UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2022
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-13561
EPR PROPERTIES
(Exact name of registrant as specified in its charter)
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Maryland | | 43-1790877 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
909 Walnut Street, | Suite 200 | | |
Kansas City, | Missouri | | 64106 |
(Address of principal executive offices) | | (Zip Code) |
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Registrant’s telephone number, including area code: | (816) | 472-1700 |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading symbol(s) | | Name of each exchange on which registered |
Common shares, par value $0.01 per share | | EPR | | New York Stock Exchange |
| | | | |
5.75% Series C cumulative convertible preferred shares, par value $0.01 per share | | EPR PrC | | New York Stock Exchange |
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9.00% Series E cumulative convertible preferred shares, par value $0.01 per share | | EPR PrE | | New York Stock Exchange |
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5.75% Series G cumulative redeemable preferred shares, par value $0.01 per share | | EPR PrG | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
At May 4,November 2, 2022, there were 74,969,61375,021,051 common shares outstanding.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of historical information, certain statements contained or incorporated by reference herein may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as those pertaining to the uncertain financial impact of the COVID-19 pandemic, our capital resources and liquidity, our expected pursuit of growth opportunities, our expected cash flows, the performance of our customers, our expected cash collections and our results of operations and financial condition. Forward-looking statements involve numerous risks and uncertainties, and you should not rely on them as predictions of actual events. There is no assurance the events or circumstances reflected in the forward-looking statements will occur. You can identify forward-looking statements by use of words such as “will be,” “intend,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “pipeline,” “estimates,” “offers,” “plans,” “would” or other similar expressions or other comparable terms or discussions of strategy, plans or intentions in this Quarterly Report on Form 10-Q. In addition, references to our budgeted amounts and guidance are forward-looking statements.
Factors that could materially and adversely affect us include, but are not limited to, the factors listed below:
•Risks associated with COVID-19, or the future outbreak of any additional variants of COVID-19 or other highly infectious or contagious diseases;
•Uncertainties regarding the ultimate impact of a customer's pending bankruptcy proceeding on our existing leases with Regal theatre tenants;
•Global economic uncertainty and disruptions in financial markets;
•The impact of inflation on our customers and our results of operations;
•Reduction in discretionary spending by consumers;
•Covenants in our debt instruments that limit our ability to take certain actions;
•Adverse changes in our credit ratings;
•Fluctuations in interest rates;
•Defaults in the performance of lease terms by our tenants;
•Defaults by our customers and counterparties on their obligations owed to us;
•A borrower's bankruptcy or default;
•Our ability to renew maturing leases on terms comparable to prior leases and/or our ability to locate substitute lessees for these properties on economically favorable terms;
•Risks of operating in the experiential real estate industry;
•Our ability to compete effectively;
•Risks associated with three tenants representing a substantial portion of our lease revenues;
•The ability of our build-to-suit tenants to achieve sufficient operating results within expected time-frames and therefore have capacity to pay their agreed upon rent;
•Risks associated with our dependence on third-party managers to operate certain of our properties;
•Risks associated with our level of indebtedness;
•Risks associated with use of leverage to acquire properties;
•Financing arrangements that require lump-sum payments;
•Our ability to raise capital;
•The concentration of our investment portfolio;
•Our continued qualification as a real estate investment trust for U.S. federal income tax purposes and related tax matters;
•The ability of our subsidiaries to satisfy their obligations;
•Financing arrangements that expose us to funding and completion risks;
•Our reliance on a limited number of employees, the loss of which could harm operations;
•Risks associated with the employment of personnel by managers of certain of our properties;
•Risks associated with the gaming industry;
•Risks associated with gaming and other regulatory authorities;
•Delays or prohibitions of transfers of gaming properties due to required regulatory approvals;
•Risks associated with security breaches and other disruptions;
•Changes in accounting standards that may adversely affect our financial statements;
•Fluctuations in the value of real estate income and investments;
•Risks relating to real estate ownership, leasing and development, including local conditions such as an
oversupply of space or a reduction in demand for real estate in the area, competition from other available space, whether tenants and users such as customers of our tenants consider a property attractive, changes in real estate taxes and other expenses, changes in market rental rates, the timing and costs associated with property improvements and rentals, changes in taxation or zoning laws or other governmental regulation, whether we are able to pass some or all of any increased operating costs through to tenants or other customers, and how well we manage our properties;
•Our ability to secure adequate insurance and risk of potential uninsured losses, including from natural disasters;
•Risks involved in joint ventures;
•Risks in leasing multi-tenant properties;
•A failure to comply with the Americans with Disabilities Act or other laws;
•Risks of environmental liability;
•Risks associated with the relatively illiquid nature of our real estate investments;
•Risks with owning assets in foreign countries;
•Risks associated with owning, operating or financing properties for which the tenants', mortgagors' or our operations may be impacted by weather conditions, climate change and natural disasters;
•Risks associated with the development, redevelopment and expansion of properties and the acquisition of other real estate related companies;
•Our ability to pay dividends in cash or at current rates;
•Risks associated with the impact of inflation or market interest rates on the value of our shares;
•Fluctuations in the market prices for our shares;
•Certain limits on changes in control imposed under law and by our Declaration of Trust and Bylaws;
•Policy changes obtained without the approval of our shareholders;
•Equity issuances that could dilute the value of our shares;
•Future offerings of debt or equity securities, which may rank senior to our common shares;
•Risks associated with changes in foreign exchange rates; and
•Changes in laws and regulations, including tax laws and regulations.
Our forward-looking statements represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. For further discussion of these factors see Item 1A - "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Annual Report") filed with the Securities and Exchange Commission ("SEC") on February 23, 2022.2022, as supplemented by Item 1A - "Risk Factors" in this Quarterly Report on Form 10-Q.
For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference herein. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except as required by law, we do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.
TABLE OF CONTENTS
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| Item 1. | | Financial Statements | |
| Item 2. | | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3. | | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 4. | | Controls and Procedures | |
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| Item 1. | | Legal Proceedings | |
| Item 1A. | | Risk Factors | |
| Item 2. | | Unregistered Sale of Equity Securities and Use of Proceeds | |
| Item 3. | | Defaults Upon Senior Securities | |
| Item 4. | | Mine Safety Disclosures | |
| Item 5. | | Other Information | |
| Item 6. | | Exhibits | |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EPR PROPERTIES
Consolidated Balance Sheets
(Dollars in thousands except share data)
| | | March 31, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
| | (unaudited) | | | | (unaudited) | | |
Assets | Assets | | Assets | |
Real estate investments, net of accumulated depreciation of $1,206,317 and $1,167,734 at March 31, 2022 and December 31, 2021, respectively | $ | 4,738,887 | | | $ | 4,713,091 | | |
Real estate investments, net of accumulated depreciation of $1,278,427 and $1,167,734 at September 30, 2022 and December 31, 2021, respectively | | Real estate investments, net of accumulated depreciation of $1,278,427 and $1,167,734 at September 30, 2022 and December 31, 2021, respectively | $ | 4,769,717 | | | $ | 4,713,091 | |
Land held for development | Land held for development | 20,168 | | | 20,168 | | Land held for development | 20,168 | | | 20,168 | |
Property under development | Property under development | 10,885 | | | 42,362 | | Property under development | 56,347 | | | 42,362 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 177,174 | | | 180,808 | | Operating lease right-of-use assets | 199,031 | | | 180,808 | |
Mortgage notes and related accrued interest receivable | Mortgage notes and related accrued interest receivable | 370,021 | | | 370,159 | | Mortgage notes and related accrued interest receivable | 399,485 | | | 370,159 | |
| Investment in joint ventures | Investment in joint ventures | 36,564 | | | 36,670 | | Investment in joint ventures | 50,124 | | | 36,670 | |
Cash and cash equivalents | Cash and cash equivalents | 323,761 | | | 288,822 | | Cash and cash equivalents | 160,838 | | | 288,822 | |
Restricted cash | Restricted cash | 2,956 | | | 1,079 | | Restricted cash | 5,252 | | | 1,079 | |
| Accounts receivable | Accounts receivable | 60,704 | | | 78,073 | | Accounts receivable | 53,375 | | | 78,073 | |
| Other assets | Other assets | 76,950 | | | 69,918 | | Other assets | 78,422 | | | 69,918 | |
Total assets | Total assets | $ | 5,818,070 | | | $ | 5,801,150 | | Total assets | $ | 5,792,759 | | | $ | 5,801,150 | |
Liabilities and Equity | Liabilities and Equity | | | | Liabilities and Equity | | | |
Liabilities: | Liabilities: | | Liabilities: | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | $ | 92,999 | | | $ | 73,462 | | Accounts payable and accrued liabilities | $ | 83,384 | | | $ | 73,462 | |
Operating lease liabilities | Operating lease liabilities | 215,112 | | | 218,795 | | Operating lease liabilities | 237,254 | | | 218,795 | |
Common dividends payable | Common dividends payable | 20,946 | | | 18,896 | | Common dividends payable | 21,411 | | | 18,896 | |
Preferred dividends payable | Preferred dividends payable | 6,033 | | | 6,034 | | Preferred dividends payable | 6,033 | | | 6,034 | |
Unearned rents and interest | Unearned rents and interest | 76,013 | | | 61,559 | | Unearned rents and interest | 79,943 | | | 61,559 | |
Debt | Debt | 2,805,853 | | | 2,804,365 | | Debt | 2,808,587 | | | 2,804,365 | |
Total liabilities | Total liabilities | 3,216,956 | | | 3,183,111 | | Total liabilities | 3,236,612 | | | 3,183,111 | |
Equity: | Equity: | | Equity: | |
Common Shares, $0.01 par value; 100,000,000 shares authorized; and 82,485,670 and 82,225,061 shares issued at March 31, 2022 and December 31, 2021, respectively | 825 | | | 822 | | |
Common Shares, $0.01 par value; 100,000,000 shares authorized; and 82,538,739 and 82,225,061 shares issued at September 30, 2022 and December 31, 2021, respectively | | Common Shares, $0.01 par value; 100,000,000 shares authorized; and 82,538,739 and 82,225,061 shares issued at September 30, 2022 and December 31, 2021, respectively | 825 | | | 822 | |
Preferred Shares, $0.01 par value; 25,000,000 shares authorized: | Preferred Shares, $0.01 par value; 25,000,000 shares authorized: | | Preferred Shares, $0.01 par value; 25,000,000 shares authorized: | |
5,392,916 Series C convertible shares issued at March 31, 2022 and December 31, 2021; liquidation preference of $134,822,900 | 54 | | | 54 | | |
3,447,381 Series E convertible shares issued at March 31, 2022 and December 31, 2021; liquidation preference of $86,184,525 | 34 | | | 34 | | |
6,000,000 Series G shares issued at March 31, 2022 and December 31, 2021; liquidation preference of $150,000,000 | 60 | | | 60 | | |
5,392,916 Series C convertible shares issued at September 30, 2022 and December 31, 2021; liquidation preference of $134,822,900 | | 5,392,916 Series C convertible shares issued at September 30, 2022 and December 31, 2021; liquidation preference of $134,822,900 | 54 | | | 54 | |
3,447,381 Series E convertible shares issued at September 30, 2022 and December 31, 2021; liquidation preference of $86,184,525 | | 3,447,381 Series E convertible shares issued at September 30, 2022 and December 31, 2021; liquidation preference of $86,184,525 | 34 | | | 34 | |
6,000,000 Series G shares issued at September 30, 2022 and December 31, 2021; liquidation preference of $150,000,000 | | 6,000,000 Series G shares issued at September 30, 2022 and December 31, 2021; liquidation preference of $150,000,000 | 60 | | | 60 | |
Additional paid-in-capital | Additional paid-in-capital | 3,886,240 | | | 3,876,817 | | Additional paid-in-capital | 3,895,354 | | | 3,876,817 | |
Treasury shares at cost: 7,517,572 and 7,416,746 common shares at March 31, 2022 and December 31, 2021, respectively | (269,608) | | | (264,817) | | |
Treasury shares at cost: 7,520,030 and 7,416,746 common shares at September 30, 2022 and December 31, 2021, respectively | | Treasury shares at cost: 7,520,030 and 7,416,746 common shares at September 30, 2022 and December 31, 2021, respectively | (269,744) | | | (264,817) | |
Accumulated other comprehensive income | Accumulated other comprehensive income | 10,471 | | | 9,955 | | Accumulated other comprehensive income | 1,097 | | | 9,955 | |
Distributions in excess of net income | Distributions in excess of net income | (1,026,962) | | | (1,004,886) | | Distributions in excess of net income | (1,071,533) | | | (1,004,886) | |
| Total equity | Total equity | $ | 2,601,114 | | | $ | 2,618,039 | | Total equity | $ | 2,556,147 | | | $ | 2,618,039 | |
Total liabilities and equity | Total liabilities and equity | $ | 5,818,070 | | | $ | 5,801,150 | | Total liabilities and equity | $ | 5,792,759 | | | $ | 5,801,150 | |
See accompanying notes to consolidated financial statements.
EPR PROPERTIES
Consolidated Statements of Income (Loss) and Comprehensive Income
(Unaudited)
(Dollars in thousands except per share data)
| | | Three Months Ended March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | | 2022 | | 2021 | | 2022 | | 2021 |
Rental revenue | Rental revenue | $ | 139,603 | | | $ | 102,614 | | | Rental revenue | $ | 140,471 | | | $ | 123,040 | | | $ | 422,949 | | | $ | 341,537 | |
Other income | Other income | 9,305 | | | 678 | | | Other income | 11,360 | | | 8,091 | | | 30,626 | | | 9,802 | |
Mortgage and other financing income | Mortgage and other financing income | 8,564 | | | 8,473 | | | Mortgage and other financing income | 9,579 | | | 8,516 | | | 25,753 | | | 25,435 | |
Total revenue | Total revenue | 157,472 | | | 111,765 | | | Total revenue | 161,410 | | | 139,647 | | | 479,328 | | | 376,774 | |
Property operating expense | Property operating expense | 13,939 | | | 15,313 | | | Property operating expense | 14,707 | | | 13,815 | | | 42,238 | | | 43,806 | |
Other expense | Other expense | 8,097 | | | 2,552 | | | Other expense | 9,135 | | | 7,851 | | | 26,104 | | | 13,428 | |
General and administrative expense | General and administrative expense | 13,224 | | | 11,336 | | | General and administrative expense | 12,582 | | | 11,154 | | | 38,497 | | | 33,866 | |
| Transaction costs | | Transaction costs | 148 | | | 2,132 | | | 3,540 | | | 3,342 | |
Credit loss expense (benefit) | | Credit loss expense (benefit) | 241 | | | (14,096) | | | 9,447 | | | (19,677) | |
Impairment charges | | Impairment charges | — | | | 2,711 | | | 4,351 | | | 2,711 | |
Depreciation and amortization | | Depreciation and amortization | 41,539 | | | 42,612 | | | 122,349 | | | 123,476 | |
Total operating expenses | | Total operating expenses | 78,352 | | | 66,179 | | | 246,526 | | | 200,952 | |
Gain on sale of real estate | | Gain on sale of real estate | 304 | | | 787 | | | 304 | | | 1,499 | |
| Income from operations | | Income from operations | 83,362 | | | 74,255 | | | 233,106 | | | 177,321 | |
Costs associated with loan refinancing or payoff | Costs associated with loan refinancing or payoff | — | | | 241 | | | Costs associated with loan refinancing or payoff | — | | | 4,741 | | | — | | | 4,982 | |
| Interest expense, net | Interest expense, net | 33,260 | | | 39,194 | | | Interest expense, net | 32,747 | | | 36,584 | | | 99,296 | | | 114,090 | |
Transaction costs | 2,247 | | | 548 | | | |
Credit loss benefit | (306) | | | (2,762) | | | |
Impairment charges | 4,351 | | | — | | | |
Depreciation and amortization | 40,044 | | | 40,326 | | | |
Income before equity in loss from joint ventures and other items | 42,616 | | | 5,017 | | | |
Equity in loss from joint ventures | (106) | | | (1,431) | | | |
| Gain on sale of real estate | — | | | 201 | | | |
| Equity in (income) loss from joint ventures | | Equity in (income) loss from joint ventures | (572) | | | 418 | | | (1,887) | | | 3,000 | |
Impairment charges on joint ventures | | Impairment charges on joint ventures | — | | | — | | | 647 | | | — | |
Income before income taxes | Income before income taxes | 42,510 | | | 3,787 | | | Income before income taxes | 51,187 | | | 32,512 | | | 135,050 | | | 55,249 | |
Income tax expense | Income tax expense | (318) | | | (407) | | | Income tax expense | 388 | | | 395 | | | 1,150 | | | 1,200 | |
| Net income | Net income | 42,192 | | | 3,380 | | | Net income | 50,799 | | | 32,117 | | | 133,900 | | | 54,049 | |
Preferred dividend requirements | Preferred dividend requirements | (6,033) | | | (6,034) | | | Preferred dividend requirements | 6,033 | | | 6,033 | | | 18,099 | | | 18,100 | |
| Net income (loss) available to common shareholders of EPR Properties | $ | 36,159 | | | $ | (2,654) | | | |
Net income available to common shareholders of EPR Properties | | Net income available to common shareholders of EPR Properties | $ | 44,766 | | | $ | 26,084 | | | $ | 115,801 | | | $ | 35,949 | |
| Net income (loss) available to common shareholders of EPR Properties per share: | | | | | |
Net income available to common shareholders of EPR Properties per share: | | Net income available to common shareholders of EPR Properties per share: | | | | | | | |
| Basic | Basic | $ | 0.48 | | | $ | (0.04) | | | Basic | $ | 0.60 | | | $ | 0.35 | | | $ | 1.55 | | | $ | 0.48 | |
| | | Diluted | Diluted | $ | 0.48 | | | $ | (0.04) | | | Diluted | $ | 0.60 | | | $ | 0.35 | | | $ | 1.54 | | | $ | 0.48 | |
Shares used for computation (in thousands): | Shares used for computation (in thousands): | | | | | Shares used for computation (in thousands): | | | | | | | |
Basic | Basic | 74,843 | | | 74,627 | | | Basic | 75,016 | | | 74,804 | | | 74,949 | | | 74,738 | |
Diluted | Diluted | 75,047 | | | 74,627 | | | Diluted | 75,183 | | | 74,911 | | | 75,102 | | | 74,819 | |
| Other comprehensive income: | Other comprehensive income: | | | Other comprehensive income: | |
Net income | Net income | $ | 42,192 | | | $ | 3,380 | | | Net income | $ | 50,799 | | | $ | 32,117 | | | $ | 133,900 | | | $ | 54,049 | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | 2,606 | | | 2,300 | | | Foreign currency translation adjustment | (21,697) | | | (5,169) | | | (24,015) | | | (195) | |
Change in net unrealized (loss) gain on derivatives | (2,090) | | | 462 | | | |
Change in net unrealized gain on derivatives | | Change in net unrealized gain on derivatives | 12,119 | | | 6,280 | | | 15,157 | | | 6,355 | |
Comprehensive income attributable to EPR Properties | Comprehensive income attributable to EPR Properties | $ | 42,708 | | | $ | 6,142 | | | Comprehensive income attributable to EPR Properties | $ | 41,221 | | | $ | 33,228 | | | $ | 125,042 | | | $ | 60,209 | |
See accompanying notes to consolidated financial statements.
