosed, we have agreed to rent and $215.8 millionmortgage 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. 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. As described further above, we are also currently in negotiations with Regal regarding our theatre properties that Regal will continue to operate and the nine months endedterms and conditions of leases for these properties in connection with Regal's pending bankruptcy proceedings, and there can be no assurance as to the ultimate outcome of these negotiations.
Commitments
As of September 30, 20172022, we had 17 development projects with commitments to fund an aggregate of approximately $161.6 million, of which approximately $14.6 million is expected to be funded in 2022. 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.
We have certain commitments related to our mortgage notes and 2016, respectively. Net cash used by investing activities was $635.1 million and $415.3 million fornotes receivable investments that we may be required to fund in the nine months endedfuture. 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 of September 30, 20172022, we had two mortgage notes with commitments totaling approximately $10.4 million, of which $3.3 million is expected to be funded in 2022. 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 2016, respectively. Net cash provided by financing activities was $326.7 million and $202.6 million forrelated infrastructure, certain public agencies require posting of surety bonds to guarantee that our obligations are satisfied. These bonds expire upon the nine months endedcompletion of the improvements or infrastructure. As of September 30, 2017 and 2016, respectively. 2022, we had three surety bonds outstanding totaling $3.3 million.
Liquidity Analysis
We currently anticipate that our cash on hand, cash from operations, funds available under our unsecured revolving credit facility and proceeds from asset dispositions will provide adequate liquidity to meet our financial commitments, including to fund our operations, make interest and principalrecurring debt service payments, on our debt, and allow distributions to our shareholders and avoid corporate level federal income or excise tax in accordance with REIT Internal Revenue Code requirements.
Commitments
AsLong-term liquidity requirements consist primarily of September 30, 2017, we had an aggregate of approximately $202.4 million of commitments to fund development projects including 34 entertainment development projects for which we had commitments to fund approximately $97.0 million, nine education development projects for which we had commitments to fund approximately $40.9 million and six recreation development projects for which we had commitments to fund approximately $64.5 million, of which approximately $65.9 million is expected to be funded in 2017 and the remainder is expected to be funded in 2018. 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.
Additionally, as of September 30, 2017, we had a commitment to fund approximately $155.0 million over the next three years, of which $22.3 million had been funded, to complete an indoor waterpark hotel and adventure park at the Adelaar casino and resort project in Sullivan County, New York. We are also responsible for the construction of the casino and resort project common infrastructure. In June 2016, the Sullivan County Infrastructure Local Development Corporation issued $110.0 million of Series 2016 Revenue Bonds which is expected to fund a substantial portion of such construction costs. We received an initial reimbursement of $43.4 million of construction costs during the year ended December 31, 2016 and an additional reimbursement of $23.9 million during the nine months ended September 30, 2017. We expect to receive an additional $21.0 million of reimbursements over the balance of the construction period. Construction of infrastructure improvements is currently expected to be completed in 2018.
We have certain commitments related to our mortgage note 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 its direct control. As of September 30, 2017, we had eight mortgage notes receivable with commitments totaling approximately $25.7 million. If commitments are funded in the future, interest will be charged at rates consistent with the existing investments.
We have provided guarantees of the payment of certain economic development revenue bonds totaling $24.9 million related to two theatres in Louisiana for which we earn a fee at annual rates of 2.88% to 4.00% over the 30-year terms of the related bonds. We have recorded $10.4 million as a deferred asset included in other assets and $10.4 million included in other liabilities in the accompanying consolidated balance sheet as of September 30, 2017 related to these guarantees. No amounts have been accrued as a loss contingency related to these guarantees because payment by us is not probable.
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 September 30, 2017, we had six surety bonds outstanding totaling $24.3 million.
Liquidity Analysis
In analyzing our liquidity, we expect that our cash provided by operating activities will meet our normal recurring operating expenses, recurring debt service requirements and distributions to shareholders.
maturities. We have no scheduled debt balloon payments coming due for the remainder of 2017. Our sources of liquidity as of September 30, 2017 to pay the above 2017 commitments include the remaining amount available under our unsecured revolving credit facility as well as unrestricted cash on hand of $11.4 million. Accordingly, while there can be no assurance, we expect that our sources of cash will exceed our existing commitments over the remainder of 2017.
until 2024. We alsocurrently believe that we will be able to repay, extend, refinance or otherwise settle our debt maturities for 2018 and thereafter 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.us, particularly in light of the continuing economic uncertainty caused by the COVID-19 pandemic and the impact of current economic and other conditions on financing costs.
Our primary use of cash after paying operating expenses, debt service, distributions to shareholders 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. We are currently experiencing an elevated cost of capital due to current economic and other conditions. As a result, in the near term, we expect our investment spending will be reduced and funded primarily from cash from operations and borrowing availability under our unsecured revolving credit facility, subject to maintaining our leverage levels consistent with past practice. 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.
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 EBITDAEBITDAre 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.
We expect to maintain our net debt to adjusted EBITDA ratio between 4.6x to 5.6x. Our net debt to adjusted EBITDAEBITDAre ratio was 5.2x and our net debt to gross assets ratio was slightly above this range at 5.66x39% as of September 30, 2017 (see "Non-GAAP financial measures" for calculation). Because adjusted EBITDA as defined does not include the annualization of adjustments for projects put in service or acquired during the quarter and other items, and net debt includes the debt provided for build-to-suit projects under development that do not have any current EBITDA, we also look at a ratio adjusted for these items, which was within the range at September 30, 2017. The level of this additional ratio, along with the timing and size of our equity and debt offerings as well as dispositions, may cause us to temporarily operate outside our stated range for the net debt to adjusted EBITDA ratio of 4.6x to 5.6x.
Our net debt2022 (see "Non-GAAP Financial Measures" for definition) to gross assets ratio (i.e. net debt to total assets plus accumulated depreciation less cash and cash equivalents) was 44% as of September 30, 2017. Our net debt as a percentage of our total market capitalization at September 30, 2017 was 35%calculation). We calculate our total market capitalization of $8.5 billion by aggregating the following at September 30, 2017:
Common shares outstanding of 73,664,933 multiplied by the last reported sales price of our common shares on the NYSE of $69.74 per share, or $5.1 billion;Aggregate liquidation value of our Series C convertible preferred shares of $135.0 million;
Aggregate liquidation value of our Series E convertible preferred shares of $86.2 million;
Aggregate liquidation value of our Series F redeemable preferred shares of $125.0 million; and
Net debt of $3.0 billion.
