UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2005
COMMISSION FILE NUMBER 1-13561
ENTERTAINMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 43-1790877
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
30 PERSHING ROAD, SUITE 201
KANSAS CITY, MISSOURI 64108
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (816) 472-1700
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 X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At July 29, 2005, there were 25,875,486 Common Shares of Beneficial Interest
outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
ASSETS (Unaudited)
Rental properties, net of accumulated depreciation of $99.2
million and $87.1 million at June 30, 2005 and December 31,
2004, respectively $ 1,215,796 $ 1,121,409
Property under development 21,134 23,144
Mortgage note and related accrued interest receivable 38,832 --
Investment in joint ventures 2,476 2,541
Cash and cash equivalents 7,214 11,255
Restricted cash 11,729 12,794
Intangible assets, net 10,489 10,900
Deferred financing costs, net 10,969 12,730
Other assets 22,079 18,675
----------- -----------
Total assets $ 1,340,718 $ 1,213,448
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 8,794 $ 10,070
Common dividends payable 15,764 14,097
Preferred dividends payable 2,916 1,366
Unearned rents 2,827 1,634
Long-term debt 644,894 592,892
----------- -----------
Total liabilities 675,195 620,059
Commitments and contingencies -- --
Minority interests 5,666 6,049
Shareholders' equity:
Common Shares, $.01 par value; 50,000,000 shares authorized;
and 25,871,913 and 25,578,472 shares issued at June 30,
2005 and December 31, 2004, respectively 259 256
Preferred Shares, $.01 par value; 10,000,000 shares authorized:
2,300,000 Series A shares issued at June 30, 2005
and December 31, 2004 23 23
3,200,000 Series B shares issued at June 30, 2005 32 --
Additional paid-in-capital 703,445 618,715
Treasury shares at cost: 649,142 and 517,421 common shares
at June 30, 2005 and December 31, 2004, respectively (14,350) (8,398)
Loans to shareholders (3,525) (3,525)
Non-vested shares (4,106) (2,338)
Accumulated other comprehensive income 6,759 7,480
Distributions in excess of net income (28,680) (24,873)
----------- -----------
Shareholders' equity 659,857 587,340
----------- -----------
Total liabilities and shareholders' equity $ 1,340,718 $ 1,213,448
=========== ===========
2
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2005 2004 2005 2004
-------- -------- -------- --------
Rental revenue $ 36,138 $ 31,426 $ 70,288 $ 58,964
Tenant reimbursements 3,091 2,583 6,070 4,766
Other income 1,073 23 1,887 95
Mortgage financing interest 472 -- 472 --
-------- -------- -------- --------
Total revenue 40,774 34,032 78,717 63,825
Property operating expense 3,749 3,067 7,613 5,891
Other operating expense 516 -- 1,163 --
General and administrative expense, excluding
amortization of non-vested shares below 1,899 1,486 3,179 2,606
Costs associated with loan refinancing -- 1,134 -- 1,134
Interest expense, net 10,239 10,026 19,761 18,844
Depreciation and amortization 6,832 5,955 13,370 11,016
Amortization of non-vested shares 405 340 858 680
-------- -------- -------- --------
Income before income from joint ventures and
minority interests 17,134 12,024 32,773 23,654
Equity in income from joint ventures 188 182 362 310
Minority interests -- (490) -- (919)
-------- -------- -------- --------
Net income $ 17,322 $ 11,716 $ 33,135 $ 23,045
Preferred dividend requirements (2,916) (1,366) (5,522) (2,731)
-------- -------- -------- --------
Net income available to
common shareholders $ 14,406 $ 10,350 $ 27,613 $ 20,314
======== ======== ======== ========
Net income per common share:
Basic $ 0.58 $ 0.47 $ 1.11 $ 0.97
======== ======== ======== ========
Diluted $ 0.57 $ 0.46 $ 1.09 $ 0.94
======== ======== ======== ========
Shares used for computation (in thousands):
Basic 24,984 22,211 24,949 20,969
Diluted 25,475 23,551 25,429 22,411
Dividends per common share $ 0.6250 $ 0.5625 $ 1.2500 $ 1.1250
======== ======== ======== ========
3
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED)
(DOLLARS IN THOUSANDS)
COMMON STOCK PREFERRED STOCK ADDITIONAL
------------- --------------- PAID-IN TREASURY LOANS TO
SHARES PAR SHARES PAR CAPITAL SHARES SHAREHOLDERS
------ ----- ------ ---- ---------- ---------- ------------
Balance at December 31, 2004 25,578 $ 256 2,300 $ 23 $ 618,715 $ (8,398) $ (3,525)
Shares issued to Trustees 4 -- -- -- 161 -- --