EPR PROPERTIES
Consolidated Statements of Changes in Equity
(Unaudited)
(Dollars in thousands except per share data)
| | | EPR Properties Shareholders’ Equity | | | | | EPR Properties Shareholders’ Equity | | | |
| | Common Stock | | Preferred Stock | | Additional paid-in capital | | Treasury shares | | Accumulated other comprehensive income | | Distributions in excess of net income | | | Total | | Common Stock | | Preferred Stock | | Additional paid-in capital | | Treasury shares | | Accumulated other comprehensive income | | Distributions in excess of net income | | | Total |
| | Shares | | Par | | Shares | | Par | | Total | | Shares | | Par | | Shares | | Par | | Additional paid-in capital | | |
Balance at December 31, 2020 | Balance at December 31, 2020 | 81,917,876 | | | $ | 819 | | | 14,841,431 | | | $ | 148 | | | $ | 3,857,632 | | | $ | (261,238) | | | $ | 216 | | | $ | (966,992) | | | | $ | 2,630,585 | | Balance at December 31, 2020 | 81,917,876 | | | $ | 819 | | | 14,841,431 | | | $ | 3,857,632 | | $ | (261,238) | | | $ | 216 | | | $ | (966,992) | | | | $ | 2,630,585 | |
| Issuance of nonvested shares and performance shares, net of cancellations | Issuance of nonvested shares and performance shares, net of cancellations | 246,562 | | | 2 | | | — | | | — | | | 2,899 | | | — | | | — | | | — | | | | 2,901 | | Issuance of nonvested shares and performance shares, net of cancellations | 246,562 | | | 2 | | | — | | | — | | | 2,899 | | | — | | | — | | | — | | | | 2,901 | |
Purchase of common shares for vesting | Purchase of common shares for vesting | — | | | — | | | — | | | — | | | — | | | (2,744) | | | — | | | — | | | | (2,744) | | Purchase of common shares for vesting | — | | | — | | | — | | | — | | | — | | | (2,744) | | | — | | | — | | | | (2,744) | |
Share-based compensation expense | Share-based compensation expense | — | | | — | | | — | | | — | | | 3,784 | | | — | | | — | | | — | | | | 3,784 | | Share-based compensation expense | — | | | — | | | — | | | — | | | 3,784 | | | — | | | — | | | — | | | | 3,784 | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 2,300 | | | — | | | | 2,300 | | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 2,300 | | | — | | | | 2,300 | |
| Change in unrealized gain on derivatives | Change in unrealized gain on derivatives | — | | | — | | | — | | | — | | | — | | | — | | | 462 | | | — | | | | 462 | | Change in unrealized gain on derivatives | — | | | — | | | — | | | — | | | — | | | — | | | 462 | | | — | | | | 462 | |
| Net income | Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,380 | | | | 3,380 | | Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,380 | | | | 3,380 | |
Issuances of common shares | Issuances of common shares | 2,509 | | | — | | | — | | | — | | | 107 | | | — | | | — | | | — | | | | 107 | | Issuances of common shares | 2,509 | | | — | | | — | | | — | | | 107 | | | — | | | — | | | — | | | | 107 | |
| Dividend equivalents accrued on performance shares | Dividend equivalents accrued on performance shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (8) | | | | (8) | | Dividend equivalents accrued on performance shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (8) | | | | (8) | |
| Dividends to Series C preferred shareholders ($0.359375 per share) | Dividends to Series C preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | (1,939) | | Dividends to Series C preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | (1,939) | |
Dividends to Series E preferred shareholders ($0.5625 per share) | Dividends to Series E preferred shareholders ($0.5625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | (1,939) | | Dividends to Series E preferred shareholders ($0.5625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | (1,939) | |
Dividends to Series G preferred shareholders ($0.359375 per share) | Dividends to Series G preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,156) | | | | (2,156) | | Dividends to Series G preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,156) | | | | (2,156) | |
| Balance at March 31, 2021 | Balance at March 31, 2021 | 82,166,947 | | | $ | 821 | | | 14,841,431 | | | $ | 148 | | | $ | 3,864,422 | | | $ | (263,982) | | | $ | 2,978 | | | $ | (969,654) | | | | $ | 2,634,733 | | Balance at March 31, 2021 | 82,166,947 | | | $ | 821 | | | 14,841,431 | | | $ | 148 | | | $ | 3,864,422 | | | $ | (263,982) | | | $ | 2,978 | | | $ | (969,654) | | | | $ | 2,634,733 | |
| Restricted share units issued to Trustees | | Restricted share units issued to Trustees | 43,306 | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | | 1 | |
Cancellations of nonvested shares | | Cancellations of nonvested shares | — | | | — | | | — | | | — | | | 484 | | | (484) | | | — | | | — | | | | — | |
| Share-based compensation expense | | Share-based compensation expense | — | | | — | | | — | | | — | | | 3,675 | | | — | | | — | | | — | | | | 3,675 | |
| Foreign currency translation adjustment | | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 2,674 | | | — | | | | 2,674 | |
| Change in unrealized loss on derivatives | | Change in unrealized loss on derivatives | — | | | — | | | — | | | — | | | — | | | — | | | (387) | | | — | | | | (387) | |
| Net income | | Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 18,552 | | | | 18,552 | |
Issuances of common shares | | Issuances of common shares | 1,826 | | | — | | | — | | | — | | | 90 | | | — | | | — | | | — | | | | 90 | |
| Conversion of Series C Convertible Preferred shares to common shares | | Conversion of Series C Convertible Preferred shares to common shares | 330 | | | — | | | (800) | | | — | | | — | | | — | | | — | | | — | | | | — | |
| Stock option exercises, net | | Stock option exercises, net | 4,065 | | | — | | | — | | | — | | | 194 | | | (194) | | | — | | | — | | | | — | |
Dividend equivalents accrued on performance shares | | Dividend equivalents accrued on performance shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (10) | | | | (10) | |
| Dividends to Series C preferred shareholders ($0.359375 per share) | | Dividends to Series C preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,938) | | | | (1,938) | |
Dividends to Series E preferred shareholders ($0.5625 per share) | | Dividends to Series E preferred shareholders ($0.5625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | (1,939) | |
Dividends to Series G preferred shareholders ($0.359375 per share) | | Dividends to Series G preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,156) | | | | (2,156) | |
| Balance at June 30, 2021 | | Balance at June 30, 2021 | 82,216,474 | | | $ | 822 | | | 14,840,631 | | | $ | 148 | | | $ | 3,868,865 | | | $ | (264,660) | | | $ | 5,265 | | | $ | (957,145) | | | | $ | 2,653,295 | |
| Continued on next page. | | Continued on next page. | | | |
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Balance at December 31, 2021 | 82,225,061 | | | $ | 822 | | | 14,840,297 | | | $ | 148 | | | $ | 3,876,817 | | | $ | (264,817) | | | $ | 9,955 | | | $ | (1,004,886) | | | | | $ | 2,618,039 | |
Restricted share units issued to Trustees | 2,794 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Issuance of nonvested shares and performance shares, net of cancellations | 243,286 | | | 3 | | | — | | | — | | | 4,496 | | | (83) | | | — | | | — | | | | | 4,416 | |
Purchase of common shares for vesting | — | | | — | | | — | | | — | | | — | | | (4,250) | | | — | | | — | | | | | (4,250) | |
Share-based compensation expense | — | | | — | | | — | | | — | | | 4,245 | | | — | | | — | | | — | | | | | 4,245 | |
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Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 2,606 | | | — | | | | | 2,606 | |
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Change in unrealized loss on derivatives | — | | | — | | | — | | | — | | | — | | | — | | | (2,090) | | | — | | | | | (2,090) | |
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Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 42,192 | | | | | 42,192 | |
Issuances of common shares | 4,730 | | | — | | | — | | | — | | | 228 | | | — | | | — | | | — | | | | | 228 | |
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Stock option exercises, net | 9,799 | | | — | | | — | | | — | | | 454 | | | (458) | | | — | | | — | | | | | (4) | |
Dividend equivalents accrued on performance shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (136) | | | | | (136) | |
Dividends to common shareholders ($0.775 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (58,099) | | | | | (58,099) | |
Dividends to Series C preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,938) | | | | | (1,938) | |
Dividends to Series E preferred shareholders ($0.5625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | | (1,939) | |
Dividends to Series G preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,156) | | | | | (2,156) | |
Balance at March 31, 2022 | 82,485,670 | | | $ | 825 | | | 14,840,297 | | | $ | 148 | | | $ | 3,886,240 | | | $ | (269,608) | | | $ | 10,471 | | | $ | (1,026,962) | | | | | $ | 2,601,114 | |
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| EPR Properties Shareholders’ Equity | | | | |
| Common Stock | | Preferred Stock | | Additional paid-in capital | | Treasury shares | | Accumulated other comprehensive income | | Distributions in excess of net income | | | | Total |
| Shares | | Par | | Shares | | Par | | |
Continued from previous page. | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | 82,216,474 | | | $ | 822 | | | 14,840,631 | | | $ | 148 | | | $ | 3,868,865 | | | $ | (264,660) | | | $ | 5,265 | | | $ | (957,145) | | | | | $ | 2,653,295 | |
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Purchase of common shares for vesting | — | | | — | | | — | | | — | | | — | | | (19) | | | — | | | — | | | | | (19) | |
Share-based compensation expense | — | | | — | | | — | | | — | | | 3,759 | | | — | | | — | | | — | | | | | 3,759 | |
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Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (5,169) | | | — | | | | | (5,169) | |
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Change in unrealized gain on derivatives | — | | | — | | | — | | | — | | | — | | | — | | | 6,280 | | | — | | | | | 6,280 | |
Loss reclassified from accumulated other comprehensive income into earnings from termination of interest rate swaps | — | | | — | | | — | | | — | | | — | | | — | | | 3,249 | | | — | | | | | 3,249 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 32,117 | | | | | 32,117 | |
Issuances of common shares | 3,051 | | | — | | | — | | | — | | | 153 | | | — | | | — | | | — | | | | | 153 | |
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Conversion of Series C Convertible Preferred shares to common shares | 138 | | | — | | | (334) | | | — | | | — | | | — | | | — | | | — | | | | | — | |
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Dividend equivalents accrued on performance shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (47) | | | | | (47) | |
Dividends to common shareholders ($0.75 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (56,104) | | | | | (56,104) | |
Dividends to Series C preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,938) | | | | | (1,938) | |
Dividends to Series E preferred shareholders ($0.5625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | | (1,939) | |
Dividends to Series G preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,156) | | | | | (2,156) | |
Balance at September 30, 2021 | 82,219,663 | | | $ | 822 | | | 14,840,297 | | | $ | 148 | | | $ | 3,872,777 | | | $ | (264,679) | | | $ | 9,625 | | | $ | (987,212) | | | | | $ | 2,631,481 | |
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| EPR Properties Shareholders’ Equity | | | | |
| Common Stock | | Preferred Stock | | Additional paid-in capital | | Treasury shares | | Accumulated other comprehensive income | | Distributions in excess of net income | | | | Total |
| Shares | | Par | | Shares | | Par | | |
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Balance at December 31, 2021 | 82,225,061 | | | $ | 822 | | | 14,840,297 | | | $ | 148 | | | $ | 3,876,817 | | | $ | (264,817) | | | $ | 9,955 | | | $ | (1,004,886) | | | | | $ | 2,618,039 | |
Restricted share units issued to Trustees | 2,794 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Issuance of nonvested shares and performance shares, net of cancellations | 243,286 | | | 3 | | | — | | | — | | | 4,496 | | | (83) | | | — | | | — | | | | | 4,416 | |
Purchase of common shares for vesting | — | | | — | | | — | | | — | | | — | | | (4,250) | | | — | | | — | | | | | (4,250) | |
Share-based compensation expense | — | | | — | | | — | | | — | | | 4,245 | | | — | | | — | | | — | | | | | 4,245 | |
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Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 2,606 | | | — | | | | | 2,606 | |
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Change in unrealized loss on derivatives | — | | | — | | | — | | | — | | | — | | | — | | | (2,090) | | | — | | | | | (2,090) | |
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Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 42,192 | | | | | 42,192 | |
Issuances of common shares | 4,730 | | | — | | | — | | | — | | | 228 | | | — | | | — | | | — | | | | | 228 | |
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Stock option exercises, net | 9,799 | | | — | | | — | | | — | | | 454 | | | (458) | | | — | | | — | | | | | (4) | |
Dividend equivalents accrued on performance shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (136) | | | | | (136) | |
Dividends to common shareholders ($0.775 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (58,099) | | | | | (58,099) | |
Dividends to Series C preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,938) | | | | | (1,938) | |
Dividends to Series E preferred shareholders ($0.5625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | | (1,939) | |
Dividends to Series G preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,156) | | | | | (2,156) | |
Balance at March 31, 2022 | 82,485,670 | | | $ | 825 | | | 14,840,297 | | | $ | 148 | | | $ | 3,886,240 | | | $ | (269,608) | | | $ | 10,471 | | | $ | (1,026,962) | | | | | $ | 2,601,114 | |
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Restricted share units issued to Trustees | 38,605 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
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Share-based compensation expense | — | | | — | | | — | | | — | | | 4,169 | | | — | | | — | | | — | | | | | 4,169 | |
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Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (4,924) | | | — | | | | | (4,924) | |
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Change in unrealized gain on derivatives | — | | | — | | | — | | | — | | | — | | | — | | | 5,128 | | | — | | | | | 5,128 | |
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Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 40,909 | | | | | 40,909 | |
Issuances of common shares | 5,587 | | | — | | | — | | | — | | | 275 | | | — | | | — | | | — | | | | | 275 | |
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Dividend equivalents accrued on performance shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (188) | | | | | (188) | |
Dividends to common shareholders ($0.825 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (61,873) | | | | | (61,873) | |
Dividends to Series C preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,938) | | | | | (1,938) | |
Dividends to Series E preferred shareholders ($0.5625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | | (1,939) | |
Dividends to Series G preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,156) | | | | | (2,156) | |
Balance at June 30, 2022 | 82,529,862 | | | $ | 825 | | | 14,840,297 | | | $ | 148 | | | $ | 3,890,684 | | | $ | (269,608) | | | $ | 10,675 | | | $ | (1,054,147) | | | | | $ | 2,578,577 | |
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| EPR Properties Shareholders’ Equity | | | | |
| Common Stock | | Preferred Stock | | Additional paid-in capital | | Treasury shares | | Accumulated other comprehensive income | | Distributions in excess of net income | | | | Total |
| Shares | | Par | | Shares | | Par | | |
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Balance at June 30, 2022 | 82,529,862 | | | $ | 825 | | | 14,840,297 | | | $ | 148 | | | $ | 3,890,684 | | | $ | (269,608) | | | $ | 10,675 | | | $ | (1,054,147) | | | | | $ | 2,578,577 | |
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Share-based compensation expense | — | | | — | | | — | | | — | | | 4,138 | | | — | | | — | | | — | | | | | 4,138 | |
| | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (21,697) | | | — | | | | | (21,697) | |
| | | | | | | | | | | | | | | | | | | |
Change in unrealized gain on derivatives | — | | | — | | | — | | | — | | | — | | | — | | | 12,119 | | | — | | | | | 12,119 | |
| | | | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 50,799 | | | | | 50,799 | |
Issuances of common shares | 6,117 | | | — | | | — | | | — | | | 296 | | | — | | | — | | | — | | | | | 296 | |
| | | | | | | | | | | | | | | | | | | |
Issuances of captive REIT preferred shares | — | | | — | | | — | | | — | | | 107 | | | — | | | — | | | — | | | | | 107 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Stock option exercises, net | 2,760 | | | — | | | — | | | — | | | 129 | | | (136) | | | — | | | — | | | | | (7) | |
Dividend equivalents accrued on performance shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (263) | | | | | (263) | |
Dividends to common shareholders ($0.825 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (61,889) | | | | | (61,889) | |
Dividends to Series C preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,938) | | | | | (1,938) | |
Dividends to Series E preferred shareholders ($0.5625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | | (1,939) | |
Dividends to Series G preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,156) | | | | | (2,156) | |
Balance at September 30, 2022 | 82,538,739 | | | $ | 825 | | | 14,840,297 | | | $ | 148 | | | $ | 3,895,354 | | | $ | (269,744) | | | $ | 1,097 | | | $ | (1,071,533) | | | | | $ | 2,556,147 | |
| | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
EPR PROPERTIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Operating activities: | | | |
Net income | $ | 42,192 | | | $ | 3,380 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| | | |
Impairment charges | 4,351 | | | — | |
| | | |
| | | |
| | | |
Gain on sale of real estate | — | | | (201) | |
Gain on insurance recovery | (552) | | | (30) | |
| | | |
| | | |
Costs associated with loan refinancing or payoff | — | | | 241 | |
Equity in loss from joint ventures | 106 | | | 1,431 | |
Distributions from joint ventures | — | | | 90 | |
Credit loss benefit | (306) | | | (2,762) | |
Depreciation and amortization | 40,044 | | | 40,326 | |
Amortization of deferred financing costs | 2,071 | | | 1,547 | |
Amortization of above/below market leases and tenant allowances, net | (87) | | | (96) | |
Share-based compensation expense to management and Trustees | 4,245 | | | 3,784 | |
| | | |
Change in assets and liabilities: | | | |
Operating lease assets and liabilities | (49) | | | (120) | |
Mortgage notes accrued interest receivable | 310 | | | 280 | |
Accounts receivable | 17,424 | | | 18,687 | |
| | | |
Other assets | (5,861) | | | (7,323) | |
Accounts payable and accrued liabilities | 15,132 | | | 997 | |
Unearned rents and interest | 9,067 | | | 18,075 | |
| | | |
| | | |
Net cash provided by operating activities | 128,087 | | | 78,306 | |
Investing activities: | | | |
Acquisition of and investments in real estate and other assets | (20,726) | | | (26,847) | |
Proceeds from sale of real estate | 61 | | | 13,707 | |
Investment in unconsolidated joint ventures | — | | | (1,625) | |
| | | |
Investment in mortgage notes receivable | — | | | (2,436) | |
Proceeds from mortgage notes receivable paydowns | 151 | | | 5,299 | |
Investment in promissory notes receivable | — | | | (4,379) | |
Proceeds from promissory note receivable paydowns | 75 | | | 105 | |
| | | |
Proceeds from insurance recovery | 609 | | | 30 | |
| | | |
| | | |
Additions to properties under development | (5,205) | | | (13,748) | |
| | | |
| | | |
| | | |
Net cash used by investing activities | (25,035) | | | (29,894) | |
Financing activities: | | | |
| | | |
Principal payments on debt | — | | | (523,765) | |
Deferred financing fees paid | (48) | | | — | |
| | | |
Net proceeds from issuance of common shares | 160 | | | 108 | |
| | | |
Impact of stock option exercises, net | (4) | | | — | |
| | | |
Purchase of common shares for treasury for vesting | (4,250) | | | (2,744) | |
| | | |
| | | |
Dividends paid to shareholders | (62,151) | | | (6,034) | |
| | | |
| | | |
Net cash used by financing activities | (66,293) | | | (532,435) | |
Effect of exchange rate changes on cash | 57 | | | 18 | |
Net change in cash and cash equivalents and restricted cash | 36,816 | | | (484,005) | |
Cash and cash equivalents and restricted cash at beginning of the period | 289,901 | | | 1,028,010 | |
Cash and cash equivalents and restricted cash at end of the period | $ | 326,717 | | | $ | 544,005 | |
Supplemental information continued on next page. | | | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Operating activities: | | | |
Net income | $ | 133,900 | | | $ | 54,049 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| | | |
Impairment charges | 4,351 | | | 2,711 | |
Impairment charges on joint ventures | 647 | | | — | |
| | | |
| | | |
Gain on sale of real estate | (304) | | | (1,499) | |
Gain on insurance recovery | (552) | | | (30) | |
Deferred income tax benefit | (37) | | | — | |
| | | |
Costs associated with loan refinancing or payoff | — | | | 4,982 | |
Equity in (income) loss from joint ventures | (1,887) | | | 3,000 | |
Distributions from joint ventures | 780 | | | 90 | |
Credit loss expense (benefit) | 9,447 | | | (19,677) | |
Depreciation and amortization | 122,349 | | | 123,476 | |
Amortization of deferred financing costs | 6,251 | | | 5,331 | |
Amortization of above/below market leases and tenant allowances, net | (265) | | | (293) | |
Share-based compensation expense to management and Trustees | 12,552 | | | 11,218 | |
| | | |
Change in assets and liabilities: | | | |
Operating lease assets and liabilities | 237 | | | (379) | |
Mortgage notes accrued interest receivable | 76 | | | 11 | |
Accounts receivable | 26,162 | | | 35,644 | |
| | | |
Other assets | (1,090) | | | (1,924) | |
Accounts payable and accrued liabilities | 23,762 | | | 5,511 | |
Unearned rents and interest | 13,296 | | | 14,203 | |
| | | |
| | | |
Net cash provided by operating activities | 349,675 | | | 236,424 | |
Investing activities: | | | |
Acquisition of and investments in real estate and other assets | (174,113) | | | (33,203) | |
Proceeds from sale of real estate | 9,995 | | | 30,821 | |
Investment in unconsolidated joint ventures | (19,690) | | | (13,611) | |
Distributions from joint venture related to refinancing | 6,695 | | | — | |
Settlement of derivative | (3,830) | | | — | |
Investment in mortgage notes receivable | (37,706) | | | (7,670) | |
Proceeds from mortgage notes receivable paydowns | 1,621 | | | 8,106 | |
Investment in notes receivable | — | | | (4,379) | |
Proceeds from note receivable paydowns | 582 | | | 7,124 | |
| | | |
Proceeds from insurance recovery, net | 3,700 | | | 30 | |
| | | |
| | | |
Additions to properties under development | (58,919) | | | (26,695) | |
| | | |
| | | |
| | | |
Net cash used by investing activities | (271,665) | | | (39,477) | |
Financing activities: | | | |
| | | |
Principal payments on debt | — | | | (1,013,765) | |
Deferred financing fees paid | (328) | | | (336) | |
Costs associated with loan refinancing or payoff (cash portion) | — | | | (3,258) | |
Net proceeds from issuance of common shares | 576 | | | 308 | |
| | | |
Impact of stock option exercises, net | (11) | | | — | |
Issuances of captive REIT preferred shares | 107 | | | — | |
Purchase of common shares for treasury for vesting | (4,250) | | | (2,763) | |
| | | |
| | | |
Dividends paid to shareholders | (197,809) | | | (55,459) | |
| | | |
| | | |
Net cash used by financing activities | (201,715) | | | (1,075,273) | |
Effect of exchange rate changes on cash | (106) | | | (109) | |
Net change in cash and cash equivalents and restricted cash | (123,811) | | | (878,435) | |
Cash and cash equivalents and restricted cash at beginning of the period | 289,901 | | | 1,028,010 | |
Cash and cash equivalents and restricted cash at end of the period | $ | 166,090 | | | $ | 149,575 | |
Supplemental information continued on next page. | | | |
EPR PROPERTIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
| Continued from previous page | Continued from previous page | | | Continued from previous page | |
| | Three Months Ended March 31, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Reconciliation of cash and cash equivalents and restricted cash: | Reconciliation of cash and cash equivalents and restricted cash: | | | | Reconciliation of cash and cash equivalents and restricted cash: | | | |
Cash and cash equivalents at beginning of the period | Cash and cash equivalents at beginning of the period | $ | 288,822 | | | $ | 1,025,577 | | Cash and cash equivalents at beginning of the period | $ | 288,822 | | | $ | 1,025,577 | |
Restricted cash at beginning of the period | Restricted cash at beginning of the period | 1,079 | | | 2,433 | | Restricted cash at beginning of the period | 1,079 | | | 2,433 | |
Cash and cash equivalents and restricted cash at beginning of the period | Cash and cash equivalents and restricted cash at beginning of the period | $ | 289,901 | | | $ | 1,028,010 | | Cash and cash equivalents and restricted cash at beginning of the period | $ | 289,901 | | | $ | 1,028,010 | |
| Cash and cash equivalents at end of the period | Cash and cash equivalents at end of the period | $ | 323,761 | | | $ | 538,077 | | Cash and cash equivalents at end of the period | $ | 160,838 | | | $ | 144,433 | |
Restricted cash at end of the period | Restricted cash at end of the period | 2,956 | | | 5,928 | | Restricted cash at end of the period | 5,252 | | | 5,142 | |
Cash and cash equivalents and restricted cash at end of the period | Cash and cash equivalents and restricted cash at end of the period | $ | 326,717 | | | $ | 544,005 | | Cash and cash equivalents and restricted cash at end of the period | $ | 166,090 | | | $ | 149,575 | |
| Supplemental schedule of non-cash activity: | Supplemental schedule of non-cash activity: | | Supplemental schedule of non-cash activity: | |
Transfer of property under development to real estate investments | Transfer of property under development to real estate investments | $ | 35,255 | | | $ | 309 | | Transfer of property under development to real estate investments | $ | 39,460 | | | $ | 87,620 | |
| Issuance of nonvested shares and restricted share units at fair value, including nonvested shares issued for payment of bonuses | Issuance of nonvested shares and restricted share units at fair value, including nonvested shares issued for payment of bonuses | $ | 19,791 | | | $ | 19,793 | | Issuance of nonvested shares and restricted share units at fair value, including nonvested shares issued for payment of bonuses | $ | 21,751 | | | $ | 21,921 | |
| Operating lease right-of-use asset and related operating lease liability recorded for new ground lease | Operating lease right-of-use asset and related operating lease liability recorded for new ground lease | $ | — | | | $ | 18,481 | | Operating lease right-of-use asset and related operating lease liability recorded for new ground lease | $ | 29,022 | | | $ | 22,126 | |
| | Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | | Supplemental disclosure of cash flow information: | |
Cash paid during the period for interest | Cash paid during the period for interest | $ | 17,298 | | | $ | 33,562 | | Cash paid during the period for interest | $ | 80,948 | | | $ | 107,456 | |
Cash paid during the period for income taxes | Cash paid during the period for income taxes | $ | — | | | $ | 285 | | Cash paid during the period for income taxes | $ | 1,011 | | | $ | 1,193 | |
Interest cost capitalized | Interest cost capitalized | $ | 200 | | | $ | 595 | | Interest cost capitalized | $ | 606 | | | $ | 1,341 | |
Change in accrued capital expenditures | Change in accrued capital expenditures | $ | 5,928 | | | $ | (3,323) | | Change in accrued capital expenditures | $ | (4,387) | | | $ | 2,172 | |
See accompanying notes to consolidated financial statements.