Non-GAAP Financial Measures
Funds From Operations (FFO), Funds From Operations As Adjusted (FFOAA) and Adjusted Funds fromFrom 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 the Board of Governors of NAREIT, we calculate FFO as net income available available to common shareholders, computed in accordance with GAAP, excluding gains and losses from salesdisposition of depreciable operating propertiesreal estate and impairment losses of depreciableon 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 (gain) associated with loan refinancing or payoff, net, transaction costs, retirement severance expense, preferred share redemption costs, termination fees associated with tenants' exercises of public charter school buy-out options, impairment of direct financingoperating lease (allowance for leaseright-of-use assets and credit loss portion)expense (benefit) and provision for loan losses and subtracting gain on early extinguishment of debt, gain (loss) on sale of land, gain on insurance recovery and deferred income tax benefit (expense).(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;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 ofof the operating performance of real estate companies and are provided here as a supplemental measuremeasures to GAAP net income availableavailable 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.
The following table summarizes our FFO, FFOAA and AFFO including per share amounts for FFO and FFOAA, for the three and nine months ended September 30, 20172022 and 20162021 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 September 30, | | Nine Months Ended September 30, |
| 2022 | 2021 | | 2022 | 2021 |
FFO: | | | | | |
Net income available to common shareholders of EPR Properties | $ | 44,766 | | $ | 26,084 | | | $ | 115,801 | | $ | 35,949 | |
Gain on sale of real estate | (304) | | (787) | | | (304) | | (1,499) | |
| | | | | |
Impairment of real estate investments, net | — | | 2,711 | | | 4,351 | | 2,711 | |
| | | | | |
Real estate depreciation and amortization | 41,331 | | 42,415 | | | 121,721 | | 122,856 | |
Allocated share of joint venture depreciation | 2,093 | | 966 | | | 5,576 | | 1,779 | |
Impairment charges on joint ventures | — | | — | | | 647 | | — | |
FFO available to common shareholders of EPR Properties | $ | 87,886 | | $ | 71,389 | | | $ | 247,792 | | $ | 161,796 | |
| | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2022 | 2021 | | 2022 | 2021 |
FFO available to common shareholders of EPR Properties | | FFO available to common shareholders of EPR Properties | $ | 87,886 | | $ | 71,389 | | | $ | 247,792 | | $ | 161,796 | |
Add: Preferred dividends for Series C preferred shares | | Add: Preferred dividends for Series C preferred shares | 1,938 | | — | | | 5,814 | | — | |
Add: Preferred dividends for Series E preferred shares | | Add: Preferred dividends for Series E preferred shares | 1,939 | | — | | | 5,817 | | — | |
Diluted FFO available to common shareholders of EPR Properties | | Diluted FFO available to common shareholders of EPR Properties | $ | 91,763 | | $ | 71,389 | | | $ | 259,423 | | $ | 161,796 | |
| FFOAA: | | FFOAA: | |
FFO available to common shareholders of EPR Properties | | FFO available to common shareholders of EPR Properties | $ | 87,886 | | $ | 71,389 | | | $ | 247,792 | | $ | 161,796 | |
Costs associated with loan refinancing or payoff | | Costs associated with loan refinancing or payoff | — | | 4,741 | | | — | | 4,982 | |
Transaction costs | | Transaction costs | 148 | | 2,132 | | | 3,540 | | 3,342 | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2017 | | 2016 | | 2017 | | 2016 | |
FFO: | | | | | | | | |
Net income available to common shareholders of EPR Properties | $ | 57,003 |
| | $ | 51,575 |
| | $ | 179,550 |
| | $ | 148,986 |
| |
Gain on sale of real estate (excluding land sale) | (997 | ) | | (549 | ) | | (28,462 | ) | | (2,819 | ) | |
Real estate depreciation and amortization | 34,457 |
| | 27,147 |
| | 95,243 |
| | 77,870 |
| |
Allocated share of joint venture depreciation | 55 |
| | 56 |
| | 163 |
| | 174 |
| |
Impairment of direct financing lease - residual value portion (1) | — |
| | — |
| | 2,897 |
| | — |
| |
FFO available to common shareholders of EPR Properties | $ | 90,518 |
| | $ | 78,229 |
| | $ | 249,391 |
| | $ | 224,211 |
| |
FFO available to common shareholders of EPR Properties | $ | 90,518 |
| | $ | 78,229 |
| | $ | 249,391 |
| | $ | 224,211 |
| |
Add: Preferred dividends for Series C preferred shares | 1,941 |
| | 1,941 |
| | 5,823 |
| | 5,823 |
| |
Diluted FFO available to common shareholders of EPR Properties | $ | 92,459 |
| | $ | 80,170 |
| | $ | 255,214 |
| | $ | 230,034 |
| |
FFOAA: | | | | | | | | |
FFO available to common shareholders of EPR Properties | $ | 90,518 |
| | $ | 78,229 |
| | $ | 249,391 |
| | $ | 224,211 |
| |
Costs associated with loan refinancing or payoff | 1,477 |
| | 14 |
| | 1,491 |
| | 905 |
| |
| Credit loss expense (benefit) | | Credit loss expense (benefit) | 241 | | (14,096) | | | 9,447 | | (19,677) | |
| Gain on insurance recovery (included in other income) | — |
| | (1,825 | ) | | (606 | ) | | (3,837 | ) | Gain on insurance recovery (included in other income) | — | | — | | | (552) | | (30) | |
Termination fee included in gain on sale | 954 |
| | 549 |
| | 6,774 |
| | 2,819 |
| |
Gain on early extinguishment of debt | — |