Issuance of restricted share grants 63 1 -- -- 2,625 -- --
Amortization of restricted share grants -- -- -- -- -- -- --
Stock option expense -- -- -- -- 45 -- --
Foreign currency translation adjustment -- -- -- -- -- -- --
Net income -- -- -- -- -- -- --
Purchase of 17,350 common shares for treasury -- -- -- -- -- (759) --
Issuances of common shares in Dividend
Reinvestment Plan 12 -- -- -- 462 -- --
Issuance of preferred shares, net of costs of $2.7
million -- -- 3,200 32 77,229 -- --
Stock option exercise, net 215 2 -- -- 4,208 (5,193) --
Dividends to common shareholders ($1.250 per share) -- -- -- -- -- -- --
Dividends to Series A preferred shareholders
($1.1875 per share) -- -- -- -- -- -- --
Dividends to Series B preferred shareholders
($0.8719 per share) -- -- -- -- -- -- --
------ ----- ----- ---- --------- --------- ---------
Balance at June 30, 2005 25,872 $ 259 5,500 $ 55 $ 703,445 $ (14,350) $ (3,525)
====== ===== ===== ==== ========= ========= =========
ACCUMULATED
OTHER DISTRIBUTIONS
NON-VESTED COMPREHENSIVE IN EXCESS OF
SHARES INCOME NET INCOME TOTAL
---------- ------------- ------------- ---------
Balance at December 31, 2004 $ (2,338) $ 7,480 $ (24,873) $ 587,340
Shares issued to Trustees -- -- -- 161
Issuance of restricted share grants (2,626) -- -- --
Amortization of restricted share grants 858 -- -- 858
Stock option expense -- -- -- 45
Foreign currency translation adjustment -- (721) -- (721)
Net income -- -- 33,135 33,135
Purchase of 17,350 common shares for treasury -- -- -- (759)
Issuances of common shares in Dividend
Reinvestment Plan -- -- -- 462
Issuance of preferred shares, net of costs of $2.7
million -- -- -- 77,261
Stock option exercise, net -- -- -- (983)
Dividends to common shareholders ($1.250 per share) -- -- (31,420) (31,420)
Dividends to Series A preferred shareholders
($1.1875 per share) -- -- (2,732) (2,732)
Dividends to Series B preferred shareholders
($0.8719 per share) -- -- (2,790) (2,790)
--------- --------- --------- ---------
Balance at June 30, 2005 $ (4,106) $ 6,759 $ (28,680) $ 659,857
========= ========= ========= =========
4
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2005 2004 2005 2004
-------- -------- -------- --------
Net income $ 17,322 $ 11,716 $ 33,135 $ 23,045
Other comprehensive income:
Foreign currency translation adjustment 408 -- (721) --
-------- -------- -------- --------
Comprensive income $ 17,730 $ 11,716 $ 32,414 $ 23,045
======== ======== ======== ========
5
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
2005 2004
--------- ---------
Operating activities:
Net income $ 33,135 $ 23,045
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in net income -- 919
Equity in income from joint ventures (362) (310)
Depreciation and amortization 13,370 11,016
Amortization of deferred financing costs 1,536 1,530
Costs associated with loan refinancing (non-cash portion) -- 729
Non-cash compensation expense to management and trustees 1,064 787
Increase in mortgage note accrued interest receivable (474) --
Increase in other assets (1,712) (817)
Increase (decrease) in accounts payable and accrued liabilities (1,840) 3,007
Increase in unearned rents 1,193 1,705
--------- ---------
Net cash provided by operating activities 45,910 41,611
--------- ---------
Investing activities:
Acquisition of rental properties (93,324) (178,478)
Net proceeds from sale of real estate and furniture, fixtures and equipment 566 --
Additions to properties under development (15,470) (24,362)
Distributions from joint ventures 427 401
Proceeds from sale of equity interest in joint venture -- 8,240
Investment in secured notes receivable (37,525) (5,000)
--------- ---------
Net cash used in investing activities (145,326) (199,199)
--------- ---------
Financing activities:
Proceeds from long-term debt facilities 149,000 246,609
Principal payments on long-term debt (94,981) (176,082)
Deferred financing fees paid (427) (5,064)
Net proceeds from issuance of common shares 462 117,082
Net proceeds from issuance of preferred shares 77,261 --
Impact of stock option exercises, net (983) --
Purchase of common shares for treasury (759) --
Distributions paid to minority interests (383) (960)
Dividends paid to shareholders (33,726) (24,073)
--------- ---------
Net cash provided by financing activities 95,464 157,512
Effect of exchange rate changes on cash (89) --
--------- ---------
Net decrease in cash and cash equivalents (4,041) (76)
Cash and cash equivalents at beginning of period 11,255 37,022
--------- ---------