EPR PROPERTIES
Notes to Consolidated Financial Statements (Unaudited)
1. Organization
Description of Business
EPR Properties (the Company) was formed on August 22, 1997 as a Maryland real estate investment trust (REIT), and an initial public offering of the Company's common shares of beneficial interest (common shares) was completed on November 18, 1997. Since that time, the Company has been a leading diversified Experiential net lease REIT specializing in select enduring experiential properties. The Company's underwriting is centered on key industry and property cash flow criteria, as well as the credit metrics of the Company's tenants and customers. The Company’s properties are located in the United States and Canada.
2. Summary of Significant Accounting Policies and Recently Issued Accounting Standards
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. In addition, operating results for the threenine month period ended March 31,September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. Amounts as of December 31, 2021 have been derived from the audited Consolidated Financial Statements as of that date and should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (SEC) on February 23, 2022.
The Company consolidates certain entities when it is deemed to be the primary beneficiary in a variable interest entity (VIE) in which it has a controlling financial interest in accordance with the consolidation guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The equity method of accounting is applied to entities in which the Company is not the primary beneficiary as defined in the FASB ASC Topic on Consolidation (Topic 810) but can exercise influence over the entity with respect to its operations and major decisions.
The Company’s variable interests in VIEs currently are in the form 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. The primary beneficiary generally is defined as the party with the controlling financial interest. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. As of March 31,September 30, 2022 and December 31, 2021, the Company does not have any investments in consolidated VIEs.
Risks and Uncertainties
The Company continues 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. 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 the Company's business still remains highly uncertain and difficult to predict.
As of March 31,September 30, 2022, the Company had no properties closed due to COVID-19 restrictions. The continuing impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but
not limited to, the scope, severity and duration of 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 ability of communities to achieve herd immunity, the public’s confidence in the health and safety measures implemented by the Company's tenants and borrowers, the continuing direct and indirect economic effects of the outbreak and containment measures, and the ability of the Company's 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. During 2020 and 2021, theThe COVID-19 pandemic has negatively affected the Company's business and could continue to have material adverse effects on the Company's financial condition, results of operations and cash flows. The Company considered the impact of, and recovery from, the COVID-19 pandemic on the assumptions and estimates used in determining the Company’s financial condition and results of operations for the threenine months ended March 31,September 30, 2022.
The following were impacts to the Company's financial statements and business during the threenine months ended March 31,September 30, 2022 arising out of or relating to the COVID-19 pandemic:
•The Company continued to recognize revenue on a cash basis for certain tenants including American-Multi Cinema, Inc. (AMC) and Regal Cinemas (Regal), a subsidiary of Cineworld Group. On September 7, 2022, Cineworld Group filed for Chapter 11 bankruptcy protection. The Company has 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 March 31,September 30, 2022, thethe Company has deferred amounts due from tenants of approximately $17.4approximately $7.0 million that are booked as receivables. Additionally, as of September 30, 2022, the Company has amounts due from tenantscustomers that were not booked as receivables because the full amounts were not deemed probable of collection as a result of the COVID-19 pandemic. The amounts not booked as receivables remain obligations of the tenantscustomers and will be recognized as revenue when received. During the threenine months ended March 31,September 30, 2022, the Company collected $1.6$10.9 million in deferred rent and $1.1 million of deferred interest from cash basis tenantscustomers and from tenantscustomers for which the deferred payments were not previously recognized as revenue. In addition, during the threenine months ended March 31,September 30, 2022, the Company collected $10.2$19.2 million of deferred rent and $0.4 million of deferred interest from accrual basis tenants and borrowerscustomers that reduced related accounts and interest receivable. The repayment terms for all of these deferments vary by tenant.customer.
Reportable Segments
The Company has 2two reportable operating segments: Experiential and Education. The Experiential segment includes the following property types: theatres, eat & play (including 7seven theatres located in entertainment districts), attractions, ski, experiential lodging, gaming, cultural and fitness & wellness.wellness, gaming and cultural. The Education segment includes the following property types: early childhood education centers and private schools. See Note 15 for financial information related to these reportable segments.
Real Estate Investments
Real estate investments are carried at initial recorded value less accumulated depreciation. Costs incurred for the acquisition and development of the properties are capitalized. In addition, the Company capitalizes certain costs that relate to property under development including interest and a portion of internal legal personnel costs. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which generally are estimated to be 30 years to 40 years for buildings, three years to 25 years for furniture, fixtures and equipment and 10 years to 20 years for site improvements. Tenant improvements, including allowances, are depreciated over the shorter of the lease term or the estimated useful life and leasehold interests are depreciated over the useful life of the underlying ground lease.
Management reviews the Company's real estate investments, including operating lease right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable, which is based on an estimate of undiscounted future cash flows expected to result from its use and eventual disposition. If impairment exists due to the inability to recover the carrying value of the property, an impairment loss is recorded to the extent that the carrying value of the property exceeds its estimated fair value.
The Company evaluates the held-for-sale classification of its real estate as of the end of each quarter. Assets that are classified as held for sale are recorded at the lower of their carrying amount or fair value less costs to sell and are generally classified as held for sale once management has initiated an active program to market them for sale and it is probable the assets will be sold within one year. On occasion, the Company will receive unsolicited offers from third parties to buy individual Company properties. Under these circumstances, the Company will classify the properties as held for sale when a sales contract is executed with no contingencies and the prospective buyer has funds at risk to ensure performance.
Real Estate Acquisitions
Upon acquisition of real estate properties, the Company evaluates the acquisition to determine if it is a business combination or an asset acquisition. If the acquisition is determined to be an asset acquisition, the Company records the purchase price and other related costs incurred to the acquired tangible assets and identified intangible assets and liabilities on a relative fair value basis. In addition, costs incurred for asset acquisitions, including transaction costs, are capitalized.
If the acquisition is determined to be a business combination, the Company records the fair value of acquired tangible assets and identified intangible assets and liabilities as well as any noncontrolling interest. Acquisition-related costs in connection with business combinations are expensed as incurred and included in "Transaction costs" in the accompanying consolidated statements of income (loss) and comprehensive income.
For real estate acquisitions (asset acquisitions or business combinations), the fair value (or relative fair value in an asset acquisition) of the tangible assets is determined by valuing the property using recent independent appraisals or methods similar to those used by independent appraisers. Land is valued using the sales comparison approach which uses available market data from recent comparable land sales as an input to estimate the fair value. Site improvements and tenant improvements are valued using the cost approach which uses replacement cost data obtained from industry recognized guides less depreciation as an input to estimate the fair value. The building is valued either using the cost approach described above or a combination of the cost and the income approach. The income approach uses market leasing assumptions to estimate the fair value of the property as if vacant. The cost and income approaches are reconciled to arrive at an estimated building fair value.
Deferred Financing Costs
Deferred financing costs are amortized over the terms of the related debt obligations or mortgage note receivable as applicable. Deferred financing costs of $35.4$32.6 million and $36.9 million as of March 31,September 30, 2022 and December 31, 2021, respectively, are shown as a reduction of debt. The deferred financing costs of $8.2$7.0 million and $8.7 million as of March 31,September 30, 2022 and December 31, 2021, respectively, related to the unsecured revolving credit facility are included in "Other assets" in the accompanying consolidated balance sheets.
Rental Revenue
The Company leases real estate to its tenants under leases classified as operating leases. The Company's leases generally provide for rent escalations throughout the lease terms. Rents that are fixed are recognized on a straight-line basis over the lease term. Base rent escalations that include a variable component are recognized upon the occurrence of the specified event as defined in the Company's lease agreements. Many of the Company's leasing arrangements include options to extend the lease, which are not included in the minimum lease terms unless it is reasonably certain to be exercised. Straight-line rental revenue is subject to an evaluation for collectibility, and the Company records a direct write-off against rental revenue if collectibility of these future rents is not probable. For the threenine months ended March 31,September 30, 2022, and 2021, the Company recognized $0.6 million and $1.3 million, respectively, of straight-line rental revenue. There were no straight-line write-offs totaling $0.2 million. Straight-line rental revenue, net of write-offs, was $4.7 million for the threenine months ended March 31,September 30, 2022 and 2021.For the nine months ended September 30, 2021, the Company recognized straight-line write-offs totaling $0.2 million. Straight-line rental revenue, net of write-offs, was $3.7 million for the nine months ended September 30, 2021.
The Company has agreed to defer rent for a substantial portion of its customers in response to the impact of the COVID-19 pandemic on their operations. On April 10, 2020, the FASB issued a Staff Q&A on Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic. In reliance upon the
FASB Staff Q&A, the Company has not treated qualifying deferrals or rent concessions during the period affected by the COVID-19 pandemic as lease modifications. While deferments for this and future periods delay rent
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 the Company's financial statements as accounts receivable if collection is determined to be probable or recognized when received as variable lease payments if collection is determined to not be probable. Certain agreements with tenants where remaining lease terms are extended, or other changes are made that do not qualify for the treatment in the FASB Staff Q&A, 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 straight-line rent receivable will be amortized over the remaining term of the lease against rental revenue. In limited cases, customers may be entitled to the abatement of rent during governmentally imposed prohibitions on business operations, which is recognized in the period to which the abatement relates, or the Company may provide rent concessions to tenants. In cases where the Company provides concessions to tenants to which they are not otherwise entitled, those amounts will be recognized in the period in which the concession is granted unless the changes are accounted for as lease modifications.
Most of the Company’s lease contracts are triple-net leases, which require the tenants to make payments to third parties for lessor costs (such as property taxes and insurance) associated with the properties. In accordance with Topic 842, the Company does not include these lessee payments to third parties in rental revenue or property operating expenses. In certain situations, the Company pays these lessor costs directly to third parties and the tenants reimburse the Company. In accordance with Topic 842, these payments are presented on a gross basis in rental revenue and property operating expense. During the threenine months ended March 31,September 30, 2022 and 2021, the Company recognized $0.5$1.8 million and $1.0$2.8 million, respectively, in tenant reimbursements related to the gross up of these reimbursed expenses which are included in rental revenue.
Certain of the Company's leases, particularly at its entertainment districts, require the tenants to make payments to the Company for property-related expenses such as common area maintenance. The Company has elected to combine these non-lease components with the lease components in rental revenue. For the threenine months ended March 31,September 30, 2022 and 2021, the amounts due for non-lease components included in rental revenue totaled $4.5$13.2 million and $3.8$11.2 million, respectively.
In addition, most of the Company's tenants are subject to additional rents (above base rents) if gross revenues of the properties exceed certain thresholds defined in the lease agreements (percentage rents). Percentage rents are recognized at the time when specific triggering events occur as provided by the lease agreement. Rental revenue included percentage rents of $3.4$5.4 million and $2.0$7.2 million forfor the threenine months ended March 31,September 30, 2022 and 2021, respectively.
The Company regularly evaluates the collectibility of its receivables on a lease-by-lease basis. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of the Company's tenants, historical trends of the tenant, current economic conditions and changes in customer payment terms. When the collectibility of lease receivables or future lease payments are no longer probable, the Company records a direct write-off of the receivable to rental revenue and recognizes future rental revenue on a cash basis.
Property Sales
Sales of real estate properties are recognized when a contract exists and the purchaser has obtained control of the property. Gains on sales of properties are recognized in full in a partial sale of nonfinancial assets, to the extent control is not retained. Any noncontrolling interest retained by the seller would, accordingly, be measured at fair value.
The Company evaluates each sale or disposal transaction to determine if it meets the criteria to qualify as discontinued operations. A discontinued operation is a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on the Company's operations and financial results. If the sale or disposal transaction does not meet the criteria, the operations and related gain or loss on sale is included in income from continuing operations.
Mortgage Notes and Other Notes Receivable
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).
In accordance with ASC Topic 326, Measurement of Credit Losses on Financial Instruments, the Company records allowance for credit loss to reflect that all mortgage notes and notes receivable have some inherent risk of loss regardless of credit quality, collateral, or other mitigating factors. While Topic 326 does not require any particular method for determining the reserves, it does specify that it should be based on relevant information about past events, including historical loss experience, current portfolio and market conditions, as well as reasonable and supportable forecasts for the term of each mortgage note or note receivable. The Company uses a forward lookingforward-looking commercial real estate forecasting tool to estimate its current expected credit losses (CECL) for each of its mortgage notes and notes receivable on a loan by loan basis. The CECL allowance required by Topic 326 is a valuation account that is deducted from the related mortgage note or note receivable.
Certain of the Company’s mortgage notes and notes receivable include commitments to fund incremental amounts to its borrowers. These future funding commitments are also subject to the CECL model. The allowance related to future funding is recorded as a liability and is included in "Accounts payable and accrued liabilities" in the accompanying consolidated balance sheet.
As permitted under Topic 326, the Company made an accounting policy election to not measure an allowance for credit losses for accrued interest receivables related to its mortgage notes and notes receivable. Accordingly, if accrued interest receivable is deemed to be uncollectible, the Company will record any necessary write-offs as a reversal of interest income. During the nine months ended September 30, 2022, the Company wrote-off approximately $1.5 million of accrued interest and fees receivables against interest income related to one mortgage note receivable and two notes receivable. There were no accrued interest write-offs for the threenine months ended March 31, 2022 andSeptember 30, 2021. As of March 31,September 30, 2022, the Company believes that all outstanding accrued interest is collectible.
In the event the Company has a past due mortgage note or note receivable andthat the Company determines it is collateral dependent, the Company measures expected credit losses based on the fair value of the collateral. As of March 31,September 30, 2022, the Company does not have any mortgage notes or notes receivable with past due principal balances. See Note 6 for further discussion of mortgage notes and notes receivable for which the Company elected to apply the collateral dependent practical expedient.
Mortgage and Other Financing Income
Certain of the Company's borrowers are subject to additional interest based on certain thresholds defined in the mortgage agreements (participating interest). Participating interest income is recognized at the time when specific parameters have been met as provided by the mortgage agreement. There was no participating interest income for the threenine months ended March 31,September 30, 2022 and 2021.
Concentrations of Risk
AMC, Topgolf USA (Topgolf) and Regal represented a significant portion of the Company's total revenue for the threenine months ended March 31,September 30, 2022 and 2021. The Company began recognizing revenue on a cash basis for AMC at the end of the first quarter of 2020 and for Regal at the end of the third quarter of 2020 and cash payments were reduced due to the impact of the COVID-19 pandemic. The Company had higher revenue from Regal during the nine months ended September 30, 2022 due to the payment of rent as well as the repayment of deferred rent due, both of which were recognized as rental revenue when received. As described above, on September 7, 2022, Cineworld Group, the parent entity of Regal, filed for Chapter 11 bankruptcy protection. The Company has not yet received contractual rent or deferral payments from Regal for September 2022, but received payment of contractual rent and deferral payments from Regal for October and November 2022. The following is a summary of the Company's total revenue derived from rental or interest payments from AMC, Topgolf and Regal (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Total Revenue | % of Company's Total Revenue | | Total Revenue | % of Company's Total Revenue |
AMC | $ | 23,422 | | 14.9 | % | | $ | 23,835 | | 21.3 | % |
Topgolf | 22,383 | | 14.2 | % | | 20,486 | | 18.3 | % |
Regal | 21,255 | | 13.5 | % | | 625 | | 0.6 | % |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Total Revenue | % of Company's Total Revenue | | Total Revenue | % of Company's Total Revenue |
AMC | $ | 71,017 | | 14.8 | % | | $ | 71,000 | | 18.8 | % |
Topgolf | 69,464 | | 14.5 | % | | 63,445 | | 16.8 | % |
Regal | 63,477 | | 13.2 | % | | 23,301 | | 6.2 | % |
Share-Based Compensation
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.
Share-based compensation expense consists of share option expense and amortization of non-vested share grants and share options issued to employees, and amortization of share units issued to non-employee Trustees for payment of their annual retainers. Share-based compensation is included in "General and administrative expense" in the accompanying consolidated statements of income (loss) and comprehensive income.
Share Options
Share options are granted to employees pursuant to the Long-Term Incentive Plan. The fair value of share options granted is estimated at the date of grant using the Black-Scholes option pricing model. Share options granted to employees vest over a period of four years and share option expense for these options is recognized on a straight-line basis over the vesting period. Expense recognized related to share options and included in "General and administrative expense" in the accompanying consolidated statements of income (loss) and comprehensive income was $4 thousand for both the three months ended March 31, 2022 and 2021.
Nonvested Shares Issued to Employees
The Company grants nonvested shares to employees pursuant to both the Annual Incentive Program and the Long-Term Incentive Plan. The Company amortizes the expense related to the nonvested shares awarded to employees under the Long-Term Incentive Plan and the premium awarded under the nonvested share alternative of the Annual Incentive Program on a straight-line basis over the future vesting period (three years or four years). Expense recognized related to nonvested shares and included in "General and administrative expense" in the accompanying consolidated statements of income (loss) and comprehensive income was $2.0$5.9 million and $6.6 million $2.2 million for the threenine months ended March 31,September 30, 2022 and 2021, respectively.
Nonvested Performance Shares Issued to Employees
The Company awards performance shares to the Company's executive officers pursuant to the Long-Term Incentive Plan. The performance shares contain both a market condition and a performance condition. The Company amortizes the expense related to the performance shares over the future performance period of three years. Expense recognized related to performance shares and included in "General and administrative expense" in the accompanying consolidated statements of income (loss) and comprehensive income was $1.6$5.0 million and $0.9$2.9 million for the threenine months ended March 31,September 30, 2022 and 2021, respectively.
Share Options
Share options were granted to employees pursuant to the Long-Term Incentive Plan prior to 2022. The fair value of share options granted was estimated at the date of grant using the Black-Scholes option pricing model. Share options granted to employees vest over a period of four years and share option expense for these options is recognized on a straight-line basis over the vesting period. Expense recognized related to share options and included in "General and administrative expense" in the accompanying consolidated statements of income and comprehensive income was $11 thousand and $13 thousand for the nine months ended September 30, 2022 and 2021, respectively.
Restricted Share Units Issued to Non-Employee Trustees
The Company issues restricted share units to non-employee Trustees for payment of their annual retainers under the Company's Trustee compensation program. The fair value of the share units granted was based on the share price at 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. This expense is amortized by the Company on a straight-line basis over the year of service by the non-employee Trustees. Total expense recognized related to shares issued to non-employee Trustees and included in "General and administrative expense" in the accompanying consolidated statements of income (loss) and comprehensive income income was $0.6 $1.7 million for both the threenine months ended March 31,September 30, 2022 and 2021.
Derivative Instruments
The Company uses derivative instruments to reduce exposure to fluctuations in foreign currency exchange rates and variable interest rates.
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 foreign currency risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows are considered cash flow hedges. 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 hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. For its net investment hedges that hedge the foreign currency exposure of its Canadian investments, the Company has elected to assess hedge effectiveness using a method based on changes in spot exchange rates and record the changes in the fair value amounts excluded from the assessment of effectiveness into earnings on a systematic and rational basis. 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.
Impact of Recently Issued Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the year ended December 31, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. On March 5, 2021, the Financial Conduct Authority ("FCA")(FCA) announced that the USD LIBOR will no longer be published after June 30, 2023. At March 31,September 30, 2022, the Company had 10six agreements (including debt, derivative,interest rate swap, mortgage note and lease agreements) that are indexed to LIBOR, of which 3 mature prior to June 30, 2023.LIBOR. The Company is monitoring and evaluating the related risks with transitioning thesehas transitioned several existing contracts to a replacement index.index and continues to make progress transitioning the remaining contracts.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the accounting guidance for troubled debt restructurings (TDR) by creditors that have adopted the CECL model and enhances disclosure requirements for loan modifications made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current period gross write-offs by year of origination for financing receivables. ASU 2022-02 is effective for fiscal years and(and interim periods within those years,years), beginning after December 15, 2022. The Company expects to adopt the guidance beginning January 1, 2023 and is currently evaluating the impact that ASU 2022-02 will have on its consolidated financial statements and related disclosures.