| | — |
| | (977 | ) | | — |
| |
Transaction costs | 113 |
| | 2,947 |
| | 388 |
| | 4,881 |
| |
Gain on sale of land | — |
| | (1,066 | ) | | — |
| | (1,066 | ) | |
Deferred income tax expense (benefit) | 227 |
| | (44 | ) | | 911 |
| | (664 | ) | |
Impairment of direct financing lease - allowance for lease loss portion (1) | — |
| | — |
| | 7,298 |
| | — |
| |
Deferred income tax benefit | | Deferred income tax benefit | (37) | | — | | | (37) | | — | |
| FFOAA available to common shareholders of EPR Properties | $ | 93,289 |
| | $ | 78,804 |
| | $ | 264,670 |
| | $ | 227,249 |
| FFOAA available to common shareholders of EPR Properties | $ | 88,238 | | $ | 64,166 | | | $ | 260,190 | | $ | 150,413 | |
| FFOAA available to common shareholders of EPR Properties | $ | 93,289 |
| | $ | 78,804 |
| | $ | 264,670 |
| | $ | 227,249 |
| FFOAA available to common shareholders of EPR Properties | $ | 88,238 | | $ | 64,166 | | | $ | 260,190 | | $ | 150,413 | |
Add: Preferred dividends for Series C preferred shares | 1,941 |
| | 1,941 |
| | 5,823 |
| | 5,823 |
| Add: Preferred dividends for Series C preferred shares | 1,938 | | — | | | 5,814 | | — | |
Add: Preferred dividends for Series E preferred shares | | Add: Preferred dividends for Series E preferred shares | 1,939 | | — | | | 5,817 | | — | |
Diluted FFOAA available to common shareholders of EPR Properties | $ | 95,230 |
| | $ | 80,745 |
| | $ | 270,493 |
| | $ | 233,072 |
| Diluted FFOAA available to common shareholders of EPR Properties | $ | 92,115 | | $ | 64,166 | | | $ | 271,821 | | $ | 150,413 | |
| AFFO: | | | | | | | | AFFO: | |
FFOAA available to common shareholders of EPR Properties | $ | 93,289 |
| | $ | 78,804 |
| | $ | 264,670 |
| | $ | 227,249 |
| FFOAA available to common shareholders of EPR Properties | $ | 88,238 | | $ | 64,166 | | | $ | 260,190 | | $ | 150,413 | |
Non-real estate depreciation and amortization | 237 |
| | 454 |
| | 676 |
| | 1,352 |
| Non-real estate depreciation and amortization | 208 | | 197 | | | 628 | | 620 | |
Deferred financing fees amortization | 1,598 |
| | 1,187 |
| | 4,579 |
| | 3,522 |
| Deferred financing fees amortization | 2,090 | | 2,210 | | | 6,251 | | 5,331 | |
Share-based compensation expense to management and Trustees | 3,605 |
| | 2,778 |
| | 10,566 |
| | 8,282 |
| |
Maintenance capital expenditures (2) | (1,125 | ) | | (805 | ) | | (4,316 | ) | | (3,805 | ) | |
Share-based compensation expense to management and trustees | | Share-based compensation expense to management and trustees | 4,138 | | 3,759 | | | 12,552 | | 11,218 | |
Amortization of above and below market leases, net and tenant allowances | | Amortization of above and below market leases, net and tenant allowances | (89) | | (98) | | | (265) | | (293) | |
Maintenance capital expenditures (1) | | Maintenance capital expenditures (1) | (386) | | (690) | | | (1,871) | | (2,913) | |
Straight-lined rental revenue | (2,357 | ) | | (4,597 | ) | | (11,417 | ) | | (10,950 | ) | Straight-lined rental revenue | (2,374) | | (981) | | | (4,702) | | (3,690) | |
Straight-lined ground sublease expense | | Straight-lined ground sublease expense | 602 | | 98 | | | 1,111 | | 293 | |
Non-cash portion of mortgage and other financing income | (905 | ) | | (962 | ) | | (2,361 | ) | | (2,907 | ) | Non-cash portion of mortgage and other financing income | (119) | | 55 | | | (353) | | (332) | |
Amortization of above and below market leases, net and tenant improvements | (55 | ) | | 42 |
| | (41 | ) | | 138 |
| |
AFFO available to common shareholders of EPR Properties | $ | 94,287 |
| | $ | 76,901 |
| | $ | 262,356 |
| | $ | 222,881 |
| AFFO available to common shareholders of EPR Properties | $ | 92,308 | | $ | 68,716 | | | $ | 273,541 | | $ | 160,647 | |
| AFFO available to common shareholders of EPR Properties | $ | 94,287 |
| | $ | 76,901 |
| | $ | 262,356 |
| | $ | 222,881 |
| AFFO available to common shareholders of EPR Properties | $ | 92,308 | | $ | 68,716 | | | $ | 273,541 | | $ | 160,647 | |
Add: Preferred dividends for Series C preferred shares | 1,941 |
| | — |
| | 5,823 |
| | — |
| Add: Preferred dividends for Series C preferred shares | 1,938 | | — | | | 5,814 | | — | |
Add: Preferred dividends for Series E preferred shares | | Add: Preferred dividends for Series E preferred shares | 1,939 | | — | | | 5,817 | | |
Diluted AFFO available to common shareholders of EPR Properties | $ | 96,228 |
| | $ | 76,901 |
| | $ | 268,179 |
| | $ | 222,881 |
| Diluted AFFO available to common shareholders of EPR Properties | $ | 96,185 | | $ | 68,716 | | | $ | 285,172 | | $ | 160,647 | |
|
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
FFO per common share: | | | | | | | |
Basic | $ | 1.23 |
| | $ | 1.23 |
| | $ | 3.55 |
| | $ | 3.54 |
|
Diluted | 1.22 |
| | 1.22 |
| | 3.52 |
| | 3.52 |
|
FFOAA per common share: | | | | | | | |
Basic | $ | 1.27 |
| | $ | 1.24 |
| | $ | 3.76 |
| | $ | 3.59 |
|
Diluted | 1.26 |
| | 1.23 |
| | 3.73 |
| | 3.56 |
|
Shares used for computation (in thousands): | | | | | | | |
Basic | 73,663 |
| | 63,627 |
| | 70,320 |
| | 63,296 |
|
Diluted | 73,724 |
| | 63,747 |
| | 70,385 |
| | 63,393 |
|
| | | | | | | |
Weighted average shares outstanding-diluted EPS | 73,724 |
| | 63,747 |
| | 70,385 |
| | 63,393 |
|
Effect of dilutive Series C preferred shares | 2,072 |
| | 2,036 |
| | 2,063 |