Cash and cash equivalents at end of period $ 7,214 $ 36,946
========= =========
Supplemental schedule of non-cash activity:
Contribution of rental property to joint venture $ -- $ 24,186
Debt assumed by joint venture $ -- $ 14,583
Transfer of property under development to rental property $ 17,241 $ --
Issuance of shares to management and trustees $ 2,626 $ 2,090
Issuance of shares in acquisition of rental properties $ -- $ 27,087
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 17,194 $ 18,326
Cash paid during the period for income taxes $ 245 $ 223
6
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
DESCRIPTION OF BUSINESS
Entertainment Properties Trust (the Company) is a Maryland real estate
investment trust (REIT) organized on August 29, 1997. The Company was formed to
acquire and develop entertainment properties including megaplex theatres and
entertainment retail centers. At June 30, 2005, the Company owned 62 megaplex
theatre properties, including three joint venture properties, located in 24
states and Ontario, Canada. The Company's portfolio also includes seven
entertainment retail centers located in Westminster, Colorado, New Rochelle, New
York, Burbank, California and Ontario, Canada, other specialty properties and
land parcels leased to restaurant and retail operators adjacent to several of
its theatre properties.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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. Operating results for the six-month period ended June 30, 2005
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
The consolidated balance sheet as of December 31, 2004 has been derived from the
audited consolidated balance sheet at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2004.
CONCENTRATION OF RISK
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (58%)
of the megaplex theatre rental properties held by the Company at June 30, 2005
as a result of a series of sale leaseback transactions pertaining to a number of
AMC megaplex theatres. A substantial portion of the Company's revenues
(approximately 57%) result from rental payments by AMC under the leases, or its
parent, AMC Entertainment, Inc. (AMCE), as the guarantor of AMC's obligations
under the leases. AMCE has publicly held debt and accordingly, their financial
information is publicly available.
SHARE BASED COMPENSATION
Share Options
During 2002, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure," which provides alternative methods of
accounting for stock-based compensation and amends SFAS No. 123 "Accounting for
Stock-Based Compensation." The Company adopted SFAS 148 as of January 1, 2003.
Prior to 2003, the Company accounted for stock options issued under its share
incentive plan under the recognition and measurement provisions of APB Opinion
No. 25 "Accounting for Stock Issued to Employees," and related interpretations.
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 123 prospectively for all awards granted, modified, or
settled after January 1, 2003. Awards under the Company's plan vest either
immediately or up
7
to a period of 5 years. Stock option expense for options issued after January 1,
2003 is recognized on a straight-line basis over the vesting period.
The expense related to stock options included in the determination of net income
for the six months ended June 30, 2005 and 2004 is less than that which would
have been recognized if the fair value based method had been applied to all
awards since the original effective date of SFAS No. 123. The following table
illustrates the effect on net income and earnings per share if the fair value
based method had been applied to all outstanding and unvested awards for each
year (in thousands):
SIX MONTHS ENDED JUNE 30,
2005 2004
---------- ----------
Net income available to common shareholders,
as reported $ 27,613 $ 20,314
Add: Stock option compensation expense
included in reported net income 45 14
Deduct: Total stock option compensation
expense determined under fair value
based method for all awards (83) (62)
---------- ----------
Pro forma net income $ 27,575 $ 20,266
========== ==========
Basic earnings per share:
As reported $ 1.11 $ 0.97
Pro forma $ 1.11 $ 0.97
Diluted earnings per share:
As reported $ 1.09 $ 0.94
Pro forma $ 1.08 $ 0.94
SFAS No. 123 was revised in December 2004 by FASB. SFAS No. 123R establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. SFAS No. 123R will be
effective for the Company beginning January 1, 2006. The adoption of SFAS No.