3. Real Estate Investments
The following table summarizes the carrying amounts of real estate investments as of March 31,September 30, 2022 and December 31, 2021 (in thousands):
| | | March 31, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
Buildings and improvements | Buildings and improvements | $ | 4,580,400 | | | $ | 4,523,052 | | Buildings and improvements | $ | 4,664,228 | | | $ | 4,523,052 | |
Furniture, fixtures & equipment | Furniture, fixtures & equipment | 108,454 | | | 108,907 | | Furniture, fixtures & equipment | 118,195 | | | 108,907 | |
Land | Land | 1,229,363 | | | 1,222,149 | | Land | 1,238,734 | | | 1,222,149 | |
Leasehold interests | Leasehold interests | 26,987 | | | 26,717 | | Leasehold interests | 26,987 | | | 26,717 | |
| | 5,945,204 | | | 5,880,825 | | | 6,048,144 | | | 5,880,825 | |
Accumulated depreciation | Accumulated depreciation | (1,206,317) | | | (1,167,734) | | Accumulated depreciation | (1,278,427) | | | (1,167,734) | |
Total | Total | $ | 4,738,887 | | | $ | 4,713,091 | | Total | $ | 4,769,717 | | | $ | 4,713,091 | |
Depreciation expense on real estate investments was $38.8$118.7 million and $38.9$119.2 million for the threenine months ended March 31,September 30, 2022 and 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 threenine months ended March 31,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. TheDuring 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 threenine months ended March 31,September 30, 2022 totaledtotal $24.4ed $321.3 million, andand included the acquisition of 1two fitness and wellness propertyproperties for approximately $19.9$63.5 million, as well asthe acquisition of two attraction properties located in Canada for approximately $142.8 million, spending on build-to-suit experiential development and redevelopment projects and the acquisition of interests in two joint ventures for approximately $50.6 million. See Note 9 for further details on these two joint ventures projects..
During the nine months ended September 30, 2022, the Company completed the sale of two vacant theatre properties and a land parcel for net proceeds of $9.9 million and recognized a combined gain on sale of $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 has not experienced historical losses on its mortgage note portfolio; therefore, 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 March 31,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 March 31,September 30, 2022 and December 31, 2021 consists of the following (in thousands):
| | | Outstanding principal amount of mortgage | Carrying amount as of | Unfunded commitments | | Outstanding principal amount of mortgage | Carrying amount as of | Unfunded commitments |
Description | Description | Year of Origination | Interest Rate | Maturity Date | March 31, 2022 | December 31, 2021 | March 31, 2022 | Description | Year of Origination | Interest Rate | Maturity Date | September 30, 2022 | December 31, 2021 | September 30, 2022 |
Attraction property Powells Point, North Carolina | Attraction property Powells Point, North Carolina | 2019 | 7.75 | % | 6/30/2025 | 28,864 | | 28,695 | | 28,243 | | — | | Attraction property Powells Point, North Carolina | 2019 | 7.75 | % | 6/30/2025 | $ | 29,206 | | $ | 29,037 | | $ | 28,243 | | $ | — | |
Fitness & wellness property Omaha, Nebraska | Fitness & wellness property Omaha, Nebraska | 2017 | 7.85 | % | 1/3/2027 | 10,905 | | 10,952 | | 10,940 | | — | | Fitness & wellness property Omaha, Nebraska | 2017 | 7.85 | % | 1/3/2027 | 10,905 | | 10,937 | | 10,940 | | — | |
Fitness & wellness property Merriam, Kansas | Fitness & wellness property Merriam, Kansas | 2019 | 7.55 | % | 7/31/2029 | 9,090 | | 9,171 | | 9,159 | | — | | Fitness & wellness property Merriam, Kansas | 2019 | 7.55 | % | 7/31/2029 | 9,090 | | 9,187 | | 9,159 | | — | |
Ski property Girdwood, Alaska | Ski property Girdwood, Alaska | 2019 | 8.20 | % | 12/31/2029 | 45,599 | | 45,623 | | 45,877 | | 11,401 | | Ski property Girdwood, Alaska | 2019 | 8.13 | % | 7/31/2032 | 72,000 | | 71,563 | | 45,877 | | 10,000 | |
Fitness & wellness property Omaha, Nebraska | Fitness & wellness property Omaha, Nebraska | 2016 | 7.85 | % | 6/30/2030 | 10,539 | | 10,602 | | 10,615 | | 379 | | Fitness & wellness property Omaha, Nebraska | 2016 | 7.85 | % | 6/30/2030 | 10,539 | | 10,563 | | 10,615 | | 379 | |
Experiential lodging property Nashville, Tennessee | Experiential lodging property Nashville, Tennessee | 2019 | 7.01 | % | 9/30/2031 | 71,223 | | 71,277 | | 70,896 | | — | | Experiential lodging property Nashville, Tennessee | 2019 | 6.99 | % | 9/30/2031 | 70,000 | | 70,542 | | 70,896 | | — | |
Eat & play property Austin, Texas | Eat & play property Austin, Texas | 2012 | 11.31 | % | 6/1/2033 | 10,629 | | 10,629 | | 10,874 | | — | | Eat & play property Austin, Texas | 2012 | 11.31 | % | 6/1/2033 | 10,382 | | 10,382 | | 10,874 | | — | |
Experiential lodging property Breaux Bridge, LA | | Experiential lodging property Breaux Bridge, LA | 2022 | 7.25 | % | 3/8/2034 | 11,305 | | 11,373 | | — | | — | |
Ski property West Dover and Wilmington, Vermont | Ski property West Dover and Wilmington, Vermont | 2007 | 11.96 | % | 12/1/2034 | 51,050 | | 51,049 | | 51,047 | | — | | 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 | Four ski properties Ohio and Pennsylvania | 2007 | 11.07 | % | 12/1/2034 | 37,562 | | 37,538 | | 37,519 | | — | | Four ski properties Ohio and Pennsylvania | 2007 | 11.07 | % | 12/1/2034 | 37,562 | | 37,533 | | 37,519 | | — | |
Ski property Chesterland, Ohio | Ski property Chesterland, Ohio | 2012 | 11.55 | % | 12/1/2034 | 4,550 | | 4,529 | | 4,516 | | — | | Ski property Chesterland, Ohio | 2012 | 11.55 | % | 12/1/2034 | 4,550 | | 4,533 | | 4,516 | | — | |
Ski property Hunter, New York | Ski property Hunter, New York | 2016 | 8.88 | % | 1/5/2036 | 21,000 | | 21,000 | | 21,000 | | — | | Ski property Hunter, New York | 2016 | 8.88 | % | 1/5/2036 | 21,000 | | 21,000 | | 21,000 | | — | |
Eat & play property Midvale, Utah | Eat & play property Midvale, Utah | 2015 | 10.25 | % | 5/31/2036 | 17,505 | | 17,505 | | 17,639 | | — | | Eat & play property Midvale, Utah | 2015 | 10.25 | % | 5/31/2036 | 17,505 | | 17,505 | | 17,639 | | — | |
Eat & play property West Chester, Ohio | Eat & play property West Chester, Ohio | 2015 | 9.75 | % | 8/1/2036 | 18,068 | | 18,066 | | 18,198 | | — | | Eat & play property West Chester, Ohio | 2015 | 9.75 | % | 8/1/2036 | 18,068 | | 18,066 | | 18,198 | | — | |
Fitness & wellness property Fort Collins, Colorado | Fitness & wellness property Fort Collins, Colorado | 2018 | 7.85 | % | 1/31/2038 | 10,292 | | 10,048 | | 10,277 | | — | | 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 | Early childhood education center Lake Mary, Florida | 2019 | 7.98 | % | 5/9/2039 | 4,200 | | 4,337 | | 4,329 | | — | | Early childhood education center Lake Mary, Florida | 2019 | 8.10 | % | 5/9/2039 | 4,200 | | 4,353 | | 4,329 | | — | |
Eat & play property Eugene, Oregon | Eat & play property Eugene, Oregon | 2019 | 8.13 | % | 6/17/2039 | 14,700 | | 15,018 | | 14,996 | | — | | Eat & play property Eugene, Oregon | 2019 | 8.13 | % | 6/17/2039 | 14,700 | | 7,780 | | 14,996 | | — | |
Early childhood education center Lithia, Florida | Early childhood education center Lithia, Florida | 2017 | 8.58 | % | 10/31/2039 | 3,959 | | 3,982 | | 4,034 | | — | | Early childhood education center Lithia, Florida | 2017 | 8.58 | % | 10/31/2039 | 3,959 | | 4,013 | | 4,034 | | — | |
| | $ | 369,735 | | $ | 370,021 | | $ | 370,159 | | $ | 11,780 | | | $ | 406,313 | | $ | 399,485 | | $ | 370,159 | | $ | 10,379 | |
Investment in notes receivable, including related accrued interest receivable, waws $7.2as $3.5 million and $7.3 million at March 31,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, 2022, the Company recorded 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 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 cash basis. During the nine months ended September 30, 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 entered into an amended and restated loan and security agreement with 1one 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 TDR.troubled debt restructuring. At March 31,September 30, 2022, this note receivable iswas considered collateral-dependentcollateral dependent and expected credit losses are based on the fair value of the underlying collateral at the reporting date.date. The note is secured by the working capital and non-real estate assets of the borrower. The Company assessed the fair value of the collateral as of March 31,September 30, 2022 and the note remains fully reserved with an allowance for credit loss totaling $8.6$8.4 million, which represents the outstanding principal balance of the note as of March 31,September 30, 2022. Income for this 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 March 31,September 30, 2022, the Company's investment in this note receivable was a variable interest investment and the underlying entity is a VIE. The Company is not the primary beneficiary of 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 $8.6$8.4 million,, which is fully reserved in the allowance for credit losses at March 31,September 30, 2022.
The following summarizes the activity within the allowance for credit losses related to mortgage notes, unfunded commitments and notesnotes receivable for the threenine months ended March 31,September 30, 2022 (in thousands):
| | | Mortgage notes receivable | Unfunded commitments - mortgage notes receivable | Notes receivable | Unfunded commitments - notes receivable | Total | | Mortgage notes receivable | Unfunded commitments - mortgage notes receivable | Notes receivable | Unfunded commitments - notes receivable | Total |
Allowance for credit losses at December 31, 2021 | Allowance for credit losses at December 31, 2021 | $ | 2,124 | | $ | 76 | | $ | 8,686 | | $ | — | | $ | 10,886 | | Allowance for credit losses at December 31, 2021 | $ | 2,124 | | $ | 76 | | $ | 8,686 | | $ | — | | $ | 10,886 | |
Credit loss (benefit) expense | (323) | | (13) | | 30 | | — | | (306) | | |
Credit loss expense (benefit) | | Credit loss expense (benefit) | 6,682 | | (12) | | 2,777 | | — | | 9,447 | |
Charge-offs | Charge-offs | — | | — | | — | | — | | — | | Charge-offs | — | | — | | — | | — | | — | |
Recoveries | Recoveries | — | | — | | — | | — | | — | | Recoveries | — | | — | | — | | — | | — | |
Allowance for credit losses at March 31, 2022 | $ | 1,801 | | $ | 63 | | $ | 8,716 | | $ | — | | $ | 10,580 | | |
Allowance for credit losses at September 30, 2022 | | Allowance for credit losses at September 30, 2022 | $ | 8,806 | | $ | 64 | | $ | 11,463 | | $ | — | | $ | 20,333 | |
7. Accounts Receivable
The following table summarizes the carrying amounts of accounts receivable as of March 31,September 30, 2022 and December 31, 2021 (in thousands):
| | | March 31, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
Receivable from tenants | Receivable from tenants | $ | 19,731 | | | $ | 37,417 | | Receivable from tenants | $ | 8,491 | | | $ | 37,417 | |
Receivable from non-tenants | Receivable from non-tenants | 2,102 | | | 2,237 | | Receivable from non-tenants | 2,197 | | | 2,237 | |
| Straight-line rent receivable | Straight-line rent receivable | 38,871 | | | 38,419 | | Straight-line rent receivable | 42,687 | | | 38,419 | |
| Total | Total | $ | 60,704 | | | $ | 78,073 | | Total | $ | 53,375 | | | $ | 78,073 | |
As of March 31,September 30, 2022, receivable from tenants includes payments of approximately $17.4ximately $7.0 million that were deferred due to the COVID-19 pandemic and determined to be collectible. Additionally, the Company has amounts due from tenants that were not booked as receivables because the full amounts were not deemed probable of collection as a result of the COVID-19 pandemic. While deferments for this and future periods delay rent payments, these deferments do not release tenants from the obligation to pay the deferred amounts in the future.
8. Capital Markets and Dividends
During the three and nine months ended March 31,September 30, 2022, the Company declared cash dividends totaling $0.775$0.825 and $2.425 per common share.share, respectively. Additionally, during the three and nine months ended March 31,September 30, 2022, the Board declared cash dividends of $0.359375 and $1.078125 per share, respectively, on each of the Company's 5.75% Series C cumulative convertible preferred shares and the Company's 5.75% Series G cumulative redeemable preferred shares and cash dividends of $0.5625 and $1.6875 per share, respectively, on the Company's 9.00% Series E cumulative convertible preferred shares.
On January 14, 2022, the Company amended the note purchase agreement governing its private placement notes (Note Purchase Agreement) to, among other things: (i) amend 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 Company's Third Amended, Restated and Consolidated Credit Agreement, dated October 6, 2021, 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.
9. Unconsolidated Real Estate Joint Ventures
AsThe following table summarizes our investment in unconsolidated joint ventures as of March 31,September 30, 2022 and December 31, 2021 the(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 had a 65% investment interesthas equity investments in 2two unconsolidated real estate joint ventures related to 2two experiential lodging properties located in St. Petersburg Beach, Florida. TheThe Company's partner, Gencom Acquisition, LLC and its affiliates, owninvestments in these joint ventures were considered to be variable interest investments, however, the remaining 35% interest in the joint ventures.underlying entities are not VIEs. There are 2two separate joint ventures, one that holds the investment in the real estate of the 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 accounts for its investment in these joint ventures under the equity method of accounting. Asaccounting 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 March 31,which are described below. In connection with this refinancing, during the nine months ended September 30, 2022, and December 31, 2021, the Company had equity investrecmentseived $6.7 million in distributions. In addition, the Company received $0.8 million in distributions from operations during the nine months ended September 30, 2022. No distributions were received during the nine months ended September 30, 2021. The Company's accounting policy is to classify the distribution on its consolidated statement of $27.1 million and $25.9 million, respectively, in these joint ventures.cash flows using the nature of the distribution approach based on facts and circumstances surrounding the distribution.
The joint venture that holds the real property has a secured mortgage loan of $85.0$105.0 million at March 31, 2022, that was due April 1, 2022 but the joint venture has temporarily extended theSeptember 30, 2022. The maturity date to July 1, 2022.of this mortgage loan is May 18, 2025. The note can be extended for 2two additional 1-yearone-year periods from the original maturity date upon the satisfaction of certain conditions. The mortgage loan bears interest
at an annual rate equal to the greater of 6.00% or LIBORSOFR plus 3.75%. Interest is payable3.65%, with monthly beginning on May 1, 2019 until the maturity date.interest payments required. The joint venture has an interest rate cap agreement to limit the variable portion of the interest rate (LIBOR)(SOFR) on this note to 3.0%3.5% from March 28, 2019May 19, 2022 to AprilJune 1, 2023.2024.
(2) The Company recognized gains of has$1.2 million and losses of $1.5 million during the three months ended March 31, 2022 and 2021, respectively, and received no distributions during the three months ended March 31, 2022 and 2021 related to the equity investments in these joint ventures.
As of March 31, 2022 and December 31, 2021, the Company's investments in these joint ventures were considered to be variable interest investments and the underlying entities are VIEs. The Company is not the primary beneficiary of the VIEs because the Company does not individually have the power to direct the activities that are most important to the joint ventures and accordingly, these investments are not consolidated. The Company's maximum exposure to loss at March 31, 2022, is its investment in the joint ventures in the amount of $27.1 million.
As of March 31, 2022 and December 31, 2021, the Company had a 95% investment interest in 2two 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 investments, however, the underlying entities are not VIEs. The Company's partner, TJO Warrens, LLC and its affiliates, owns the remaining 5% interest in the joint ventures. There are 2two 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 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. As of March 31, 2022 and December 31, 2021, the Company had equity investments of $8.8 million and $10.1 million, respectively, in these joint ventures.
The joint venture that holds the real property has a secured mortgage loan of $15.0$16.3 million at March 31,September 30, 2022 andthat provides for additional draws of approximately $9.6$8.3 million to fund 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 Company has guaranteed the completion of the renovations in the amount of approximately $8.7$14.2 million, with $6.6$9.5 million remaining to fund at March 31,September 30, 2022.
The(3) The Company recognized losses of $1.3 million during the three months ended March 31, 2022has and received no distributions during the three months ended March 31, 2022equity investments in two unconsolidated real estate joint ventures related to the equityan experiential lodging property located in Breaux Bridge, Louisiana. The Company's investments in these joint ventures.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 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.
In addition, asThe joint venture that holds the real estate property has a secured senior mortgage loan of both$38.5 million at September 30, 2022. The maturity date of this mortgage loan is March 31, 20228, 2034. The mortgage loan bears interest at an annual fixed rate of 3.85% through April 7, 2025 and December 31, 2021,increases to 4.25% from April 8, 2025 through maturity. Monthly interest payments are required. Additionally, the Company hadprovided a subordinated loan to the joint venture for $11.3 million with a maturity date of March 8, 2034. The mortgage loan bears interest at an annual fixed rate of 7.25% through the sixth anniversary and increases to SOFR plus 7.20% with a cap of 8.00%, through maturity.
(4) The Company has equity investments of $0.7 million in unconsolidated joint ventures for 3three theatre projects located in China.China, with ownership interests ranging from 30% to 49%. During the nine months ended September 30, 2022, the Company recognized $0.6 million in other-than-temporary impairment charges related to these equity investments. The Company determined these investments had no fair value based primarily on discounted cash flow projections. The Company recognized losses of $10 thousand during the three months ended March 31, 2022 and income of $55 thousand during the three months ended March 31, 2021, and received distributionsdistributions of $90 thousand fromfrom its investment in these joint ventures for the threenine months ended March 31,September 30, 2021. No distributions were received during the threenine months ended March 31,September 30, 2022.
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 has elected not to offset its derivative
position for purposes of balance sheet presentation and disclosure. The Company had derivative assets of $0.6$14.1 million at March 31,September 30, 2022 and no derivative assets at December 31, 2021. The Company had derivative liabilities of $7.6$4.9 million and $4.9 millionat at March 31, 2022 and December 31, 2021 respectively.and no derivative liabilities at September 30, 2022. The Company has not posted or received collateral with its derivative counterparties as of March 31,September 30, 2022 or December 31, 2021. See Note 11 for disclosures relating to the fair value of the derivative 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-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 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 the Company recording net interest expense that is fixed over the life of the agreements without exchange of the underlying notional amount.
At March 31,September 30, 2022, the Company had 1one 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 March 31,September 30, 2022 is summarized below:
| | | | | | | | | | | | | | | | | | | | |
Fixed rate | | Notional Amount (in millions) | | Index | | Maturity |
1.3925% | | $ | 25.0 | | | USD LIBOR | | September 30, 2024 |
| | | | | | |
The change 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 within the same income statement line item as the earnings effect of the 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 March 31,September 30, 2022, the Company estimates that during the twelve months ending March 31,September 30, 2023, $0.1$0.7 million of gains will be reclassified from AOCI to other income.interest expense.
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 4six Canadian properties. The Company uses cross-currency swaps to mitigate its exposure to fluctuations in the USD-CAD exchange rate on cash inflows associated with these properties which should hedge a significant portion of the Company's expected CAD denominated cash flows.
The Company entered into 3 USD-CAD cross-currency swaps that were effective July 1, 2020 with a fixed original notional value As of $100.0 million CAD and $76.6 million USD. The net effect of these swaps is to lock in an exchange rate of $1.31 CAD per USD on approximately $7.2 million annual CAD denominated cash flows through June 2022.
On April 12,September 30, 2022, the Company entered into 3 USD-CADhad the following cross-currency swaps that will be effective July 1, 2022 with a total fixed original notional value of $150.0 million CAD and $118.7 million USD. The net effect of these swaps is to lock in an exchange rate of $1.27 CAD per USD on approximately $10.8 million annual CAD denominated cash flows through September 2024.swaps:
Additionally, on April 29, 2022, the Company entered into 2 additional 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 exchange rate of $1.29 CAD per USD on approximately $4.5 million of additional annual CAD denominated cash flows through October 1, 2024. | | | | | | | | | | | | | | | | | | | | |
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 change 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 reclassified into earnings in the period that the hedged forecasted transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction. As of March 31,September 30, 2022, the Company estimates that during the twelve months ending March 31,September 30, 2023, $0.1$1.1 million of losses willgains will be reclassified from AOCI to other expense.income.
Net Investment Hedges
The Company is exposed to fluctuations in the USD-CAD exchange rate on its net investments in Canada. As such, the Company uses either currency forward agreements or cross-currency swaps to manage its exposure to changes in foreign exchange rates on certain of its foreign net investments. As of March 31,September 30, 2022, the Company had the following cross-currency swapsforeign currency forwards designated as net investment hedges:
| | | | | | | | | | | | | | |
Fixed rate | | Notional Amount (in millions, CAD) | | Maturity |
$1.321.28 CAD per USD | | $ | 100.0 | | | July 1, 2023 |
$1.32 CAD per USD | | 100.0 | | | July 1, 2023 |
Total | | $ | 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 also havethat were designated as net investment hedges. The cross-currency swaps included a monthly settlement feature lockedto lock in at an exchange rate of $1.32 CAD per USD on $4.5 million of CAD annual cash flows, the net effect of which is an excluded component from the effectiveness testing of this hedge.
to USD. On April 29, 2022, the Company de-designated theseterminated its CAD to USD cross-currency swaps in conjunction with entering into new agreements, effectively terminating the cross-currency swap agreements. These contracts were previously designated as net investment hedges. The Company paid $3.8 million in connection with the settlement of the CAD to USD cross-currency swap agreements.