| | 2,029 |
|
Adjusted weighted average shares outstanding-diluted | 75,796 |
| | 65,783 |
| | 72,448 |
| | 65,422 |
|
| | | | | | | |
Other financial information: | | | | | | | |
Dividends per common share | $ | 1.02 |
| | $ | 0.96 |
| | $ | 3.06 |
| | $ | 2.88 |
|
| | | | | | | |
| |
(1) | Impairment charges recognized during the nine months ended September 30, 2017 total $10.2 million and related to our investment in a direct financing lease, net, consisting of $2.9 million related to the residual value portion and $7.3 million related to the allowance for lease loss portion. See Note 6 for further information. |
| |
(2) | Includes maintenance capital expenditures and certain second generation tenant improvements and leasing commissions. |
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | 2021 | | 2022 | 2021 |
FFO per common share: | | | | | |
Basic | $ | 1.17 | | $ | 0.95 | | | $ | 3.31 | | $ | 2.16 | |
Diluted | 1.16 | | 0.95 | | | 3.28 | | 2.16 | |
FFOAA per common share: | | | | | |
Basic | $ | 1.18 | | $ | 0.86 | | | $ | 3.47 | | $ | 2.01 | |
Diluted | 1.16 | | 0.86 | | | 3.44 | | 2.01 | |
Shares used for computation (in thousands): | | | | | |
Basic | 75,016 | | 74,804 | | | 74,949 | | 74,738 | |
Diluted | 75,183 | | 74,911 | | | 75,102 | | 74,819 | |
| | | | | |
Weighted average shares outstanding-diluted EPS | 75,183 | | 74,911 | | | 75,102 | | 74,819 | |
Effect of dilutive Series C preferred shares | 2,250 | | — | | | 2,245 | | — | |
| | | | | |
Effect of dilutive Series E preferred shares | 1,664 | | — | | | 1,664 | | — | |
Adjusted weighted average shares outstanding-diluted Series C and Series E | 79,097 | | 74,911 | | | 79,011 | | 74,819 | |
| | | | | |
Other financial information: | | | | | |
Dividends per common share | $ | 0.8250 | | $ | 0.7500 | | | $ | 2.4250 | | $ | 0.7500 | |
| | | | | |
(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 additional common shares that would result from the conversion of the 5.75% Series C cumulative convertible preferred shares and the 9.00% Series E cumulative convertible preferred shares for the three and nine months ended September 30, 2021, and the corresponding add-back of the preferred dividends declared on those shares are not included in the calculation of diluted FFO, FFOAA and AFFO per share because the effect is anti-dilutive. 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, FFOAA and FFOAAAFFO per share for the three and nine months ended September 30, 2017 and 2016.2022. Therefore, the additional 2.1 million and 2.0 million 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, FFOAA and diluted FFOAAAFFO per share for the three and nine months ended September 30, 2017 and 2016, respectively. The effect of the conversion of our 9.0% Series E cumulative convertible preferred shares do not result in more dilution to per share results and are therefore not included in the calculation of diluted per share data for the three and nine months ended September 30, 2017 and 2016.share.
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.
Net Debt to Gross Assets Ratio
Net Debt to Gross Assets Ratio 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 the Net Debt to Gross Assets Ratio 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 the Board of Governors of NAREIT, we calculate EBITDAre as net 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 EBITDAEBITDAre
Management uses Adjusted EBITDAEBITDAre in its analysis of the performance of the business and operations of the Company. Management believes Adjusted EBITDAEBITDAre 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 EBITDAEBITDAre as net income available to common shareholdersEBITDAre (defined above) for the quarter excluding costs associated with loan refinancing or payoff, interest expense (net), depreciation and amortization, equity in (income) loss from joint ventures, gain (loss) on the sale of real estate, gain on early extinguishment of debt, gain on insurance recovery, income tax expense (benefit), preferred dividend requirements, the effect of non-cash impairment
charges, retirement severance expense, the provision for loan losses andcredit loss (benefit) expense, transaction costs, (benefit),impairment losses on operating lease right-of-use assets and which is then multiplied by four to get an annual amount.prepayment fees.
Our method of calculating Adjusted EBITDAEBITDAre may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. Adjusted EBITDAEBITDAre 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 foror any other GAAP measure as a measurement of the purposeresults of evaluating the Company's performanceour operations or to cash flows or liquidity as a measure of liquidity.defined by GAAP.
Net Debt to Adjusted EBITDAEBITDAre Ratio
Net Debt to Adjusted EBITDAEBITDAre Ratio is a supplemental measure derived from non-GAAP financial measures that we use to evaluate our capital structure and the magnitude of our debt against our operating performance. We believe that investors commonly use versions of this ratio in a similar manner. In addition, financial institutions use versions of this ratio in connection with debt agreements to set pricing and covenant limitations. Our method of calculating the Net Debt to Adjusted EBITDAEBITDAre Ratio may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs.