123R is not expected to have a material impact on the Company's financial
statements.
Restricted Shares
For the six months ended June 30, 2005 and 2004, the Company issued 63,048 and
55,651, respectively, of restricted common shares as bonus and long-term
incentive compensation to executives and other employees of the Company. For the
six months ended June 30, 2004, the Company also issued 717 restricted common
shares as retainers to trustees of the Company. No restricted common shares were
issued to trustees of the Company for the six months ended June 30, 2005. Based
upon the market price of the Company's common shares on the grant dates,
approximately $2.6 and $2.1 million were recognized as non-vested shares issued
for the six months ended June 30, 2005 and 2004, respectively.
The holders of these restricted shares have voting rights and receive dividends
from the date of grant. These shares vest ratably over a period of one to five
years. The Company records the awards as unearned compensation when granted
using the fair value of the stock at the grant date and stock compensation
expense pertaining to these restricted shares is amortized on a straight line
basis over the period of vesting. Total stock compensation expense related to
the restricted shares recorded for the six months ended June 30, 2005 and 2004
amounted to $858 thousand and $680 thousand, respectively. At June 30, 2005
there were 140,133 non-vested restricted shares issued and outstanding.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period amounts to conform
to the current period presentation.
3. RENTAL PROPERTIES
The following table summarizes the carrying amounts of rental properties as of
June 30, 2005 and December 31, 2004 (in thousands):
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
Buildings and improvements $ 1,011,784 $ 941,235
Furniture, fixtures & equipment 1,537 2,000
Land 301,630 265,276
----------- -----------
1,314,951 1,208,511
Accumulated depreciation (99,155) (87,102)
----------- -----------
Total $ 1,215,796 $ 1,121,409
=========== ===========
Depreciation expense on rental properties was $13.2 million and $10.9 million
for the six months ended June 30, 2005 and 2004, respectively.
4. UNCONSOLIDATED REAL ESTATE JOINT VENTURES
At June 30, 2005, the Company had a 20% investment interest in each of two
unconsolidated real estate joint ventures, Atlantic-EPR I and Atlantic-EPR II.
The Company accounts for its investment in these joint ventures under the equity
method of accounting.
The Company recognized income of $215 and $203 (in thousands) from its
investment in the Atlantic-EPR I joint venture during the first six months of
2005 and 2004, respectively. The Company also received distributions from
Atlantic-EPR I of $251 and $263 (in thousands) during the first six months of
2005 and 2004, respectively. Condensed financial information for Atlantic-EPR I
is as follows as of and for the six months ended June 30, 2005 and 2004 (in
thousands):
2005 2004
------- ------
Rental properties, net $30,211 30,855
Cash 141 141
Long-term debt 16,621 16,906
Partners' equity 13,627 14,447
Rental revenue 2,068 2,030
Net income 1,018 963
The Atlantic-EPR II joint venture was formed on March 1, 2004. The Company
recognized income of $147 and $107 (in thousands) from its investment in this
joint venture during the first six months of 2005 and 2004, respectively. The
Company also received distributions from Atlantic-EPR II of $176 and $138 (in
thousands) during the first six months of 2005 and 2004, respectively. Condensed
financial information for Atlantic-EPR II is as follows as of and for the six
months ended June 30, 2005 and 2004 (in thousands):
2005 2004
------- ------
Rental properties, net $23,572 24,032
Cash 5 98
Long-term debt 14,278 14,525
Partners' equity 9,218 9,428
Rental revenue 1,389 926
Net income 659 422
9
The joint venture agreements allow Atlantic to exchange up to a maximum of 10%
of its ownership interest per year in Atlantic-EPR I, beginning in 2005, and in
Atlantic-EPR II, beginning in 2007, for common shares of the Company or, at the
discretion of the Company, the cash value of those shares as defined in the
partnership agreement.