On April 29, 2022,agreements, which continues to be reported in AOCI until the Company entered into 2 forward contracts with a fixed notional value of $200.0 million CAD and $156.0 million USD with a settlement date of October 1, 2024. The exchange rate of this forward contractnet investment is approximately $1.28 CAD per USD.sold or liquidated.
For qualifying foreign currency derivatives designated as net investment hedges, the change in the fair value of the derivatives are reported in AOCI as part of the cumulative translation adjustment. 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 March 31,September 30, 2022 and 2021.
Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and Comprehensive Income for the Three and Nine Months Ended March 31,September 30, 2022 and 2021 (Dollars in thousands) | | | Three Months Ended March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
Description | Description | 2022 | | 2021 | | Description | 2022 | 2021 | | 2022 | 2021 |
Cash Flow Hedges | Cash Flow Hedges | | | | | Cash Flow Hedges | | | |
Interest Rate Swaps | Interest Rate Swaps | | | Interest Rate Swaps | |
Amount of Gain Recognized in AOCI on Derivative | $ | 825 | | | $ | 259 | | | |
Amount of Expense Reclassified from AOCI into Earnings (1) | (76) | | | (2,033) | | | |
Amount of Gain (Loss) Recognized in AOCI on Derivative | | 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) | | Amount of Income (Expense) Reclassified from AOCI into Earnings (1) | 55 | | (4,962) | | | (58) | | (9,074) | |
Cross-Currency Swaps | Cross-Currency Swaps | | | Cross-Currency Swaps | |
Amount of Loss Recognized in AOCI on Derivative | (26) | | | (93) | | | |
Amount of Expense Reclassified from AOCI into Earnings (2) | (54) | | | (49) | | | |
Amount of Gain (Loss) Recognized in AOCI on Derivative | | 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) | | Amount of Income (Expense) Reclassified from AOCI into Earnings (2) | 128 | | (57) | | | 29 | | (205) | |
Net Investment Hedges | Net Investment Hedges | | | Net Investment Hedges | |
Cross-Currency Swaps | Cross-Currency Swaps | | | Cross-Currency Swaps | |
Amount of Loss Recognized in AOCI on Derivative | (3,019) | | | (1,786) | | | |
Amount of Gain Recognized in AOCI on Derivative | | Amount of Gain Recognized in AOCI on Derivative | — | | 4,456 | | | 665 | | 356 | |
Amount of Income Recognized in Earnings (2) (3) | Amount of Income Recognized in Earnings (2) (3) | 99 | | | 102 | | | Amount of Income Recognized in Earnings (2) (3) | — | | 97 | | | 170 | | 270 | |
| Currency Forward Agreements | | Currency Forward Agreements | |
Amount of Gain Recognized in AOCI on Derivative | | Amount of Gain Recognized in AOCI on Derivative | 9,703 | | — | | | 10,641 | | — | |
| Total | Total | | | Total | |
Amount of Loss Recognized in AOCI on Derivatives | $ | (2,220) | | | $ | (1,620) | | | |
Amount of Expense Reclassified from AOCI into Earnings | (130) | | | (2,082) | | | |
Amount of Gain (Loss) Recognized in AOCI on Derivatives | | 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 | | Amount of Income (Expense) Reclassified from AOCI into Earnings | 183 | | (5,019) | | | (29) | | (9,279) | |
Amount of Income Recognized in Earnings | Amount of Income Recognized in Earnings | 99 | | | 102 | | | Amount of Income Recognized in Earnings | — | | 97 | | | 170 | | 270 | |
| Interest expense, net in accompanying consolidated statements of income (loss) and comprehensive income | $ | 33,260 | | | $ | 39,194 | | | |
Other income in accompanying consolidated statements of income (loss) and comprehensive income | $ | 9,305 | | | $ | 678 | | | |
Interest expense, net in accompanying consolidated statements of income and comprehensive income | | 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 | | 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 (loss) and comprehensive income for the three and nine months ended March 31,September 30, 2022 and 2021.
(2) Included in "Other income" in the accompanying consolidated statements of income (loss) and comprehensive income for the three and nine months ended March 31,September 30, 2022 and 2021.
(3) Amounts represent derivative gains excluded from the effectiveness testing.
Credit-risk-related Contingent Features
The Company has an agreement with its interest rate derivative counterparty that contains a provision where if the Company defaults on any of its obligations for borrowed money or credit in an amount exceeding $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 March 31,September 30, 2022, the fair value of the Company'sCompany had no derivatives in a liability position related to these derivative agreements was $7.6 million. If t. As ohe Company breached any of the contractual provisions of these derivative contracts, it would be required to settle its obligations under the agreements at their termination value of $7.1 million. As of March 31,f September 30, 2022, the Company had not posted any collateral related to these agreements and was not in breach of any provisions in these agreements.
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 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 value of interest rate swaps is 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 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 March 31,September 30, 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 March 31,September 30, 2022 and December 31, 2021 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
March 31,September 30, 2022 and December 31, 2021
(Dollars in thousands)
| Description | 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 | 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 |
March 31, 2022 | | | | | | | | | |
September 30, 2022 | | September 30, 2022 | | | | | | | | |
| Cross-Currency Swaps (1) | Cross-Currency Swaps (1) | | $ | — | | | $ | (7,618) | | | $ | — | | | $ | (7,618) | | Cross-Currency Swaps (1) | | $ | — | | | $ | 2,118 | | | $ | — | | | $ | 2,118 | |
| Currency Forward Agreements (1) | | Currency Forward Agreements (1) | | — | | | 10,641 | | | — | | | 10,641 | |
Interest Rate Swap Agreements (2)(1) | Interest Rate Swap Agreements (2)(1) | | — | | | 639 | | | — | | | 639 | | Interest Rate Swap Agreements (2)(1) | | — | | | 1,374 | | | — | | | 1,374 | |
December 31, 2021 | December 31, 2021 | | December 31, 2021 | |
| Cross-Currency Swaps (1)(2) | Cross-Currency Swaps (1)(2) | | $ | — | | | $ | (4,626) | | | $ | — | | | $ | (4,626) | | Cross-Currency Swaps (1)(2) | | $ | — | | | $ | (4,626) | | | $ | — | | | $ | (4,626) | |
| Interest Rate Swap Agreements (1)(2) | Interest Rate Swap Agreements (1)(2) | | — | | | (262) | | | — | | | (262) | | Interest Rate Swap Agreements (1)(2) | | — | | | (262) | | | — | | | (262) | |
(1) Included in "Accounts payable and accrued liabilities""Other assets" in the accompanying consolidated balance sheets.
(2) Included in "Other assets""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 as of March 31,September 30, 2022, aggregated by the level in the fair value hierarchy within which those measurements are classified.
Assets Measured at Fair Value on a Non-Recurring Basis at March 31,September 30, 2022 and December 31, 2021
(Dollars in thousands) | Description | 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 | 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 |
March 31, 2022 | | | | | | | | |
September 30, 2022 | | September 30, 2022 | | | | | | | |
Real estate investments, net | Real estate investments, net | $ | — | | | $ | 4,700 | | | $ | — | | | $ | 4,700 | | Real estate investments, net | $ | — | | | $ | 4,700 | | | $ | — | | | $ | 4,700 | |
Mortgage notes and related accrued interest receivable | | Mortgage notes and related accrued interest receivable | — | | | — | | | 7,780 | | | 7,780 | |
Investment in joint ventures | | Investment in joint ventures | — | | | — | | | — | | | — | |
Other assets (1) | Other assets (1) | — | | | — | | | — | | | — | | Other assets (1) | — | | | — | | | 1,316 | | | 1,316 | |
December 31, 2021 | December 31, 2021 | | December 31, 2021 | |
Real estate investments, net | Real estate investments, net | $ | — | | | $ | 6,956 | | | $ | — | | | $ | 6,956 | | Real estate investments, net | $ | — | | | $ | 6,956 | | | $ | — | | | $ | 6,956 | |
Other assets (1) | Other assets (1) | — | | | — | | | — | | | — | | Other assets (1) | — | | | — | | | — | | | — | |
(1) Includes collateral dependent notes receivable, which are presented within "Other assets" in the accompanying consolidated balance sheets.
As further discussed further in Note 4, during the threenine months ended March 31,September 30, 2022, the Company recorded an impairment charge of $4.4 million related to real estate investments, net on 1one 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 2two 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 in Note 6, during the nine months ended September 30, 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 of $0.6 million related to its investment in joint ventures. Management estimated the fair value of these investments, taking into account various factors including implied asset value changes based on discounted cash flow projections and current market conditions. The Company determined, based on the inputs, that its valuation of investment in joint ventures was classified within Level 3 of the fair value hierarchy as many of the assumptions were not observable.
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 March 31,September 30, 2022 and December 31, 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 March 31,September 30, 2022, the Company had a carrying value of $370.0$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 9.04%8.96%. The fixed rate mortgage notes bear interest at rates of 7.01%6.99% to 11.96%12.14%. Discounting the future cash flows for fixed rate mortgage notes receivable using rates of 7.50%7.25% to 9.25%, management estimates the fair value of the fixed rate mortgage notes receivable to be approximately $401.9$436.6 million with an estimated weighted average market rate of 7.98%7.79% at March 31,September 30, 2022.
At December 31, 2021, the Company had a carrying value of $370.2 million in fixed rate mortgage notes receivable outstanding, including related accrued interest, with a weighted average interest rate of approximately 9.04%. The fixed rate mortgage notes bear interest at rates of 7.01% to 11.96%. Discounting the future cash flows for fixed rate mortgage notes receivable using rates of 7.50% to 9.25%, management estimates the fair value of the fixed rate mortgage notes receivable to be $400.1 million with an estimated weighted average market rate of 8.05% at December 31, 2021.
Derivative instruments:
Derivative instruments are carried at their fair 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 March 31,September 30, 2022, the Company had a carrying value of $25.0 million in variable rate debt outstanding with an average interest rate of approximately 0.55%3.27%. The carrying value of the variable rate debt outstanding approximated the fair value at March 31,September 30, 2022.
At December 31, 2021, the Company had a carrying value of $25.0 million in variable rate debt outstanding with a weighted average interest rate of approximately 0.15%. The carrying value of the variable rate debt outstanding approximated the fair value at December 31, 2021.
At both March 31,September 30, 2022 and December 31, 2021, the $25.0 million of variable rate debt outstanding, discussed above, had been effectively converted to a fixed rate by interest rate swap agreements. See Note 10 for additional information related to the Company's interest rate swap agreements.agreement.
At March 31,September 30, 2022, the Company had a carrying value of $2.82 billion in fixed rate long-term debt outstanding with a weighted average interest rate of approximately 4.34%. Discounting the future cash flows for fixed rate debt using March 31,September 30, 2022 market rates of 4.21%7.29% to 4.92%8.14%, management estimates the fair value of the fixed rate debt to be approximately $2.75$2.37 billion with an estimated weighted average market rate of 4.69%7.97% at March 31,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 $2.93 billion with an estimated weighted average market rate of 3.43% at December 31, 2021.
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 March 31,September 30, 2022 and 2021 (amounts in thousands except per share information):
| | | Three Months Ended March 31, 2022 | | | 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 | | Income (numerator) | | Shares (denominator) | | Per Share Amount |
Basic EPS: | Basic EPS: | | | | | | | Basic EPS: | | | | | | | | | | | |
Net income | Net income | $ | 42,192 | | | | Net income | $ | 50,799 | | | $ | 133,900 | | |
Less: preferred dividend requirements | Less: preferred dividend requirements | (6,033) | | | | Less: preferred dividend requirements | (6,033) | | | (18,099) | | |
| Net income available to common shareholders | Net income available to common shareholders | $ | 36,159 | | | 74,843 | | | $ | 0.48 | | | Net income available to common shareholders | $ | 44,766 | | | 75,016 | | | $ | 0.60 | | | $ | 115,801 | | | 74,949 | | | $ | 1.55 | |
Diluted EPS: | Diluted EPS: | | | | | | | Diluted EPS: | | | | | | | | | | | |
Net income available to common shareholders | Net income available to common shareholders | $ | 36,159 | | | 74,843 | | | | Net income available to common shareholders | $ | 44,766 | | | 75,016 | | | $ | 115,801 | | | 74,949 | | |
Effect of dilutive securities: | Effect of dilutive securities: | | | Effect of dilutive securities: | |
Share options and performance shares | Share options and performance shares | — | | | 204 | | | | Share options and performance shares | — | | | 167 | | | — | | | 153 | | |
| Net income available to common shareholders | Net income available to common shareholders | $ | 36,159 | | | 75,047 | | | $ | 0.48 | | | Net income available to common shareholders | $ | 44,766 | | | 75,183 | | | $ | 0.60 | | | $ | 115,801 | | | 75,102 | | | $ | 1.54 | |
| | | Three Months Ended March 31, 2021 | | | 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 | | Income (numerator) | | Shares (denominator) | | Per Share Amount |
Basic EPS: | Basic EPS: | | | | | | | Basic EPS: | | | | | | | | | | | |
Net income | Net income | $ | 3,380 | | | | Net income | $ | 32,117 | | | $ | 54,049 | | |
Less: preferred dividend requirements | Less: preferred dividend requirements | (6,034) | | | | Less: preferred dividend requirements | (6,033) | | | (18,100) | | |
| Net loss available to common shareholders | $ | (2,654) | | | 74,627 | | | $ | (0.04) | | | |
Net income available to common shareholders | | Net income available to common shareholders | $ | 26,084 | | | 74,804 | | | $ | 0.35 | | | $ | 35,949 | | | 74,738 | | | $ | 0.48 | |
Diluted EPS: | Diluted EPS: | | | | | | | Diluted EPS: | | | | | | | | | | | |
Net loss available to common shareholders | $ | (2,654) | | | 74,627 | | | | |
Net income available to common shareholders | | Net income available to common shareholders | $ | 26,084 | | | 74,804 | | | $ | 35,949 | | | 74,738 | | |
Effect of dilutive securities: | Effect of dilutive securities: | | | Effect of dilutive securities: | |
Share options and performance shares | Share options and performance shares | — | | | — | | | | Share options and performance shares | — | | | 107 | | | — | | | 81 | | |
| Net loss available to common shareholders | $ | (2,654) | | | 74,627 | | | $ | (0.04) | | | |
Net income available to common shareholders | | Net income available to common shareholders | $ | 26,084 | | | 74,911 | | | $ | 0.35 | | | $ | 35,949 | | | 74,819 | | | $ | 0.48 | |
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.
The following shares have an anti-dilutive effect and are thereforebeen excluded from the calculation of diluted earnings per share:share, either because they are anti-dilutive or, in the case of contingently issuable performance shares, are not probable:
•The additionaladditional 2.2 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 sharesshares for both the three and nine months ended March 31,September 30, 2022 and 2021.
•The additional 1.7 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 for both the three and nine months ended March 31,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, 2022, respectively.
•Outstanding options to purchase 89 thousand common shares at per share prices ranging from $44.44 to $76.63 for both the three and nine months ended March 31, 2022.
•Outstanding options to purchase 114 thousand common shares at per share prices ranging from $44.44 to $76.63 for the three months ended March 31,September 30, 2021.
•The effect of 10299 thousand contingently issuable performance shares granted during 20212022 for both the three and nine months ended March 31, 2021.September 30, 2022.
•The effect of 56 thousand contingently issuable performance shares granted during 2020 for both the three and nine months ended March 31,September 30, 2022 and 2021.
13. Equity Incentive Plans
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 3,950,000 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 March 31,September 30, 2022, there were 2,022,2001,983,595 shares available for grant under the 2016 Equity Incentive Plan.
Share Options
Share options 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. 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 | | Number of options | | Option price per share | | Weighted avg. exercise price |
Outstanding at December 31, 2021 | Outstanding at December 31, 2021 | 108,671 | | | $ | 44.44 | | | — | | | $ | 76.63 | | | $ | 56.79 | | Outstanding at December 31, 2021 | 108,671 | | | $ | 44.44 | | | — | | | $ | 76.63 | | | $ | 56.79 | |
Exercised | Exercised | (9,799) | | | 44.62 | | | — | | | 47.15 | | | 46.30 | | Exercised | (12,559) | | | 44.62 | | | — | | | 47.15 | | | 46.43 | |
| Outstanding at March 31, 2022 | 98,872 | | | $ | 44.44 | | | — | | | $ | 76.63 | | | $ | 57.83 | | |
Outstanding at September 30, 2022 | | Outstanding at September 30, 2022 | 96,112 | | | $ | 44.44 | | | — | | | $ | 76.63 | | | $ | 58.15 | |
The weighted average fair value of options granted was $20.34 during the threenine months ended March 31,September 30, 2021. No options were granted during the threenine months ended March 31,September 30, 2022. The intrinsic value of share options exercised was $62 thousand a was $38nd $7 thousand for the threenine months ended March 31, 2022. No options were exercised during the three months ended March 31, 2021.September 30, 2022 and 2021, respectively.
The following table summarizes outstanding and exercisable options at March 31,September 30, 2022:
| | | Options outstanding | | Options exercisable | | Options outstanding | | Options exercisable |
Exercise price range | 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) | 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 | $44.44 - 49.99 | | 11,510 | | 5.1 | | | 10,132 | | 2.0 | | $44.44 - 49.99 | | 8,750 | | 5.9 | | | 7,372 | | 1.9 | |
50.00 - 59.99 | 50.00 - 59.99 | | 31,008 | | 2.3 | | 31,008 | | 2.3 | | 50.00 - 59.99 | | 31,008 | | 1.8 | | 31,008 | | 1.8 | |
60.00 - 69.99 | 60.00 - 69.99 | | 52,198 | | 4.3 | | 50,754 | | 3.6 | | 60.00 - 69.99 | | 52,198 | | 3.8 | | 50,754 | | 3.1 | |
70.00 - 76.63 | 70.00 - 76.63 | | 4,156 | | 5.8 | | 3,671 | | 5.7 | | 70.00 - 76.63 | | 4,156 | | 5.3 | | 3,671 | | 5.2 | |
| | 98,872 | | 3.8 | $ | 57.83 | | $ | 176 | | | 95,565 | | 3.1 | $ | 57.77 | | $ | 162 | | | 96,112 | | 3.4 | $ | 58.15 | | $ | — | | | 92,805 | | 2.6 | $ | 58.10 | | $ | — | |
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 | (215,096) | | | 59.97 | | | |
Forfeited | (2,176) | | | 46.98 | | | |
Outstanding at March 31, 2022 | 504,568 | | | $ | 50.38 | | | 1.37 |
| | | | | | | | | | | | | | | | | |
| 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 |
The holders of nonvested shares have voting rights and receive dividends from the date of grant. The fair value of the nonvested shares that vested was $10.2 million aand nd $6.5$6.6 million for the threenine months ended March 31,September 30, 2022 and 2021, respectively. At March 31,September 30, 2022, unamortized share-based compensation expense related to nonvested shares was $15.4$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 March 31,September 30, 2022 | 257,386 | |
The number of common shares issuable upon settlement of the performance shares granted during the threenine months ended March 31,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 threenine months ended March 31,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 threenine months ended March 31,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 March 31,September 30, 2022, achievement of the performance condition was deemed probable for the performance shares granted during the threenine months ended March 31,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 threenine months ended March 31,September 30, 2020 was deemed not probable at March 31,September 30, 2022, resulting in no expected payout.
At March 31,September 30, 2022, unamortized share-based compensation expense related to nonvested performance shares was $13.5$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 threenine months ended March 31,September 30, 2022 and 2021, the Company accrued dividend equivalents expected to be paid on earned awards of $136$587 thousand and $9$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 | | Number of shares | | Weighted avg. grant date fair value | | Weighted avg. life remaining |
Outstanding at December 31, 2021 | Outstanding at December 31, 2021 | 43,306 | | | $ | 49.15 | | | | Outstanding at December 31, 2021 | 43,306 | | | $ | 49.15 | | | |
Granted | Granted | 2,794 | | | 46.61 | | | Granted | 41,399 | | | 50.49 | | |
Vested | Vested | — | | | — | | | Vested | (46,100) | | | 49.00 | | |
Outstanding at March 31, 2022 | 46,100 | | | $ | 49.15 | | | 0.17 | |
Outstanding at September 30, 2022 | | Outstanding at September 30, 2022 | 38,605 | | | $ | 50.77 | | | 0.67 |
The holders of restricted share units receive dividend equivalents from the date of grant. At March 31,September 30, 2022, unamortized share-based compensation expense related to restricted share units was $0.4$1.3 million.
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 both March 31,September 30, 2022 and December 31, 2021, the Company was lessee in 52 and 51 operatingoperating ground leases.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 March 31,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, 2 ofaddition, 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 March 31,September 30, 2022 and 2021 (in thousands):
| | | Three Months Ended March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | Classification | | 2022 | | 2021 | | | Classification | | 2022 | | 2021 | | 2022 | | 2021 |
Operating leases | Operating leases | Rental revenue | | $ | 133,828 | | | $ | 97,672 | | | Operating leases | Rental revenue | | $ | 134,316 | | | $ | 117,408 | | | $ | 405,062 | | | $ | 325,429 | |
Sublease income - operating ground leases | Sublease income - operating ground leases | Rental revenue | | 5,775 | | | 4,942 | | | Sublease income - operating ground leases | Rental revenue | | 6,155 | | | 5,632 | | | $ | 17,887 | | | $ | 16,108 | |
| Lease costs | Lease costs | | | Lease costs | |
Operating ground lease cost | Operating ground lease cost | Property operating expense | | $ | 5,969 | | | $ | 5,413 | | | Operating ground lease cost | Property operating expense | | $ | 6,602 | | | $ | 5,827 | | | $ | 18,707 | | | $ | 17,051 | |
Operating office lease cost | Operating office lease cost | General and administrative expense | | 226 | | | 226 | | | Operating office lease cost | General and administrative expense | | 226 | | | 226 | | | 678 | | | 678 | |
|
15. Segment Information
The Company groups its investments into 2two reportable operating segments: Experiential and Education.