Reconciliations of debt, total assets and net income available to common shareholders (both(all reported in accordance with GAAP) to Net Debt, Gross Assets, Net Debt to Gross Assets Ratio, EBITDAre, Adjusted EBITDAEBITDAre and Net Debt to Adjusted EBITDAEBITDAre Ratio (each of which is a non-GAAP financial measure), as applicable, are included in the following tables (unaudited, in thousands):
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
Net Debt: | | | |
Debt | $ | 2,808,587 | | | $ | 2,684,063 | |
Deferred financing costs, net | 32,642 | | | 32,166 | |
Cash and cash equivalents | (160,838) | | | (144,433) | |
Net Debt | $ | 2,680,391 | | | $ | 2,571,796 | |
| | | |
Gross Assets: | | | |
Total Assets | $ | 5,792,759 | | | $ | 5,721,157 | |
Accumulated depreciation | 1,278,427 | | | 1,142,513 | |
Cash and cash equivalents | (160,838) | | | (144,433) | |
Gross Assets | $ | 6,910,348 | | | $ | 6,719,237 | |
| | | |
Net Debt to Gross Assets Ratio | 39 | % | | 38 | % |
| | | |
| Three Months Ended September 30, |
| 2022 | | 2021 |
EBITDAre and Adjusted EBITDAre: | | | |
Net income | $ | 50,799 | | | $ | 32,117 | |
Interest expense, net | 32,747 | | | 36,584 | |
Income tax expense | 388 | | | 395 | |
Depreciation and amortization | 41,539 | | | 42,612 | |
Gain on sale of real estate | (304) | | | (787) | |
| | | |
Impairment of real estate investments, net | — | | | 2,711 | |
| | | |
| | | |
Costs associated with loan refinancing or payoff | — | | | 4,741 | |
| | | |
Allocated share of joint venture depreciation | 2,093 | | | 966 | |
Allocated share of joint venture interest expense | 1,822 | | | 981 | |
| | | |
EBITDAre | $ | 129,084 | | | $ | 120,320 | |
| | | |
| | | |
| | | |
| | | |
Transaction costs | 148 | | | 2,132 | |
| | | |
Credit loss expense (benefit) | 241 | | | (14,096) | |
| | | |
| | | |
| | | |
| | | |
Adjusted EBITDAre (for the quarter) | $ | 129,473 | | | $ | 108,356 | |
| | | |
Adjusted EBITDAre (annualized) (1) | $ | 517,892 | | | Footnote 2 |
| | | |
Net Debt/Adjusted EBITDAre Ratio | 5.2 | | | Footnote 2 |
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(1) Adjusted EBITDA for the quarter is multiplied by four to calculate an annual amount. |
(2) Not presented as ratio is not meaningful given the disruption caused by COVID-19 and the associated accounting for tenant rent deferrals and other lease modifications. |
|
| | | | | | | |
| September 30, |
| 2017 | | 2016 |
Net Debt: | | | |
Debt | $ | 2,987,925 |
| | $ | 2,248,576 |
|
Deferred financing costs, net | 33,951 |
| | 18,885 |
|
Cash and cash equivalents | (11,412 | ) | | (7,311 | ) |
Net Debt | $ | 3,010,464 |
| | $ | 2,260,150 |
|
| | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
Adjusted EBITDA: | | | |
Net income available to common shareholders of EPR Properties | $ | 57,003 |
| | $ | 51,575 |
|
Costs associated with loan refinancing or payoff | 1,477 |
| | 14 |
|
Interest expense, net | 34,194 |
| | 24,265 |
|
Transaction costs | 113 |
| | 2,947 |
|
Depreciation and amortization | 34,694 |
| | 27,601 |
|
Equity in income from joint ventures | (35 | ) | | (203 | ) |
Gain on sale of real estate | (997 | ) | | (1,615 | ) |
Income tax expense | 587 |
| | 358 |
|
Preferred dividend requirements | 5,951 |
| | 5,951 |
|
Gain on insurance recovery (1) | — |
| | (1,825 | ) |
Adjusted EBITDA (for the quarter) | $ | 132,987 |
| | $ | 109,068 |
|
| | | |
Adjusted EBITDA (2) | $ | 531,948 |
| | $ | 436,272 |
|
| | | |
Net Debt/Adjusted EBITDA Ratio | 5.66 |
| | 5.18 |
|
| | | |
(1) Included in other income in the accompanying consolidated statements of income. Other income includes the following: |
| Three Months Ended September 30, |
| 2017 | | 2016 |
Income from settlement of foreign currency swap contracts | $ | 520 |
| | $ | 643 |
|
Gain on insurance recovery | — |
| | 1,825 |
|
Fee income | 1 |
| | — |
|
Miscellaneous income | 1 |
| | 8 |
|
Other income | $ | 522 |
| | $ | 2,476 |
|
| | | |
(2) Adjusted EBITDA for the quarter is multiplied by four to calculate an annual amount.
Total Investments
Total investments is a non-GAAP financial measure defined as the sum of the carrying values of rental propertiesreal estate investments (before accumulated depreciation), land held for development, property under development, mortgage notes receivable (including related accruedaccrued interest receivable), investment in a direct financing lease, net, 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):
| | | September 30, 2017 | | December 31, 2016 | | September 30, 2022 | | December 31, 2021 |
Total Investments: | | | | Total Investments: | | | |
Rental properties, net of accumulated depreciation | $ | 4,535,994 |
| | $ | 3,595,762 |
| |
Add back accumulated depreciation on rental properties | 711,384 |
| | 635,535 |
| |
Real estate investments, net of accumulated depreciation | | Real estate investments, net of accumulated depreciation | $ | 4,769,717 | | | $ | 4,713,091 | |
Add back accumulated depreciation on real estate investments | | Add back accumulated depreciation on real estate investments | 1,278,427 | | | 1,167,734 | |
Land held for development | 33,674 |
| | 22,530 |
| Land held for development | 20,168 | | | 20,168 | |
Property under development | 284,211 |
| | 297,110 |
| Property under development | 56,347 | | | 42,362 | |
Mortgage notes and related accrued interest receivable | 972,371 |
| | 613,978 |
| Mortgage notes and related accrued interest receivable | 399,485 | | | 370,159 | |
Investment in a direct financing lease, net | 57,698 |
| | 102,698 |
| |
| Investment in joint ventures | 5,616 |
| | 5,972 |
| Investment in joint ventures | 50,124 | | | 36,670 | |
Intangible assets, gross(1) | 45,848 |
| | 28,787 |
| Intangible assets, gross (1) | 60,109 | | | 57,962 | |
Notes receivable and related accrued interest receivable, net(1) | 5,213 |
| | 4,765 |
| Notes receivable and related accrued interest receivable, net (1) | 3,495 | | | 7,254 | |
Total investments | $ | 6,652,009 |
| | $ | 5,307,137 |
| Total investments | $ | 6,637,872 | | | $ | 6,415,400 | |
| | | | | | | |
Total investments | $ | 6,652,009 |
| | $ | 5,307,137 |
| Total investments | $ | 6,637,872 | | | $ | 6,415,400 | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 199,031 | | | 180,808 | |
Cash and cash equivalents | 11,412 |
| | 19,335 |
| Cash and cash equivalents | 160,838 | | | 288,822 | |
Restricted cash | 24,323 |
| | 9,744 |
| Restricted cash | 5,252 | | | 1,079 | |
Account receivable, net | 99,213 |
| | 98,939 |
| |
Less: accumulated depreciation on rental properties | (711,384 | ) | | (635,535 | ) | |
Less: accumulated amortization on intangible assets | (16,318 | ) | | (14,008 | ) | |
Accounts receivable | | Accounts receivable | 53,375 | | | 78,073 | |
Less: accumulated depreciation on real estate investments | | Less: accumulated depreciation on real estate investments | (1,278,427) | | | (1,167,734) | |
Less: accumulated amortization on intangible assets (1) | | Less: accumulated amortization on intangible assets (1) | (22,650) | | | (20,163) | |
Prepaid expenses and other current assets(1) | 73,755 |
| | 79,410 |
| 37,468 | | | 24,865 | |
Total assets | $ | 6,133,010 |
| | $ | 4,865,022 |
| Total assets | $ | 5,792,759 | | | $ | 5,801,150 | |
| | | | | | | |
(1) Included in other assets in the accompanying consolidated balance sheet. Other assets includes the following: | |
(1) Included in "Other assets" in the accompanying consolidated balance sheet. Other assets include the following: | | (1) Included in "Other assets" in the accompanying consolidated balance sheet. Other assets include the following: |
| | | | |
| September 30, 2017 | | December 31, 2016 | | September 30, 2022 | | December 31, 2021 |
Intangible assets, gross | $ | 45,848 |
| | $ | 28,787 |
| Intangible assets, gross | $ | 60,109 | | | $ | 57,962 | |
Less: accumulated amortization on intangible assets | (16,318 | ) | | (14,008 | ) | Less: accumulated amortization on intangible assets | (22,650) | | | (20,163) | |
Notes receivable and related accrued interest receivable, net | 5,213 |
| | 4,765 |
| Notes receivable and related accrued interest receivable, net | 3,495 | | | 7,254 | |
Prepaid expenses and other current assets | 73,755 |
| | 79,410 |
| Prepaid expenses and other current assets | 37,468 | | | 24,865 | |
Total other assets | $ | 108,498 |
| | $ | 98,954 |
| Total other assets | $ | 78,422 | | | $ | 69,918 | |
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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, primarily relating to potential losses due to changes in interest rates and foreign currency exchange rates. We seek to mitigate the effects of fluctuations in interest rates by matching the term of new investments with new long-term fixed rate borrowings whenever possible. As of September 30, 2017,2022, we had a $1.0 billion unsecured revolving credit facilityfacility with a $170.0 millionno outstanding balance and $25.0 million in bonds, all of which bear interest at a floating rate.balance. We also had a $400.0$25.0 million unsecured term loan facilitybond that bears interestinterest at a floating rate and $300.0 million of this LIBOR-based debtbut has been fixed with interest rate swaps at a blended rate of 2.64% through April 5, 2019. As discussed in Note 7 to the consolidated financial statements in this Quarterly Report on Form 10-Q, these facilities were amended and restated on September 27, 2017.
On October 31, 2017, we entered into threean interest rate swap agreementsagreement.
As of September 30, 2022, we had a 65% investment interest in two unconsolidated real estate joint ventures related to fixtwo experiential lodging properties located in St. Petersburg Beach, Florida. At September 30, 2022, the joint venture had a secured mortgage loan with an outstanding balance of $105.0 million. The mortgage loan bears interest at SOFR plus 3.65%, with monthly interest payments required. The joint venture has an interest rate cap agreement to limit the variable portion of the interest rate at 3.15%(SOFR) on an additional $50.0 million of the unsecured term loan facilitythis note to 3.5% from November 6, 2017May 19, 2022 to April 4, 2019 and on $350.0 million of the unsecured term loan facility from April 5, 2019 to February 7, 2022.June 1, 2024.
We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of such refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings are subject to contractual agreements or mortgages which limit the amount of indebtedness we may incur. Accordingly, if we are unable to raise additional equity or borrow money due to these limitations, our ability to make additional real estate investments may be limited.
We are exposed to foreign currency risk against our functional currency, the U.S. dollar, on our foursix Canadian properties and the rents received from tenants of the properties are payable in CAD. To mitigateIn order to hedge our foreign currency riskCAD denominated cash flow and our net investment in future periods on theseour six Canadian properties, we entered into crosscross-currency swaps designated as cash flow hedges and foreign currency forwards designated as net investment hedges as further described below.
Cash Flow Hedges of Foreign Exchange Risk-Cross Currency Swaps
On April 12, 2022, we entered into three USD-CAD cross-currency swaps effective July 1, 2022 with a total fixed original notional value of $100.0$150.0 million CAD and $98.1$118.7 million U.S. The net effect of this swap is to lock in an exchange rate of $1.05 CAD per U.S. dollar on approximately $13.5 million of annual CAD denominated cash flows on the properties through June 2018. There is no initial or final exchange of the notional amounts on these swaps. These foreign currency derivatives should hedge a significant portion of our expected CAD denominated FFO of these four Canadian properties through June 2018 as their impact on our reported FFO when settled should move in the opposite direction of the exchange rates used to translate revenues and expenses of these properties. Additionally, on August 30, 2017, we entered into a cross-currency swap that will be effective July 1, 2018 with a fixed original notional value of $100.0 million CAD and $79.5 million U.S.USD. The net effect of these swaps is to lock in an exchange rate of 1.26$1.26 CAD per U.S. dollarUSD on approximately $13.5$10.8 million annual CAD denominated cash flows through October 1, 2024.
On April 29, 2022, we entered into two USD-CAD cross-currency swaps effective May 1, 2022 with a total fixed notional value of $200.0 million CAD and $156.0 million USD. The net effect of these swaps is to lock in an exchange rate of $1.28 CAD per USD on approximately $4.5 million of annual CAD denominated cash flows through October 1, 2024.
On June 14, 2022, we entered into three USD-CAD cross-currency swaps with a total fixed notional value of $90.0 million CAD and $69.5 million USD. The net effect of these swaps is to lock in an exchange rate of $1.30 CAD per USD on the propertiesapproximately $8.1 million of annual CAD denominated cash flows through December 1, 2024.
Net Investment Hedges - Foreign Currency Forwards
On April 29, 2022, we entered into two forward contracts with a fixed notional value of $200.0 million CAD and $155.9 million USD with a settlement date of October 1, 2024. The exchange rate of these forward contracts is approximately $1.28 CAD per USD.