The financial information summarized below is presented by reportable operating segment (in thousands):
| Balance Sheet Data: | Balance Sheet Data: | Balance Sheet Data: |
| | As of March 31, 2022 | | As of September 30, 2022 |
| | Experiential | Education | Corporate/Unallocated | Consolidated | | Experiential | Education | Corporate/Unallocated | Consolidated |
Total Assets | Total Assets | $ | 4,983,264 | | $ | 500,369 | | $ | 334,437 | | $ | 5,818,070 | | Total Assets | $ | 5,122,466 | | $ | 493,550 | | $ | 176,743 | | $ | 5,792,759 | |
| | | As of December 31, 2021 | | As of December 31, 2021 |
| | Experiential | Education | Corporate/Unallocated | Consolidated | | Experiential | Education | Corporate/Unallocated | Consolidated |
Total Assets | Total Assets | $ | 4,995,241 | | $ | 505,086 | | $ | 300,823 | | $ | 5,801,150 | | Total Assets | $ | 4,995,241 | | $ | 505,086 | | $ | 300,823 | | $ | 5,801,150 | |
| Operating Data: | Operating Data: | | Operating Data: | |
| | Three Months Ended March 31, 2022 | | Three Months Ended September 30, 2022 |
| | Experiential | Education | Corporate/Unallocated | Consolidated | | Experiential | Education | Corporate/Unallocated | Consolidated |
Rental revenue | Rental revenue | $ | 129,025 | | $ | 10,578 | | $ | — | | $ | 139,603 | | Rental revenue | $ | 130,588 | | $ | 9,883 | | $ | — | | $ | 140,471 | |
Other income | Other income | 9,210 | | — | | 95 | | 9,305 | | Other income | 11,200 | | — | | 160 | | 11,360 | |
Mortgage and other financing income | Mortgage and other financing income | 8,334 | | 230 | | — | | 8,564 | | Mortgage and other financing income | 9,353 | | 226 | | — | | 9,579 | |
Total revenue | Total revenue | 146,569 | | 10,808 | | 95 | | 157,472 | | Total revenue | 151,141 | | 10,109 | | 160 | | 161,410 | |
| Property operating expense | Property operating expense | 13,693 | | (7) | | 253 | | 13,939 | | Property operating expense | 14,707 | | — | | — | | 14,707 | |
Other expense | Other expense | 8,097 | | — | | — | | 8,097 | | Other expense | 9,135 | | — | | — | | 9,135 | |
Total investment expenses | Total investment expenses | 21,790 | | (7) | | 253 | | 22,036 | | Total investment expenses | 23,842 | | — | | — | | 23,842 | |
Net operating income - before unallocated items | Net operating income - before unallocated items | 124,779 | | 10,815 | | (158) | | 135,436 | | Net operating income - before unallocated items | 127,299 | | 10,109 | | 160 | | 137,568 | |
| Reconciliation to Consolidated Statements of Income (Loss) and Comprehensive Income: | |
Reconciliation to Consolidated Statements of Income and Comprehensive Income: | | Reconciliation to Consolidated Statements of Income and Comprehensive Income: |
General and administrative expense | General and administrative expense | | (13,224) | | General and administrative expense | | (12,582) | |
| Transaction costs | | Transaction costs | | (148) | |
Credit loss expense | | Credit loss expense | | (241) | |
| Depreciation and amortization | | Depreciation and amortization | | (41,539) | |
Gain on sale of real estate | | Gain on sale of real estate | | 304 | |
Interest expense, net | Interest expense, net | | (33,260) | | Interest expense, net | | (32,747) | |
Transaction costs | | (2,247) | | |
Credit loss benefit | | 306 | | |
Impairment charges | | (4,351) | | |
Depreciation and amortization | | (40,044) | | |
Equity in loss from joint ventures | | (106) | | |
| Equity in income from joint ventures | | Equity in income from joint ventures | | 572 | |
| Income tax expense | Income tax expense | | (318) | | Income tax expense | | (388) | |
| Net income | Net income | | 42,192 | | Net income | | 50,799 | |
| Preferred dividend requirements | Preferred dividend requirements | | (6,033) | | Preferred dividend requirements | | (6,033) | |
Net income available to common shareholders of EPR Properties | Net income available to common shareholders of EPR Properties | $ | 36,159 | | Net income available to common shareholders of EPR Properties | $ | 44,766 | |
| Operating Data: | Operating Data: | | Operating Data: | |
| | Three Months Ended March 31, 2021 | | Three Months Ended September 30, 2021 |
| | Experiential | Education | Corporate/Unallocated | Consolidated | | Experiential | Education | Corporate/Unallocated | Consolidated |
Rental revenue | Rental revenue | $ | 93,276 | | $ | 9,338 | | $ | — | | $ | 102,614 | | Rental revenue | $ | 113,589 | | $ | 9,451 | | $ | — | | $ | 123,040 | |
Other income | Other income | 329 | | — | | 349 | | 678 | | Other income | 8,052 | | — | | 39 | | 8,091 | |
Mortgage and other financing income | Mortgage and other financing income | 8,141 | | 332 | | — | | 8,473 | | Mortgage and other financing income | 8,283 | | 233 | | — | | 8,516 | |
Total revenue | Total revenue | 101,746 | | 9,670 | | 349 | | 111,765 | | Total revenue | 129,924 | | 9,684 | | 39 | | 139,647 | |
| Property operating expense | Property operating expense | 14,992 | | 82 | | 239 | | 15,313 | | Property operating expense | 13,572 | | 16 | | 227 | | 13,815 | |
Other expense | Other expense | 2,552 | | — | | — | | 2,552 | | Other expense | 7,851 | | — | | — | | 7,851 | |
Total investment expenses | Total investment expenses | 17,544 | | 82 | | 239 | | 17,865 | | Total investment expenses | 21,423 | | 16 | | 227 | | 21,666 | |
Net operating income - before unallocated items | Net operating income - before unallocated items | 84,202 | | 9,588 | | 110 | | 93,900 | | Net operating income - before unallocated items | 108,501 | | 9,668 | | (188) | | 117,981 | |
| Reconciliation to Consolidated Statements of Income (Loss) and Comprehensive Income: | |
Reconciliation to Consolidated Statements of Income and Comprehensive Income: | | Reconciliation to Consolidated Statements of Income and Comprehensive Income: |
General and administrative expense | General and administrative expense | | (11,336) | | General and administrative expense | | (11,154) | |
| Costs associated with loan refinancing or payoff | | (241) | | |
| Interest expense, net | | (39,194) | | |
Transaction costs | Transaction costs | | (548) | | Transaction costs | | (2,132) | |
Credit loss benefit | Credit loss benefit | | 2,762 | | Credit loss benefit | | 14,096 | |
| Impairment charges | | Impairment charges | | (2,711) | |
Depreciation and amortization | Depreciation and amortization | | (40,326) | | Depreciation and amortization | | (42,612) | |
Gain on sale of real estate | | Gain on sale of real estate | | 787 | |
Costs associated with loan refinancing or payoff | | Costs associated with loan refinancing or payoff | | (4,741) | |
Interest expense, net | | Interest expense, net | | (36,584) | |
Equity in loss from joint ventures | Equity in loss from joint ventures | | (1,431) | | Equity in loss from joint ventures | | (418) | |
| Gain on sale of real estate | | 201 | | |
| Income tax expense | Income tax expense | | (407) | | Income tax expense | | (395) | |
| | | Net income | Net income | | 3,380 | | Net income | | 32,117 | |
Preferred dividend requirements | Preferred dividend requirements | | (6,034) | | Preferred dividend requirements | | (6,033) | |
Net loss available to common shareholders of EPR Properties | $ | (2,654) | | |
Net income available to common shareholders of EPR Properties | | Net income available to common shareholders of EPR Properties | $ | 26,084 | |
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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 | |
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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 | |
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Reconciliation to Consolidated Statements of Income and Comprehensive Income: |
General and administrative expense | | | (38,497) | |
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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) | |
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Income tax expense | | | | (1,150) | |
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Net income | | | 133,900 | |
Preferred dividend requirements | | (18,099) | |
Net income available to common shareholders of EPR Properties | $ | 115,801 | |
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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 | |
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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 | |
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Reconciliation to Consolidated Statements of Income and Comprehensive Income: |
General and administrative expense | | | (33,866) | |
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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) | |
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Income tax expense | | | | (1,200) | |
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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 March 31,September 30, 2022, the Company had 1517 development projects with commitments to fund an aggregate of approximately $105.2$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.
The Company has certain commitments related to its mortgage notes 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 March 31,September 30, 2022, the Company had 2two mortgage notes with commitments totaling approximately $11.8$10.4 million. If commitments are funded in the future, interest will be charged at rates consistent with the existing investments.
In connection with construction of the 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 March 31,September 30, 2022, the Company had 4three surety bonds outstanding totaling $33.3$3.3 million.
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 statements and notes 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 Item 1A - "Risk Factors" in our 2021 Annual Report, as supplemented by Item 1A - "Risk Factors" in this Quarterly Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 23, 2022.10-Q.
Overview
Business
Our principal business objective is to enhance shareholder value by achieving predictable and increasing Funds From Operations As Adjusted ("FFOAA") and dividends per share. Our strategy is to focus on long-term investments in the Experiential sector which benefit from our depth of knowledge and relationships, and which we believe offer sustained performance throughout most economic cycles.
Our investment portfolio includes ownership of and long-term mortgages on Experiential and Education properties. Substantially all of our owned single-tenant properties are leased pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of the property. Tenants at our owned multi-tenant properties are typically required to pay common area maintenance charges to reimburse us for their pro-rata portion of these costs. We also own certain experiential lodging assets structured using traditional REIT lodging structures.
It has been our strategy to structure leases and financings to ensure a positive spread between our cost of capital and the rentals or interest paid by our tenants. We have primarily acquired or developed new properties that are pre-leased to a single tenant or multi-tenant properties that have a high occupancy rate. We have also entered into certain joint ventures and we have provided mortgage note financing. We intend to continue entering into some or all of these types of arrangements in the foreseeable future.
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 Item 1A - “Risk Factors” in our 2021 Annual Report, as supplemented by Item 1A - "Risk Factors" in this Quarterly Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 23, 2022.10-Q.
As of March 31,September 30, 2022, our total assets were approximately $5.8 billion (after accumulated depreciation of approximately $1.2$1.3 billion) with properties located in 44 states, Ontario and Ontario,Quebec, Canada. Our total investments (a non-GAAP financial measure) were approximately $6.5$6.6 billion at March 31,September 30, 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 March 31,September 30, 2022 and December 31, 2021. We group our investments into two reportable segments, Experiential and Education. As of March 31,September 30, 2022, our Experiential investments comprised $5.9$6.0 billion, or 91%, and our Education investments comprised $0.6 billion, or 9%, of our total investments.
As of March 31,September 30, 2022, our Experiential segment (excluding property under development and undeveloped land inventory) consisted of the following property types (owned or financed):
•175173 theatre properties;
•57 eat & play properties (including seven theatres located in entertainment districts);
•1822 attraction properties;
•11 ski properties;
•eightsix experiential lodging properties;
•nine fitness & wellness properties;
•one gaming property; and
•three cultural properties; and
•eight fitness & wellness properties.
As of March 31,September 30, 2022, our owned Experiential real estate portfolio consisted of approximately 19.420.1 million square feet, which was 96.0%97% leased and included $10.9$56.3 million in property under development and $20.2 million in undeveloped land inventory.
As of March 31,September 30, 2022, our Education segment consisted of the following property types (owned or financed):
•65 early childhood education center properties; and
•nine private school properties.
As of March 31,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 20.821.5 million square feet and was 96.3%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.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 March 31,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 ability of communities to achieve herd immunity, 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. During 2020 and 2021, theThe 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 threenine months ended March 31,September 30, 2022.
The following were impacts to our financial statements during the threenine months ended March 31,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 Regal 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 March 31,September 30, 2022, we have deferred amounts due from tenants of approximately $17.4approximately $7.0 million thatthat are booked as receivables. Additionally, as of September 30, 2022, we have amounts due from tenantscustomers 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 tenantscustomers and will be recognized as revenue when any such amounts are received. During the threenine months ended March 31,September 30, 2022, we collected $1.6$10.9 million in deferred rent and $1.1 million of deferred interest from cash basis tenantscustomers and from tenantscustomers for which the deferred payments were not previously recognized as revenue. In addition, during the threenine months ended March 31,September 30, 2022, we collected $10.2$19.2 million of deferred rent and $0.4 million of deferred interest from accrual basis tenants and borrowerscustomers that reduced related accounts and interest receivable. The repayment terms for all of these deferments vary by tenant.customer.
While deferments for this and future periods delay rent or mortgage payments, these deferments generally do not release customers from the obligation to pay the deferred amounts in the future. Deferred rent amounts are reflected in our financial statements as accounts receivable if collection is determined to be probable or will be recognized when received as variable lease payments if collection is determined to not be probable, while deferred mortgage payments are reflected as mortgage notes and related accrued interest receivable, less any allowance for credit loss. Certain agreements with tenants where remaining lease terms are extended, or other changes are made that do not qualify for the treatment in 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 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 (loss) 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 March 31,September 30, 2022 and 2021 (in millions, except per share information):
| | | Three Months Ended March 31, | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2022 | 2021 | Change | | | 2022 | 2021 | Change | | 2022 | 2021 | Change |
Total revenue | Total revenue | $ | 157.5 | | $ | 111.8 | | 41 | % | | Total revenue | $ | 161.4 | | $ | 139.6 | | 16 | % | | $ | 479.3 | | $ | 376.8 | | 27 | % |
Net income (loss) available to common shareholders per diluted share | 0.48 | | (0.04) | | 1,300 | % | | |
Net income available to common shareholders per diluted share | | Net income available to common shareholders per diluted share | $ | 0.60 | | $ | 0.35 | | 71 | % | | $ | 1.54 | | $ | 0.48 | | 221 | % |
FFOAA per diluted share | FFOAA per diluted share | 1.10 | | 0.48 | | 129 | % | | FFOAA per diluted share | $ | 1.16 | | $ | 0.86 | | 35 | % | | $ | 3.44 | | $ | 2.01 | | 71 | % |
The major factors impacting our results for the three and nine months ended March 31,September 30, 2022, as compared to the three and nine months ended March 31,September 30, 2021 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 property acquisitions as well as dispositions that occurred in 2022 and 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 exiting the covenant relief period in July of 2021 which had caused higher interest rates on certain debt;
•AThe decrease in equitycosts associated with loan refinancing or payoff;
•Improved earnings from investments in loss from joint ventures; and
•The increase in impairment charges, general and administrative expense and transaction costs offset by a decrease in credit loss benefit.expense.
For further detail on items impacting our operating results, see the section below titled "Results of Operations". FFOAA is a non-GAAP financial measure. For the definitions and further details on the calculations of FFOAA and certain other non-GAAP financial measures, see the section below titled "Non-GAAP Financial Measures."
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted 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 and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions and estimates relate to the valuation of real estate, accounting for real estate acquisitions, assessing the collectibility of receivables and the credit loss related to mortgage and other notes receivable. Application of these
assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates. A summary of critical accounting policies and estimates is included in our 2021 Annual Report on Form 10-K for the year ended December 31, 2021.Report. For the threenine months ended March 31,September 30, 2022, there were no changes to critical accounting policies.
Recent Developments
Investment Spending
Our investment spending during the threenine months ended March 31,September 30, 2022 and 2021 totaled $24.4$321.3 million and $52.1$107.9 million, respectively, and is detailed below (in thousands):
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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 | | — | | — | |
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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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Three Months Ended March 31, 2022 |
Operating Segment | | Total Investment Spending | New Development | Re-development | Asset Acquisition | Mortgage Notes or Notes Receivable | Investment in Joint Ventures |
Experiential: | | | | | | | |
Theatres | | $ | 45 | | $ | 5 | | $ | 40 | | $ | — | | $ | — | | $ | — | |
Eat & Play | | 2,899 | | 2,793 | | 106 | | — | | — | | — | |
Attractions | | 300 | | — | | 300 | | — | | — | | — | |
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Experiential Lodging | | 1,256 | | 309 | | 299 | | — | | — | | 648 | |
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Cultural | | 5 | | — | | 5 | | — | | — | | — | |
Fitness & Wellness | | 19,858 | | — | | — | | 19,858 | | — | | — | |
Total Experiential | | 24,363 | | 3,107 | | 750 | | 19,858 | | — | | 648 | |
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Total Education | | — | | — | | — | | — | | — | | — | |
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Total Investment Spending | | $ | 24,363 | | $ | 3,107 | | $ | 750 | | $ | 19,858 | | $ | — | | $ | 648 | |
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Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
Operating Segment | Operating Segment | | Total Investment Spending | New Development | Re-development | Asset Acquisition | Mortgage Notes or Notes Receivable | Investment in Joint Ventures | Operating Segment | | Total Investment Spending | New Development | Re-development | Asset Acquisition | Mortgage Notes or Notes Receivable | Investment in Joint Ventures |
Experiential: | Experiential: | | | Experiential: | | |
Theatres | Theatres | | $ | 2,440 | | $ | 2,382 | | $ | 58 | | $ | — | | $ | — | | $ | — | | Theatres | | $ | 4,190 | | $ | 3,785 | | $ | 405 | | $ | — | | $ | — | | $ | — | |
Eat & Play | Eat & Play | | 30,847 | | 4,061 | | 111 | | 26,675 | | — | | — | | Eat & Play | | 36,414 | | 9,347 | | 315 | | 26,752 | | — | | — | |
Attractions | Attractions | | 14 | | — | | 14 | | — | | — | | — | | Attractions | | 46 | | — | | 46 | | — | | — | | — | |
Ski | Ski | | 1,013 | | — | | — | | — | | 1,013 | | — | | Ski | | 5,546 | | — | | — | | — | | 5,546 | | — | |
Experiential Lodging | Experiential Lodging | | 11,993 | | 6,680 | | 3,688 | | — | | — | | 1,625 | | Experiential Lodging | | 55,193 | | 16,300 | | 11,070 | | — | | — | | 27,823 | |
Fitness & Wellness | | Fitness & Wellness | | 4,394 | | — | | 15 | | — | | 4,379 | | — | |
| Cultural | Cultural | | 4,383 | | — | | 4 | | — | | 4,379 | | — | | Cultural | | 2,124 | | — | | — | | — | | 2,124 | | — | |
Fitness & Wellness | | 1,423 | | — | | — | | — | | 1,423 | | — | | |
Total Experiential | Total Experiential | | 52,113 | | 13,123 | | 3,875 | | 26,675 | | 6,815 | | 1,625 | | Total Experiential | | 107,907 | | 29,432 | | 11,851 | | 26,752 | | 12,049 | | 27,823 | |
| Education: | Education: | | Education: | |
| Total Education | Total Education | | — | | — | | — | | — | | — | | — | | Total Education | | — | | — | | — | | — | | — | | — | |
| Total Investment Spending | Total Investment Spending | | $ | 52,113 | | $ | 13,123 | | $ | 3,875 | | $ | 26,675 | | $ | 6,815 | | $ | 1,625 | | Total Investment Spending | | $ | 107,907 | | $ | 29,432 | | $ | 11,851 | | $ | 26,752 | | $ | 12,049 | | $ | 27,823 | |
The above amounts include $0.2$0.6 million and $0.6$1.3 million in capitalized interest for the threenine months ended March 31,September 30, 2022 and 2021, respectively, and $51 thousand and $25 thousand$0.3 million in capitalized other general and administrative direct project costs for both the threenine months ended March 31,September 30, 2022 and 2021, respectively.2021. Excluded from the table above is approximately $1.4$1.8 million and $0.8$2.8 million of maintenance capital expenditures and other spending for the threenine months ended March 31,September 30, 2022 and 2021, respectively.
Impairment chargesCharges
During the threenine months ended March 31,September 30, 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.
During 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, 2022, we completed the sale of two vacant theatre properties and a land parcel for net proceeds totaling $9.9 million. In connection with these sales, we recognized a combined gain on sale of $0.3 million.
Mortgage Note and Notes Receivable Updates
During the nine months ended September 30, 2022, we recorded an allowance for credit loss of $6.8 million related to 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 determined the borrowers are experiencing financial difficulty. The repayments are expected to be provided substantially through the sale or operation of the collateral, therefore, we 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. During the nine months ended September 30, 2022, we wrote-off $1.5 million in accrued interest receivables and fees to mortgage and other financing income related to the mortgage note and notes receivables. See Note 6 to the consolidated 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 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 in October 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 properties Regal will continue to operate and the terms and conditions of leases 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 Promissory Note for rent deferred during the COVID-19 pandemic and approximately $7.2 million for September 2022 rent, of 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 senior to the Promissory Note, as well as other unsecured debt. As a result, there is significant uncertainty regarding the collection of the amounts due under the Promissory Note.