On June 2020.
In order to also hedge our net investment on the four Canadian properties,14, 2022, we entered into a forward contract with a fixed notional amountvalue of $100.0$90.0 million CAD and $94.3$69.2 million U.S.USD with a July 2018 settlement date.date of December 2, 2024. The exchange rate of this forward contract is approximately $1.06$1.30 CAD per U.S. dollar. Additionally, the Company entered into another forward contractUSD.
On April 29, 2022, we terminated two cross-currency swaps with a fixed notional value of $100.0$200.0 million CAD and $88.1 million U.S. with a July 2018 settlement date. The exchange rate of this forward contract is approximately $1.13 CAD per U.S. dollar.CAD. These forward contracts should hedge a significant portion of our CAD denominatedwere previously designated as net investment hedges. We paid $3.8 million in connection with the settlement of these four centers through July 2018CAD to USD cross-currency swap agreements.
For foreign currency derivatives designated as net investment hedges, the impact on accumulated other comprehensive income from marking the derivative to market should movechange in the opposite directionfair value of the derivatives are reported in AOCI as part of the cumulative translation adjustment onadjustment. Amounts are reclassified out of AOCI into earnings when the hedged net assets of our four Canadian properties.investment is either sold or substantially liquidated.
See Note 910 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on our derivative financial instruments and hedging activities.
Item 4.Controls and Procedures
Evaluation of disclosures controls and procedures
As of September 30, 2017,2022, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Limitations on the effectiveness of controls
Our disclosure controls were designed to provide reasonable assurance that the controls and procedures would meet their objectives. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the designed control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusions of two or more people, or by management override of the control. Because of the inherent limitations in a cost-effective, maturing control system, misstatements due to error or fraud may occur and not be detected.
Change in internal controls
There have not been any changes in the Company’sCompany's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter of the fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Prior proposed casino
We are subject to certain claims and resort developers Concord Associates, L.P., Concord Resort, LLC and Concord Kiamesha LLC, which are affiliates of Louis Cappelli and from whom the Company acquired the Adelaar resort property (the "Cappelli Group"), commenced litigation against the Company beginning in 2011 regarding matters relating to the acquisition of that property and our relationship with Empire Resorts, Inc. and certain of its subsidiaries. This litigation involves three separate cases filed in state and federal court. Two of the cases, a state and the federal case, are closed and resulted in no liability to the Company.
The remaining case was filed on October 20, 2011 by the Cappelli Group against the Company and two of its affiliateslawsuits in the Supreme Courtordinary course of the State of New York, County of Westchester (the "Westchester Action"), asserting a claim for breach of contract and the implied covenant of good faith, and seeking damages of at least $800 million, based on allegations that the Company had breached an agreement (the "Casino Development Agreement"), dated June 18, 2010. The Company moved to dismiss the complaint in the Westchester Action based on a decision issued by the Sullivan County Supreme Court (one of the two closed cases referenced above) on June 30, 2014, as affirmed by the Appellate Division, Third Department (the "Sullivan Action"). On January 26, 2016, the Westchester County Supreme Court denied the Company's motion to dismiss but ordered the Cappelli Group to amend its pleading and remove all claims and allegations previously determined by the Sullivan Action. On February 18, 2016, the Cappelli Group filed an amended complaint asserting a single cause of action for breach of the covenant of good faith and fair dealing based upon allegations the Company had interfered with plaintiffs’ ability to obtain financing which complied with the Casino Development Agreement. On March 23, 2016, the Company filed a motion to dismiss the Cappelli Group’s revised amended complaint. On January 5, 2017, the Westchester County Supreme Court denied the Company’s second motion to dismiss. Discovery is ongoing.
The Company has not determined that losses related to the remaining Westchester Action are probable. In light of the inherent difficulty of predictingbusiness, the outcome of litigation generally,which cannot be determined at this time. In the Company does not have sufficient information to determineopinion of management, any liability we might incur upon the amount or rangeresolution of reasonably possible loss with respect to these matters. The Company’s assessments are based on estimates and assumptions that have been deemed reasonable by management, but that may prove to be
incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. The Company intends to vigorously defend the claims asserted against the Company and certain of its subsidiaries by the Cappelli Group and its affiliates, for which the Company believes it has meritorious defenses, but there can be no assurances as to the outcome of the claims and related litigation.lawsuits will not, in the aggregate, have a material adverse effect on our consolidated financial position or results of operations.
Item 1A. Risk Factors
Other thanThere are many risks and uncertainties that can affect our current or future business, operating results, financial performance or share price. The following discussion describes certain important factors that could adversely affect our current or future business, operating results, financial condition or share price, and supplements the risk factor discussed below, there were no material changes during the quarter from the risk factors previously discussed inset forth under Item 1A - "Risk Factors" in our 2021 Annual Report. This discussion includes a number of forward-looking statements. See "Cautionary Statement Concerning Forward-Looking Statements." The following risk factors replace and supersede the risk factors with the same titles set forth under Item 1A - "Risk Factors" in our 2021 Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC10-K.
We depend on March 1, 2017.
The Company's build-to-suit educationleasing space to tenants may not achieve sufficient enrollment within expected timeframeson economically favorable terms and thereforecollecting rent from our tenants, who may not be able to pay.
At any time, a tenant may experience a downturn in its business that may weaken its financial condition. Similarly, a general decline in the economy may result in a decline in demand for space at our commercial properties. Our financial results depend significantly on leasing space at our properties to tenants on economically favorable terms. In addition, because a majority of our income comes from leasing real property, our income, funds available to pay indebtedness and funds available for distribution to our shareholders or share repurchases will decrease if a significant number of our tenants cannot pay their agreed upon rent which could adversely affector if we are not able to maintain our levels of occupancy on favorable terms. If our tenants cannot pay their rent or we are not able to maintain our levels of occupancy on favorable terms, there is also a risk that the Company's financial results.
A significant portionfair value of the Company's education investments include investmentsunderlying property will be considered less than its carrying value and we may have to take a charge against earnings. In addition, if a tenant does not pay its rent, we might not be able to enforce our rights as landlord without significant delays and substantial legal costs.
If a tenant becomes bankrupt or insolvent, that could diminish or eliminate the income we expect from that tenant's leases. If a tenant becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in build-to-suit projects. When constructiona bankruptcy proceeding relating to the tenant. On the other hand, a bankruptcy court might authorize the tenant to terminate its leases with us. If that happens, our claim against the bankrupt tenant for unpaid future rent would be subject to statutory limitations that might be substantially less than the remaining rent owed under the leases. In addition, any claim we have for unpaid past rent would likely not be paid in full and we would also have to take a charge against earnings for any accrued straight-line rent receivable related to the leases.
Specifically, Cineworld Group, plc, Regal Entertainment Group and our other Regal theatre tenants (collectively, “Regal”) filed for protection under Chapter 11 of the U.S. Bankruptcy Code (the “Code”) on September 7, 2022. Regal leases 57 theatres from us pursuant to two master leases and 28 single property leases (the “Regal Leases”). As a result of the filing, Regal did not pay its rent or monthly deferral payment for September 2022. Regal resumed payment of rent and deferral payments for all Regal Leases for October and November 2022. However, there can be no assurance that subsequent payments will be made in a timely and complete manner. Regal is completed for these projects, tenants may require some periodentitled to certain rights under the Code regarding the assumption or rejection of timethe Regal Leases and we are currently in negotiations with Regal regarding the properties Regal will continue to achieve full enrollment,operate and the Company may provide them with lease terms and conditions of leases for those properties. There can be no assurance that are more favorablethese negotiations will be successful and which Regal Leases, if any, will be assumed under the Code. As described below, Regal owes us a significant amount for rent deferred during the COVID-19 pandemic pursuant to a Promissory Note, and there can be no assurance how much of the tenant during this timeframe. Tenantsamount, if any, we will recover under the Promissory Note.
The reduced economic activity that failinitially resulted from the COVID-19 pandemic severely impacted our tenants' businesses, financial condition and liquidity and caused most of our tenants to achieve sufficient enrollment within expected timeframes may be unable to paymeet their rent pursuantobligations to the agreed upon lease termsus in full, or at all. all, or to otherwise seek modifications of such obligations. The ultimate extent to which the COVID-19 pandemic, as well as generally weakening economic conditions, impacts the operations of our tenants will depend on future developments, which, as discussed above, are highly uncertain and cannot be predicted with confidence.
We could be adversely affected by a borrower's bankruptcy or default.
If the Company is requireda borrower becomes bankrupt or insolvent or defaults under its loan, that could force us to restructure lease terms or take other action with respectdeclare a default and foreclose on any available collateral. As a result, future interest income recognition related to the applicable note receivable could be significantly reduced or eliminated. There is also a risk that the fair value of the collateral, if any, will be less than the carrying value of the note and accrued interest receivable at the time of a foreclosure and we may have to take a charge against earnings. If a property itsserves as collateral for a note, we may experience costs and delays in recovering the property in foreclosure or finding a substitute operator for the property. If a mortgage we hold is subordinated to senior financing secured by the property, our recovery would be limited to any amount remaining after satisfaction of all amounts due to the holder of the senior financing. In addition, to protect our subordinated investment, we may desire to refinance any senior financing. However, there is no assurance that such refinancing would be available or, if it were to be available, that the terms would be attractive. We experienced borrower defaults resulting from the COVID-19 pandemic, and we may experience future defaults, the breadth of
which will depend upon the scope, severity and duration of the COVID-19 pandemic, as well as generally weakening economic conditions.
As discussed above, Regal filed for protection under Chapter 11 of the Code on September 7, 2022. At September 30, 2022, Regal owed us approximately $91.9 million pursuant to a Promissory Note for rent deferred during the COVID-19 pandemic. Because revenue derived from Regal is recognized on a cash-basis, this amount is not reflected as an asset in our financial results maystatements. Substantially all of our claim under the Promissory Note is unsecured and subject to the provisions of the Code, including those provisions regarding assumption and rejection of leases. Regal has substantial secured debt which is senior to the Promissory Note, as well as other unsecured debt. As a result, there can be impacted by lower lease revenues, recording an impairment loss, writing off rental amounts or otherwise.no assurance how much of the amount, if any, we will recover under the Promissory Note.
The ultimate extent to which the COVID-19 pandemic, as well as generally weakening economic conditions, impacts the operations of our borrowers will depend on future developments, which, as discussed above, are highly uncertain and cannot be predicted with confidence.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no reportable events during the quarter ended September 30, 2017.2022.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended September 30, 2017.2022.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
There were no reportable events during the quarter ended September 30, 2017.2022.
Item 6. Exhibits
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| Second Amended, Restated and Consolidated Credit Agreement, dated as of September 27, 2017, among the Company, as borrower, KeyBank National Association, as administrative agent, and the other agents and lenders party thereto, which is attached as Exhibit 10.1 to the Company's Form 8-K (Commission File No. 001-13561) filed on September 27, 2017, is hereby incorporated as Exhibit 10.1. |
| First Amendment, dated as of September 27, 2017, to Note Purchase Agreement, dated as of August 1, 2016, by and among the Company and the institutional investors party thereto, which is attached as Exhibit 10.2 to the Company's Form 8-K (Commission File No. 001-13561) filed on September 27, 2017, is hereby incorporated as Exhibit 10.2. |
| Computation of Ratio of Earnings to Fixed Charges is attached hereto as Exhibit 12.1. |
| Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends is attached hereto as Exhibit 12.2. |
| Certification of Gregory K. Silvers pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, is attached hereto as Exhibit 31.1. |
| Certification of Mark A. Peterson pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, is attached hereto as Exhibit 31.2. |
| Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is attached hereto as Exhibit 32.1. |
| Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is attached hereto as Exhibit 32.2. |
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101.CAL* | Inline XBRL Extension Calculation Linkbase |
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* Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | EPR Properties |
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Dated: | November 8, 20173, 2022 | By | | /s//s/ Gregory K. Silvers |
| | | | Gregory K. Silvers, Chairman, President and Chief Executive Officer (Principal Executive Officer) |
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Dated: | November 8, 20173, 2022 | By | | /s//s/ Tonya L. Mater |
| | | | Tonya L. Mater, Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) |