Results of Operations
Three and nine months ended March 31,September 30, 2022 compared to the three and nine months ended March 31,September 30, 2021
Analysis of Revenue
The following table summarizes our total revenue (dollars in thousands):
| | | Three Months Ended March 31, | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2022 | 2021 | | Change | | | 2022 | 2021 | | Change | | 2022 | 2021 | | Change |
Minimum rent (1) | Minimum rent (1) | $ | 130,275 | | $ | 94,190 | | | $ | 36,085 | | | Minimum rent (1) | $ | 131,642 | | $ | 114,375 | | | $ | 17,267 | | | $ | 396,834 | | $ | 315,665 | | | $ | 81,169 | |
Percentage rent (2) | Percentage rent (2) | 3,443 | | 2,030 | | | 1,413 | | | Percentage rent (2) | 1,453 | | 3,149 | | | (1,696) | | | 5,415 | | 7,195 | | | (1,780) | |
Straight-line rent(3) | Straight-line rent(3) | 595 | | 1,289 | | | (694) | | | Straight-line rent(3) | 2,374 | | 981 | | | 1,393 | | | 4,702 | | 3,690 | | | 1,012 | |
Tenant reimbursements | Tenant reimbursements | 5,001 | | 4,822 | | | 179 | | | Tenant reimbursements | 4,652 | | 4,187 | | | 465 | | | 15,001 | | 14,009 | | | 992 | |
Other rental revenue | Other rental revenue | 289 | | 283 | | | 6 | | | Other rental revenue | 350 | | 348 | | | 2 | | | 997 | | 978 | | | 19 | |
Total Rental Revenue | Total Rental Revenue | $ | 139,603 | | $ | 102,614 | | | $ | 36,989 | | | Total Rental Revenue | $ | 140,471 | | $ | 123,040 | | | $ | 17,431 | | | $ | 422,949 | | $ | 341,537 | | | $ | 81,412 | |
| Other income (3)(4) | Other income (3)(4) | 9,305 | | 678 | | | 8,627 | | | Other income (3)(4) | 11,360 | | 8,091 | | | 3,269 | | | 30,626 | | 9,802 | | | 20,824 | |
Mortgage and other financing income(5) | Mortgage and other financing income(5) | 8,564 | | 8,473 | | | 91 | | | Mortgage and other financing income(5) | 9,579 | | 8,516 | | | 1,063 | | | 25,753 | | 25,435 | | | 318 | |
Total revenue | Total revenue | $ | 157,472 | | $ | 111,765 | | | $ | 45,707 | | | Total revenue | $ | 161,410 | | $ | 139,647 | | | $ | 21,763 | | | $ | 479,328 | | $ | 376,774 | | | $ | 102,554 | |
(1) For the three months ended March 31,September 30, 2022 compared to the three months ended March 31,September 30, 2021, the increase in minimum rent resulted primarily from an increase of $35.1$13.5 million related to rental revenue on existing properties including improved collections of rent being recognized on a cash basis and from tenants which were previously receiving abatements, as well as scheduled rent increases.basis. In addition, there was an increase in minimum rent of $2.5$5.1 million related to property acquisitions and developments completed in 2022 and 2021. This was partially offset by a decrease in rental revenue of $1.5$1.3 million from property dispositions.
For the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, 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 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 March 31,September 30, 2022, there werewe renewed three lease agreements on approximately 127 thousand square feet and funded or agreed to fund an average of $55.05 per square foot in tenant improvements. We experienced an increase of 7.5% in rental rates and paid no significantleasing commissions with respect to these lease renewalsrenewals.
During the nine months ended September 30, 2022, we renewed four lease agreements on existing properties.approximately 206 thousand square feet and funded or agreed to fund an average of $33.87 per square foot in tenant improvements. We experienced a decrease of 2.2% in rental rates and paid no leasing commissions with respect to these lease renewals.
(2) The increasedecrease in percentage rent (amounts above base rent) for the three and nine months ended March 31,September 30, 2022 compared to the three and nine months ended March 31,September 30, 2021 was due primarily to higher percentage rent recognized from our gaming and golf entertainment tenants as well as one cultural tenant. This increase was partially offset by lesslower 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, 2022, 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 the 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 March 31,September 30, 2022 compared to the three and nine months ended March 31,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 March 31,September 30, 2022 the increase in other income was the result of increased operating income from two theatre properties and a gain on insurance recovery.properties.
33(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, 2022.
Analysis of Expenses and Other Line Items
The following table summarizes our expenses and other line items (dollars in thousands):
| | | Three Months Ended March 31, | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2022 | 2021 | | Change | | | 2022 | 2021 | | Change | | 2022 | 2021 | | Change |
Property operating expense | Property operating expense | $ | 13,939 | | $ | 15,313 | | | $ | (1,374) | | | Property operating expense | $ | 14,707 | | $ | 13,815 | | | $ | 892 | | | $ | 42,238 | | $ | 43,806 | | | $ | (1,568) | |
Other expense (1) | Other expense (1) | 8,097 | | 2,552 | | | 5,545 | | | Other expense (1) | 9,135 | | 7,851 | | | 1,284 | | | 26,104 | | 13,428 | | | 12,676 | |
General and administrative expense (2) | General and administrative expense (2) | 13,224 | | 11,336 | | | 1,888 | | | General and administrative expense (2) | 12,582 | | 11,154 | | | 1,428 | | | 38,497 | | 33,866 | | | 4,631 | |
| Costs associated with loan refinancing or payoff | — | | 241 | | | (241) | | | |
Interest expense, net (3) | 33,260 | | 39,194 | | | (5,934) | | | |
Transaction costs (4) | 2,247 | | 548 | | | 1,699 | | | |
Credit loss benefit (5) | (306) | | (2,762) | | | 2,456 | | | |
Impairment charges (6) | 4,351 | | — | | | 4,351 | | | |
Transaction costs (3) | | Transaction costs (3) | 148 | | 2,132 | | | (1,984) | | | 3,540 | | 3,342 | | | 198 | |
Credit loss expense (benefit) (4) | | Credit loss expense (benefit) (4) | 241 | | (14,096) | | | 14,337 | | | 9,447 | | (19,677) | | | 29,124 | |
Impairment charges (5) | | Impairment charges (5) | — | | 2,711 | | | (2,711) | | | 4,351 | | 2,711 | | | 1,640 | |
Depreciation and amortization | Depreciation and amortization | 40,044 | | 40,326 | | | (282) | | | Depreciation and amortization | 41,539 | | 42,612 | | | (1,073) | | | 122,349 | | 123,476 | | | (1,127) | |
Equity in loss from joint ventures (7) | (106) | | (1,431) | | | 1,325 | | | |
| Gain on sale of real estate | Gain on sale of real estate | — | | 201 | | | (201) | | | Gain on sale of real estate | 304 | | 787 | | | (483) | | | 304 | | 1,499 | | | (1,195) | |
| Costs associated with loan refinancing or payoff (6) | | Costs associated with loan refinancing or payoff (6) | — | | 4,741 | | | (4,741) | | | — | | 4,982 | | | (4,982) | |
Interest expense, net (7) | | Interest expense, net (7) | 32,747 | | 36,584 | | | (3,837) | | | 99,296 | | 114,090 | | | (14,794) | |
Equity in (income) loss from joint ventures (8) | | Equity in (income) loss from joint ventures (8) | (572) | | 418 | | | (990) | | | (1,887) | | 3,000 | | | (4,887) | |
Impairment charges on joint ventures | | Impairment charges on joint ventures | — | | — | | | — | | | 647 | | — | | | 647 | |
Income tax expense | Income tax expense | (318) | | (407) | | | 89 | | | Income tax expense | 388 | | 395 | | | (7) | | | 1,150 | | 1,200 | | | (50) | |
| Preferred dividend requirements | Preferred dividend requirements | (6,033) | | (6,034) | | | 1 | | | 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 March 31,September 30, 2022 compared to the three and nine months ended March 31,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 March 31,September 30, 2022 related primarily to an increase in payroll and benefit costs as well as an increase in travel expenses and professional fees and travel expenses.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 borrower on a previously fully-reserved note receivable and the release from an additional $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, 2022 related to a vacant property that we determined the cash flows were not sufficient to recover the carrying value. This property was sold during the nine months ended September 30, 2022. Impairment charges recognized during the three and nine months ended September 30, 2021 related to 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, 2021 related to the pay-off of our unsecured term loan facility and the termination of related interest rate swaps.
(7) The decrease in interest expense, net for the three and nine months ended March 31,September 30, 2022 compared to the three and nine months ended March 31,September 30, 2021, resulted primarily from a decrease in average borrowings and a decrease in the weighted average interest rate on outstanding debt.
(4)(8) The increase in transaction costsequity in (income) loss from joint ventures for the threenine months ended March 31,September 30, 2022 compared to the threenine months ended March 31,September 30, 2021 was due to an increase in costs related to terminated transactions.
(5) The change in credit loss benefit for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to a change in the credit loss model related to the expected timing of the economic recovery from the impacts of the COVID-19 pandemic.
(6) Impairment charges recognized during the three months ended March 31, 2022 related to one recently vacated property that we intend to sell and we determined that the cash flows were not sufficient to recover the carrying value.
(7) The decrease in equity in loss from joint ventures related primarily to more income recognized at two experiential lodging properties located in St. Petersburg, Florida. This was partially offset by lossesFlorida as well as income recognized at our experiential lodging property located in Warrens, WisconsinBreaux Bridge, Louisiana, which was acquired in August of 2021.May 2022.
Liquidity and Capital Resources
Cash and cash equivalents were $323.8$160.8 million at March 31,September 30, 2022. In addition, we had restricted cash of $3.0$5.3 million at March 31,September 30, 2022. Of the restricted cash at March 31,September 30, 2022, $1.9$3.0 million related to cash held for our tenants' off-season rent reserves and $1.1$2.3 million related to escrow deposits required for property management agreements or held for potential acquisitions and redevelopments.
Mortgage Debt, Senior Notes and Unsecured Revolving Credit Facility
At March 31,September 30, 2022, we had total debt outstandioungtstanding of $2.8 billion, of which 99% was unsecured.
At March 31,September 30, 2022, we had outstanding $2.5 billion in aggregate principal amount of unsecured senior notes (excluding the private placement notes discussed below) ranging in interest rates from 3.60% to 4.95%. The notes contain various covenants, including: (i) a limitation on incurrence of any debt that would cause the ratio of our debt to adjusted total assets to exceed 60%; (ii) a limitation on incurrence of any secured debt that would cause the ratio of secured debt to adjusted total assets to exceed 40%; (iii) a limitation on incurrence of any debt that would cause our debt service coverage ratio to be less than 1.5 times; and (iv) the maintenance at all times of our total unencumbered assets such that they are not less than 150% of our outstanding unsecured debt.
At March 31,September 30, 2022, we had no outstanding balance under our $1.0 billion unsecured revolving credit facility. 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 an "accordion" feature under which we may increase the total maximum principal amount available by $1.0 billion, to a total of $2.0 billion, subject to lender consent. The unsecured revolving credit facility bears interest at a floating rate of LIBOR plus 1.20% (based on our unsecured debt ratings and with a LIBOR floor of zero), which was 1.66%4.34% at March 31,September 30, 2022. Additionally, the facility fee on the revolving credit facility is 0.25%.
At March 31,September 30, 2022, we had outstanding $316.2 million of senior unsecured notes that were issued in a private placement transaction. The private placement notes were issued in two tranches with $148.0 million due August 22, 2024, and $192.0 million due August 22, 2026. At March 31,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 facility and the private placement notes contain financial covenants or restrictions that limit our levels of consolidated debt, secured debt, investments outside certain categories, stock repurchases and dividend distributions and require us to maintain a minimum consolidated tangible net worth and meet certain coverage levels for fixed charges and debt service. Additionally, these debt instruments contain cross-default provisions if we default under other indebtedness exceeding certain amounts. Those cross-default thresholds vary from $50.0 million to $75.0 million, depending upon the debt instrument. We were in compliance with all financial and other covenants under our debt instruments at March 31,September 30, 2022.
Our principal investing activities are acquiring, developing and financing Experiential and Education properties. These investing activities have generally been financed with senior unsecured notes, as well as the proceeds from equity offerings. Our unsecured revolving credit facility is also used to finance the acquisition or development of properties, and to provide mortgage financing. We have and expect to continue to issue debt securities in public or private offerings. We have and may in the future assume mortgage debt in connection with property acquisitions or incur new mortgage debt on existing properties. We may also issue equity securities in connection with acquisitions. Continued growth of our real estate investments and mortgage financing portfolios will depend in part on our continued ability to access funds through additional borrowings and securities offerings and, to a lesser extent, our ability to assume debt in connection with property acquisitions. We may also fund investments with the proceeds from asset dispositions. As discussed above, we intend to fund our investments in the near term primarily from cash from operations and borrowing availability under our unsecured revolving credit facility, subject to maintaining our leverage levels consistent with past practice, due to our current elevated cost of capital.
Liquidity Requirements
Short-term liquidity requirements consist primarily of normal recurring corporate operating expenses, debt service requirements and distributions to shareholders. We have historically met these requirements primarily through cash provided by operating activities. The table below summarizes our cash flows (dollars in thousands):
| | | Three Months Ended March 31, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Net cash provided by operating activities | Net cash provided by operating activities | | $ | 128,087 | | | $ | 78,306 | | Net cash provided by operating activities | | $ | 349,675 | | | $ | 236,424 | |
Net cash used by investing activities | Net cash used by investing activities | | (25,035) | | | (29,894) | | Net cash used by investing activities | | (271,665) | | | (39,477) | |
Net cash used by financing activities | Net cash used by financing activities | | (66,293) | | | (532,435) | | Net cash used by financing activities | | (201,715) | | | (1,075,273) | |
|
As previously disclosed, we have agreed to rent and mortgage payment deferral arrangements with most of our customers as a result of the COVID-19 pandemic. Under these deferral arrangements, our customers are required to resume rent and mortgage payments at negotiated times, and begin repaying deferred amount under negotiated schedules. 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 terms 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 March 31,September 30, 2022, wewe had 1517 development projects with commitments to fund an aggregate of approximately $105.2$161.6 million, of which approximately $47.4$14.6 million is expected to be funded in 2022. Development costs are advanced by us in periodic draws. If we determine that constructionconstruction 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 notes receivable investments that we may be required to fund in the future. We are generally obligated to fund these commitments at the request of the borrower or upon the occurrence of events outside of our direct control. As of March 31,September 30, 2022, we had two mortgage notes with commitments totaling approximately $11.8$10.4 million, of which approximately $5.1$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 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 March 31,September 30, 2022, we had fourthree surety bonds outstanding totaling $33.3$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 recurring debt service payments, and allow distributions to our shareholders and avoid corporate level federal income or excise tax in accordance with REIT Internal Revenue Code requirements.
Long-term liquidity requirements consist primarily of maturities of debt.debt maturities. We have no scheduled debt payments due until 2024. We currently believe that we will be able to repay, extend, refinance or otherwise settle our debt maturities as the debt comes due and that we will be able to fund our remaining commitments, as necessary. However, there can be no assurance that additional financing or capital will be available, or that terms will be acceptable or advantageous to us, particularly in light of the continuing economic uncertainty caused by the COVID-19 pandemic.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 EBITDAre ratio (see "Non-GAAP Financial Measures" for definitions). We also seek to maintain conservative interest, fixed charge, debt service coverage and net debt to gross asset ratios. Our net debt to adjusted EBITDAre ratio wasw 5.1x aas 5.2x and ond ourur net debt to gross assets ratio was 38%39% as of March 31,September 30, 2022 (see "Non-GAAP Financial Measures" for calculation).
Non-GAAP Financial Measures
Funds From Operations (FFO), Funds From Operations As Adjusted (FFOAA) and Adjusted Funds From Operations (AFFO)
The National Association of Real Estate Investment Trusts (“NAREIT”) developed FFO as a relative non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. Pursuant to the definition of FFO by the Board of Governors of NAREIT, we calculate FFO as net income (loss) available to common shareholders, computed in accordance with GAAP, excluding gains and losses from disposition of real estate and impairment losses on real estate, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships, joint ventures and other affiliates. Adjustments for unconsolidated partnerships, joint ventures and other affiliates are calculated to reflect FFO on the same basis. We have calculated FFO for all periods presented in accordance with this definition.
In addition to FFO, we present FFOAA and AFFO. FFOAA is presented by adding to FFO costs associated with loan refinancing or payoff, transaction costs, severance expense, preferred share redemption costs, impairment of operating lease right-of-use assets and credit loss expense (benefit) expense and subtracting gain on insurance recovery and deferred income tax (benefit) expense. AFFO is presented by adding to FFOAA non-real estate depreciation and amortization, deferred financing fees amortization, share-based compensation expense to management and Trustees and amortization of above and below market leases, net and tenant allowances; and subtracting maintenance capital expenditures (including second generation tenant improvements and leasing commissions), straight-lined rental revenue (removing the impact of straight-line ground sublease expense), and the non-cash portion of mortgage and other financing income.
FFO, FFOAA and AFFO are widely used measures of the operating performance of real estate companies and are provided here as supplemental measures to GAAP net income (loss) available to common shareholders and earnings per share, and management provides FFO, FFOAA and AFFO herein because it believes this information is useful to investors in this regard. FFO, FFOAA and AFFO are non-GAAP financial measures. FFO, FFOAA and AFFO do not represent cash flows from operations as defined by GAAP and are not indicative that cash flows are adequate to fund all cash needs and are not to be considered alternatives to net income or any other GAAP measure as a measurement of the results of our operations or our cash flows or liquidity as defined by GAAP. It should also be noted that not all REITs calculate FFO, FFOAA and AFFO the same way so comparisons with other REITs may not be meaningful.
The following table summarizes our FFO, FFOAA and AFFO including per share amounts for FFO and FFOAA, for the three and nine months ended March 31,September 30, 2022 and 2021 and reconciles such measures to net income (loss) 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 March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | 2021 | | |
FFO: | | | |
Net income (loss) available to common shareholders of EPR Properties | $ | 36,159 | | $ | (2,654) | | | |
Gain on sale of real estate | — | | (201) | | | |
| Impairment of real estate investments, net | 4,351 | | — | | | |
| Real estate depreciation and amortization | 39,827 | | 40,109 | | | |
Allocated share of joint venture depreciation | 1,487 | | 354 | | | |
| FFO available to common shareholders of EPR Properties | $ | 81,824 | | $ | 37,608 | | | |
| | | | | 2022 | 2021 | | 2022 | 2021 |
FFO available to common shareholders of EPR Properties | FFO available to common shareholders of EPR Properties | $ | 81,824 | | $ | 37,608 | | | 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 | | — | | | 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 | | — | | | 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 | $ | 85,701 | | $ | 37,608 | | | Diluted FFO available to common shareholders of EPR Properties | $ | 91,763 | | $ | 71,389 | | | $ | 259,423 | | $ | 161,796 | |
| FFOAA: | FFOAA: | | | FFOAA: | |
FFO available to common shareholders of EPR Properties | FFO available to common shareholders of EPR Properties | $ | 81,824 | | $ | 37,608 | | | 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 | — | | 241 | | | Costs associated with loan refinancing or payoff | — | | 4,741 | | | — | | 4,982 | |
Transaction costs | Transaction costs | 2,247 | | 548 | | | Transaction costs | 148 | | 2,132 | | | 3,540 | | 3,342 | |
| Credit loss benefit | (306) | | (2,762) | | | |
Credit loss expense (benefit) | | Credit loss expense (benefit) | 241 | | (14,096) | | | 9,447 | | (19,677) | |
| Gain on insurance recovery (included in other income) | Gain on insurance recovery (included in other income) | (552) | | (30) | | | Gain on insurance recovery (included in other income) | — | | — | | | (552) | | (30) | |
| Deferred income tax benefit | | Deferred income tax benefit | (37) | | — | | | (37) | | — | |
| FFOAA available to common shareholders of EPR Properties | FFOAA available to common shareholders of EPR Properties | $ | 83,213 | | $ | 35,605 | | | FFOAA available to common shareholders of EPR Properties | $ | 88,238 | | $ | 64,166 | | | $ | 260,190 | | $ | 150,413 | |
| FFOAA available to common shareholders of EPR Properties | FFOAA available to common shareholders of EPR Properties | $ | 83,213 | | $ | 35,605 | | | FFOAA available to common shareholders of EPR Properties | $ | 88,238 | | $ | 64,166 | | | $ | 260,190 | | $ | 150,413 | |
Add: Preferred dividends for Series C preferred shares | Add: Preferred dividends for Series C preferred shares | 1,938 | | — | | | 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 | | — | | | Add: Preferred dividends for Series E preferred shares | 1,939 | | — | | | 5,817 | | — | |
Diluted FFOAA available to common shareholders of EPR Properties | Diluted FFOAA available to common shareholders of EPR Properties | $ | 87,090 | | $ | 35,605 | | | Diluted FFOAA available to common shareholders of EPR Properties | $ | 92,115 | | $ | 64,166 | | | $ | 271,821 | | $ | 150,413 | |
| AFFO: | AFFO: | | | AFFO: | |
FFOAA available to common shareholders of EPR Properties | FFOAA available to common shareholders of EPR Properties | $ | 83,213 | | $ | 35,605 | | | FFOAA available to common shareholders of EPR Properties | $ | 88,238 | | $ | 64,166 | | | $ | 260,190 | | $ | 150,413 | |
Non-real estate depreciation and amortization | Non-real estate depreciation and amortization | 217 | | 217 | | | Non-real estate depreciation and amortization | 208 | | 197 | | | 628 | | 620 | |
Deferred financing fees amortization | Deferred financing fees amortization | 2,071 | | 1,547 | | | Deferred financing fees amortization | 2,090 | | 2,210 | | | 6,251 | | 5,331 | |
Share-based compensation expense to management and trustees | Share-based compensation expense to management and trustees | 4,245 | | 3,784 | | | 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 | (87) | | (96) | | | Amortization of above and below market leases, net and tenant allowances | (89) | | (98) | | | (265) | | (293) | |
Maintenance capital expenditures (1) | Maintenance capital expenditures (1) | (1,351) | | (756) | | | Maintenance capital expenditures (1) | (386) | | (690) | | | (1,871) | | (2,913) | |
Straight-lined rental revenue | Straight-lined rental revenue | (595) | | (1,288) | | | Straight-lined rental revenue | (2,374) | | (981) | | | (4,702) | | (3,690) | |
Straight-lined ground sublease expense | Straight-lined ground sublease expense | 248 | | 84 | | | Straight-lined ground sublease expense | 602 | | 98 | | | 1,111 | | 293 | |
Non-cash portion of mortgage and other financing income | Non-cash portion of mortgage and other financing income | (116) | | (171) | | | Non-cash portion of mortgage and other financing income | (119) | | 55 | | | (353) | | (332) | |
AFFO available to common shareholders of EPR Properties | AFFO available to common shareholders of EPR Properties | $ | 87,845 | | $ | 38,926 | | | AFFO available to common shareholders of EPR Properties | $ | 92,308 | | $ | 68,716 | | | $ | 273,541 | | $ | 160,647 | |
| AFFO available to common shareholders of EPR Properties | AFFO available to common shareholders of EPR Properties | $ | 87,845 | | $ | 38,926 | | | AFFO available to common shareholders of EPR Properties | $ | 92,308 | | $ | 68,716 | | | $ | 273,541 | | $ | 160,647 | |
Add: Preferred dividends for Series C preferred shares | Add: Preferred dividends for Series C preferred shares | 1,938 | | — | | | 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 | | — | | | Add: Preferred dividends for Series E preferred shares | 1,939 | | — | | | 5,817 | | |
Diluted AFFO available to common shareholders of EPR Properties | Diluted AFFO available to common shareholders of EPR Properties | $ | 91,722 | | $ | 38,926 | | | Diluted AFFO available to common shareholders of EPR Properties | $ | 96,185 | | $ | 68,716 | | | $ | 285,172 | | $ | 160,647 | |
| FFO per common share: | | | |
Basic | $ | 1.09 | | $ | 0.50 | | | |
Diluted | 1.09 | | 0.50 | | | |
FFOAA per common share: | | | |
Basic | $ | 1.11 | | $ | 0.48 | | | |
Diluted | 1.10 | | 0.48 | | | |
Shares used for computation (in thousands): | | | |
Basic | 74,843 | | 74,627 | | | |
Diluted | 75,047 | | 74,669 | | | |
|
| | | Three Months Ended March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | 2021 | | | 2022 | 2021 | | 2022 | 2021 |
FFO per common share: | | FFO per common share: | |
Basic | | Basic | $ | 1.17 | | $ | 0.95 | | | $ | 3.31 | | $ | 2.16 | |
Diluted | | Diluted | 1.16 | | 0.95 | | | 3.28 | | 2.16 | |
FFOAA per common share: | | FFOAA per common share: | |
Basic | | Basic | $ | 1.18 | | $ | 0.86 | | | $ | 3.47 | | $ | 2.01 | |
Diluted | | Diluted | 1.16 | | 0.86 | | | 3.44 | | 2.01 | |
Shares used for computation (in thousands): | | Shares used for computation (in thousands): | |
Basic | | Basic | 75,016 | | 74,804 | | | 74,949 | | 74,738 | |
Diluted | | Diluted | 75,183 | | 74,911 | | | 75,102 | | 74,819 | |
| Weighted average shares outstanding-diluted EPS | Weighted average shares outstanding-diluted EPS | 75,047 | | 74,669 | | | Weighted average shares outstanding-diluted EPS | 75,183 | | 74,911 | | | 75,102 | | 74,819 | |
Effect of dilutive Series C preferred shares | Effect of dilutive Series C preferred shares | 2,241 | | — | | | Effect of dilutive Series C preferred shares | 2,250 | | — | | | 2,245 | | — | |
| Effect of dilutive Series E preferred shares | Effect of dilutive Series E preferred shares | 1,664 | | — | | | Effect of dilutive Series E preferred shares | 1,664 | | — | | | 1,664 | | — | |
Adjusted weighted average shares outstanding-diluted Series C and Series E | Adjusted weighted average shares outstanding-diluted Series C and Series E | 78,952 | | 74,669 | | | Adjusted weighted average shares outstanding-diluted Series C and Series E | 79,097 | | 74,911 | | | 79,011 | | 74,819 | |
| Other financial information: | Other financial information: | | | Other financial information: | |
Dividends per common share | Dividends per common share | $ | 0.7750 | | $ | — | | | 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 March 31,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 AFFO per share for the three and nine months ended March 31,September 30, 2022. Therefore, the additional common shares that would result from the conversion and the corresponding add-back of the preferred dividends declared on those shares are included in the calculation of diluted FFO, FFOAA and AFFO per 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, (loss), computed in accordance with GAAP, excluding interest expense (net), income tax (benefit) expense, depreciation and amortization, gains and losses from disposition of real estate, impairment losses on real estate, costs associated with loan refinancing or payoff and adjustments for unconsolidated partnerships, joint ventures and other affiliates.
Management provides EBITDAre herein because it believes this information is useful to investors as a supplemental performance measure as it can help facilitate comparisons of operating performance between periods and with other REITs. Our method of calculating EBITDAre may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. EBITDAre is not a measure of performance under GAAP, does not represent cash generated from operations as defined by GAAP and is not indicative of cash available to fund all cash needs, including distributions. This measure should not be considered an alternative to net income or any other GAAP measure as a measurement of the results of our operations or cash flows or liquidity as defined by GAAP.
Adjusted EBITDAre
Management uses Adjusted EBITDAre in its analysis of the performance of the business and operations of the Company. Management believes Adjusted EBITDAre is useful to investors because it excludes various items that management believes are not indicative of operating performance, and that it is an informative measure to use in computing various financial ratios to evaluate the Company. We define Adjusted EBITDAre as EBITDAre (defined above) for the quarter excluding gain on insurance recovery, severance expense, credit loss (benefit) expense, transaction costs, impairment losses on operating lease right-of-use assets and prepayment fees.
Our method of calculating Adjusted EBITDAre may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. Adjusted EBITDAre is not a measure of performance under GAAP, does not represent cash generated from operations as defined by GAAP and is not indicative of cash available to fund all cash needs, including distributions. This measure should not be considered as an alternative to net income or any other GAAP measure as a measurement of the results of our operations or cash flows or liquidity as defined by GAAP.
Net Debt to Adjusted EBITDAre Ratio
Net Debt to Adjusted EBITDAre 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 EBITDAre 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 (loss) (all reported in accordance with GAAP) to Net Debt, Gross Assets, Net Debt to Gross Assets Ratio, EBITDAre, Adjusted EBITDAre and Net Debt to Adjusted EBITDAre Ratio (each of which is a non-GAAP financial measure), as applicable, are included in the following tables (unaudited, in thousands):
| | | | | | | | | | | |
| March 31, |
| 2022 | | 2021 |
Net Debt: | | | |
Debt | $ | 2,805,853 | | | $ | 3,171,193 | |
Deferred financing costs, net | 35,376 | | | 35,036 | |
Cash and cash equivalents | (323,761) | | | (538,077) | |
Net Debt | $ | 2,517,468 | | | $ | 2,668,152 | |
| | | |
Gross Assets: | | | |
Total Assets | $ | 5,818,070 | | | $ | 6,208,102 | |
Accumulated depreciation | 1,206,317 | | | 1,101,727 | |
Cash and cash equivalents | (323,761) | | | (538,077) | |
Gross Assets | $ | 6,700,626 | | | $ | 6,771,752 | |
| | | |
Net Debt to Gross Assets Ratio | 38 | % | | 39 | % |
| | | |
| | | | September 30, |
| | | 2022 | | 2021 |
Net Debt: | | Net Debt: | | | |
Debt | | Debt | $ | 2,808,587 | | | $ | 2,684,063 | |
Deferred financing costs, net | | Deferred financing costs, net | 32,642 | | | 32,166 | |
Cash and cash equivalents | | Cash and cash equivalents | (160,838) | | | (144,433) | |
Net Debt | | Net Debt | $ | 2,680,391 | | | $ | 2,571,796 | |
| Gross Assets: | | Gross Assets: | |
Total Assets | | Total Assets | $ | 5,792,759 | | | $ | 5,721,157 | |
Accumulated depreciation | | Accumulated depreciation | 1,278,427 | | | 1,142,513 | |
Cash and cash equivalents | | Cash and cash equivalents | (160,838) | | | (144,433) | |
Gross Assets | | Gross Assets | $ | 6,910,348 | | | $ | 6,719,237 | |
| Net Debt to Gross Assets Ratio | | Net Debt to Gross Assets Ratio | 39 | % | | 38 | % |
| | | Three Months Ended March 31, | | Three Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
EBITDAre and Adjusted EBITDAre: | EBITDAre and Adjusted EBITDAre: | | | | EBITDAre and Adjusted EBITDAre: | | | |
Net income | Net income | $ | 42,192 | | | $ | 3,380 | | Net income | $ | 50,799 | | | $ | 32,117 | |
Interest expense, net | Interest expense, net | 33,260 | | | 39,194 | | Interest expense, net | 32,747 | | | 36,584 | |
Income tax expense | Income tax expense | 318 | | | 407 | | Income tax expense | 388 | | | 395 | |
Depreciation and amortization | Depreciation and amortization | 40,044 | | | 40,326 | | Depreciation and amortization | 41,539 | | | 42,612 | |
Gain on sale of real estate | Gain on sale of real estate | — | | | (201) | | Gain on sale of real estate | (304) | | | (787) | |
| Impairment of real estate investments, net | Impairment of real estate investments, net | 4,351 | | | — | | Impairment of real estate investments, net | — | | | 2,711 | |
| | Costs associated with loan refinancing or payoff | Costs associated with loan refinancing or payoff | — | | | 241 | | Costs associated with loan refinancing or payoff | — | | | 4,741 | |
| Allocated share of joint venture depreciation | Allocated share of joint venture depreciation | 1,487 | | | 354 | | Allocated share of joint venture depreciation | 2,093 | | | 966 | |
Allocated share of joint venture interest expense | Allocated share of joint venture interest expense | 1,121 | | | 789 | | Allocated share of joint venture interest expense | 1,822 | | | 981 | |
| EBITDAre | EBITDAre | $ | 122,773 | | | $ | 84,490 | | EBITDAre | $ | 129,084 | | | $ | 120,320 | |
| Gain on insurance recovery (1) | (552) | | | (30) | | |
| | Transaction costs | Transaction costs | 2,247 | | | 548 | | Transaction costs | 148 | | | 2,132 | |
| Credit loss benefit | (306) | | | (2,762) | | |
Credit loss expense (benefit) | | Credit loss expense (benefit) | 241 | | | (14,096) | |
| Adjusted EBITDAre (for the quarter) | Adjusted EBITDAre (for the quarter) | $ | 124,162 | | | $ | 82,246 | | Adjusted EBITDAre (for the quarter) | $ | 129,473 | | | $ | 108,356 | |
| Adjusted EBITDAre (2) | $ | 496,648 | | | Footnote 3 | |
Adjusted EBITDAre (annualized) (1) | | Adjusted EBITDAre (annualized) (1) | $ | 517,892 | | | Footnote 2 |
| Net Debt/Adjusted EBITDAre Ratio | Net Debt/Adjusted EBITDAre Ratio | 5.1 | | | Footnote 3 | Net Debt/Adjusted EBITDAre Ratio | 5.2 | | | Footnote 2 |
| | (1) Included in "Other income" in the consolidated statements of (loss) income and comprehensive income for the quarter. Other income includes the following: | |
| Three Months Ended March 31, | |
| 2022 | | 2021 | |
Income from settlement of foreign currency swap contracts | $ | 45 | | | $ | 52 | | |
Gain on insurance recovery | 552 | | | 30 | | |
Operating income from operated properties | 8,648 | | | 295 | | |
Miscellaneous income | 60 | | | 301 | | |
Other income | $ | 9,305 | | | $ | 678 | | |
| | | | | | | (2) Adjusted EBITDA for the quarter is multiplied by four to calculate an annual amount. | |
(3) 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. | |
| | (1) Adjusted EBITDA for the quarter is multiplied by four to calculate an annual amount. | | (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. | | (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. |
Total Investments
Total investments is a non-GAAP financial measure defined as the sum of the carrying values of real estate investments (before accumulated depreciation), land held for development, property under development, mortgage notes receivable (including related accrued interest receivable), investment in joint ventures, intangible assets, gross (before accumulated amortization and included in other assets) and notes receivable and related accrued interest receivable, net (included in other assets). Total investments is a useful measure for management and investors as it illustrates across which asset categories the Company's funds have been invested. Our method of calculating total investments may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. A reconciliation of total investments to total assets (computed in accordance with GAAP) is included in the following table (unaudited, in thousands):
| | | March 31, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
Total Investments: | Total Investments: | | | | Total Investments: | | | |
Real estate investments, net of accumulated depreciation | Real estate investments, net of accumulated depreciation | $ | 4,738,887 | | | $ | 4,713,091 | | 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 | 1,206,317 | | | 1,167,734 | | Add back accumulated depreciation on real estate investments | 1,278,427 | | | 1,167,734 | |
Land held for development | Land held for development | 20,168 | | | 20,168 | | Land held for development | 20,168 | | | 20,168 | |
Property under development | Property under development | 10,885 | | | 42,362 | | Property under development | 56,347 | | | 42,362 | |
Mortgage notes and related accrued interest receivable | Mortgage notes and related accrued interest receivable | 370,021 | | | 370,159 | | Mortgage notes and related accrued interest receivable | 399,485 | | | 370,159 | |
| Investment in joint ventures | Investment in joint ventures | 36,564 | | | 36,670 | | Investment in joint ventures | 50,124 | | | 36,670 | |
Intangible assets, gross (1) | Intangible assets, gross (1) | 60,109 | | | 57,962 | | Intangible assets, gross (1) | 60,109 | | | 57,962 | |
Notes receivable and related accrued interest receivable, net (1) | Notes receivable and related accrued interest receivable, net (1) | 7,222 | | | 7,254 | | Notes receivable and related accrued interest receivable, net (1) | 3,495 | | | 7,254 | |
Total investments | Total investments | $ | 6,450,173 | | | $ | 6,415,400 | | Total investments | $ | 6,637,872 | | | $ | 6,415,400 | |
| Total investments | Total investments | $ | 6,450,173 | | | $ | 6,415,400 | | Total investments | $ | 6,637,872 | | | $ | 6,415,400 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 177,174 | | | 180,808 | | Operating lease right-of-use assets | 199,031 | | | 180,808 | |
Cash and cash equivalents | Cash and cash equivalents | 323,761 | | | 288,822 | | Cash and cash equivalents | 160,838 | | | 288,822 | |
Restricted cash | Restricted cash | 2,956 | | | 1,079 | | Restricted cash | 5,252 | | | 1,079 | |
Accounts receivable | Accounts receivable | 60,704 | | | 78,073 | | Accounts receivable | 53,375 | | | 78,073 | |
Less: accumulated depreciation on real estate investments | Less: accumulated depreciation on real estate investments | (1,206,317) | | | (1,167,734) | | 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) | (20,976) | | | (20,163) | | Less: accumulated amortization on intangible assets (1) | (22,650) | | | (20,163) | |
Prepaid expenses and other current assets (1) | Prepaid expenses and other current assets (1) | 30,595 | | | 24,865 | | Prepaid expenses and other current assets (1) | 37,468 | | | 24,865 | |
Total assets | Total assets | $ | 5,818,070 | | | $ | 5,801,150 | | Total assets | $ | 5,792,759 | | | $ | 5,801,150 | |
| (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: | (1) Included in "Other assets" in the accompanying consolidated balance sheet. Other assets include the following: |
| | | March 31, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
Intangible assets, gross | Intangible assets, gross | $ | 60,109 | | | $ | 57,962 | | Intangible assets, gross | $ | 60,109 | | | $ | 57,962 | |
Less: accumulated amortization on intangible assets | Less: accumulated amortization on intangible assets | (20,976) | | | (20,163) | | Less: accumulated amortization on intangible assets | (22,650) | | | (20,163) | |
Notes receivable and related accrued interest receivable, net | Notes receivable and related accrued interest receivable, net | 7,222 | | | 7,254 | | Notes receivable and related accrued interest receivable, net | 3,495 | | | 7,254 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 30,595 | | | 24,865 | | Prepaid expenses and other current assets | 37,468 | | | 24,865 | |
Total other assets | Total other assets | $ | 76,950 | | | $ | 69,918 | | 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 March 31,September 30, 2022, we had a $1.0 billion unsecured revolving credit facility with no outstanding balance. We also had a $25.0 million bond that bears interest at a floating rate but has been fixed through an interest rate swap agreement.
As of March 31,September 30, 2022, we had a 65% investment interest in two unconsolidated real estate joint ventures related to two experiential lodging properties located in St. Petersburg Beach, Florida. At March 31,September 30, 2022, the joint venture had a secured mortgage loan with an outstandingoutstanding balance of $85.0$105.0 million. The mortgage loan bears interest at an annual rate equal to the greater of 6.00% or LIBORSOFR plus 3.75%. 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 (LIBOR)(SOFR) on this note to 3.0%3.5% from March 28, 2019May 19, 2022 to AprilJune 1, 2023.2024.
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. In order to hedge our CAD denominated cash flow and our net investment in our foursix Canadian properties, we entered into two fixed-to-fixed cross-currency swaps with a fixed notional value of $200.0 million CAD. These investments became effective on July 1, 2018, mature on July 1, 2023designated as cash flow hedges and areforeign currency forwards designated as net investment hedges of our Canadian net investments. The net effect of this hedge is to lock in an exchange rate of $1.32 CAD per U.S. dollar on $200.0 million CAD of our foreign net investments. The cross-currency swaps also have a monthly settlement feature locked in at an exchange rate of $1.32 CAD per USD on $4.5 million of CAD annual cash flows, the net effect of which is an excluded component from the effectiveness testing of this hedge. On April 29, 2022, we de-designated these CAD to USD cross-currency swaps in conjunction with entering into new agreements, effectively terminating the cross-currency swap agreements. These contracts were previously designated as net investment hedges. We paid $3.8 million in connection with the settlement of the CAD to USD cross-currency swap agreements.further described below.
On April 29, 2022, we entered into two forward contracts with a fixed notional valueCash Flow Hedges of $200.0 million CAD and $156.0 million USD with a settlement date of October 1, 2024. The exchange rate of this forward contract is approximately $1.28 CAD per USD.
Foreign Exchange Risk-
In order to also hedge our net investment on the four Canadian properties, we entered into three USD-CAD cross-currency swaps that were effective July 1, 2020 with a total fixed original notional value of $100.0 million CAD and $76.6 million USD. The net effect of these swaps is to lock in an exchange rate of $1.31 CAD per USD on approximately $7.2 million annual CAD denominated cash flows through June 2022.
Cross Currency Swaps
On April 12, 2022, we entered into three USD-CAD cross-currency swaps that will be effective July 1, 2022 with a total fixed original notional value of $150.0 million CAD and $118.7 million USD. The net effect of these swaps is to lock in an exchange rate of $1.27$1.26 CAD per USD on approximately $10.8 million annual CAD denominated cash flows through SeptemberOctober 1, 2024.
Additionally, onOn April 29, 2022, we entered into two additionalUSD-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 $1.29$1.28 CAD per USD on approximately $4.5 million of additional 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 approximately $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 14, 2022, we entered into a forward contract with a fixed notional value of $90.0 million CAD and $69.2 million USD with a settlement date of December 2, 2024. The exchange rate of this forward contract is approximately $1.30 CAD per USD.
On April 29, 2022, we terminated two cross-currency swaps with a fixed notional value of $200.0 million CAD. These contracts were previously designated as net investment hedges. We paid $3.8 million in connection with the settlement of these CAD to USD cross-currency swap agreements.
For foreign currency derivatives designated as net investment hedges, the change in the fair value of the derivatives are reported in AOCI as part of the cumulative translation adjustment. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.
See Note 10 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 March 31,September 30, 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'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
We are subject to certain claims and lawsuits in the ordinary course of business, the outcome of which cannot be determined at this time. In the opinion of management, any liability we might incur upon the resolution of these claims and lawsuits will not, in the aggregate, have a material adverse effect on our consolidated financial position or results of operations.
Item 1A. Risk Factors
There have been no material changes toare 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 factors associated with our business previously disclosed 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 fiscal year ended December 31, 2021 filed with the SEC on February 23, 2022.10-K.
We depend on leasing space to tenants on economically favorable terms and collecting 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 rent or 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 fair value of the underlying 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 a 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 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 properties Regal will continue to operate and the terms and conditions of leases for those properties. There can be no assurance that these 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 amount, if any, we will recover under the Promissory Note.
The reduced economic activity that initially resulted from the COVID-19 pandemic severely impacted our tenants' businesses, financial condition and liquidity and caused most of our tenants to be unable to meet their obligations to us in full, or at 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 a borrower becomes bankrupt or insolvent or defaults under its loan, that could force us to declare 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 serves 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 statements. 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 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
Issuer Purchases of Equity Securities
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Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
January 1 through January 31, 2022 common shares | | 88,819 | | (1) | $ | 47.49 | | | — | | | $ | — | |
February 1 through February 28, 2022 common shares | | 699 | | (1) | 46.11 | | | — | | | — | |
March 1 through March 31, 2022 common shares | | — | | | — | | | — | | | — | |
| | | | | | | | |
Total | | 89,518 | | | $ | 47.48 | | | — | | | $ | — | |
(1) The repurchases of equity securitiesThere were no reportable events during January and February 2022 were completed in conjunction with the vesting of employee nonvested shares. These repurchases were not made pursuant to a publicly announced plan or program.quarter ended September 30, 2022.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended March 31,September 30, 2022.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
There were no reportable events during the quarter ended March 31,September 30, 2022.
Item 6. Exhibits
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| Fourth Amendment to Note Purchase Agreement, dated January 14, 2022, by and among the Company and the purchasers named therein, which is attached as Exhibit 4.11.5 to the Company's Form 10-K filed on February 23, 2022, is hereby incorporated by reference as Exhibit 4.1. |
| 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: | May 5,November 3, 2022 | By | | /s/ Gregory K. Silvers |
| | | | Gregory K. Silvers, Chairman, President and Chief Executive
Officer (Principal Executive Officer) |
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Dated: | May 5,November 3, 2022 | By | | /s/ Tonya L. Mater |
| | | | Tonya L. Mater, Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) |