5. EARNINGS PER SHARE
The following table summarizes the Company's common shares used for computation
of basic and diluted earnings per share (in thousands):
THREE MONTHS ENDED JUNE 30, 2005 SIX MONTHS ENDED JUNE 30, 2005
------------------------------------------ -------------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Basic earnings:
Income available to common shareholders $14,406 24,984 $0.58 $27,613 24,949 $1.11
Effect of dilutive securities:
Stock options -- 351 (0.01) -- 340 (0.01)
Non-vested common share grants -- 140 -- -- 140 (0.01)
------- ------- ----- ------- ------- -----
Diluted earnings $14,406 25,475 $0.57 $27,613 25,429 $1.09
======= ======= ===== ======= ======= =====
THREE MONTHS ENDED JUNE 30, 2004 SIX MONTHS ENDED JUNE 30, 2004
------------------------------------------ ------------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Basic earnings:
Income available to common shareholders $10,350 22,211 $0.47 $20,314 20,969 $0.97
Effect of dilutive securities:
Stock options -- 352 (0.01) -- 454 (0.02)
Contingent shares from conversion of
minority interest 375 857 -- 750 857 --
Non-vested common share grants -- 131 -- -- 131 (0.01)
------- ------- ----- ------- ------- -----
Diluted earnings $10,725 23,551 $0.46 $21,064 22,411 $0.94
======= ======= ===== ======= ======= =====
6. PROPERTY ACQUISITIONS
On June 28, 2005, the Company completed the acquisition of a megaplex theatre
property in Indianapolis, Indiana. The ShowPlace 12 is operated by Kerasotes
Showplace Theatres and was acquired for a total cost (including land and
building) of approximately $6.0 million. This theatre is leased under a
long-term triple-net lease.
During the three months ended June 30, 2005, the Company also completed
development of a megaplex theatre property in Conroe, Texas. The Grand Theatre
14 is operated by Southern Theatres and was completed for a total development
cost (including land and building) of approximately $9.8 million. The land was
purchased in 2004 by the Company for $1.8 million. This theatre is leased under
a long-term triple-net lease.
10
7. INVESTMENT IN MORTGAGE NOTE
On June 1, 2005, a wholly-owned subsidiary of the Company provided a secured
mortgage construction loan of $47 million Canadian (US $ 37.5 million) to
Metropolis Limited Partnership (the Partnership). The Partnership was formed for
the purpose of developing a 13 level entertainment center in downtown Toronto,
Ontario, Canada. The Partnership consists of the developer of the center as
general partner and two limited partner pension funds. It is anticipated that
the development will be completed by the end of 2007 at a total cost of
approximately $241 million Canadian, including all capitalized costs, and will
contain approximately 360,000 square feet of net rentable area (excluding
signage).
This mortgage note receivable bears interest at 15% and is senior to all other
debt and equity in the Partnership at June 30, 2005. The Partnership has a
written commitment from a bank to provide a first mortgage construction loan to
the Partnership of up to $107 million. The bank construction financing will be
senior to the Company's mortgage note. The Company's mortgage note has a stated
maturity of five years from issuance. No principal or interest payments are due
prior to the end of 30 months from the date of the note. A 25% principal payment
is due 30 months from the date of the note along with all accrued interest to
date (defined as the "Option Due Date Amount"). The Partnership also has an
option at the end of 30 months (the "Option Date") to either pay off the note in
full including all accrued interest, without penalty, or to extend the Option
Due Date Amount by an additional 12 months, in which case the Option Date will
be at the end of 42 months. The Partnership can also prepay the note (in full
only, including all accrued interest) at any other time with prepayment
penalties as defined in the agreement. It is anticipated that permanent
financing will be obtained upon project completion at the end of 30 months
(November 2007) to replace the then existing construction financing.
On the maturity date or any other date that the Partnership elects to prepay the
note in full to the Company, the Company has the option to purchase a 50% equity
interest in the Partnership or alternative joint venture vehicle that is
established. The purchase price stipulated in the option is based on estimated
fair market value at the time of exercise, defined as the then existing
stabilized net operating income capitalized at a pre-determined rate. A
subscription agreement governs the terms of the cash flow sharing with the other
partners should the Company elect to become an owner.
The carrying value of the Company's mortgage note receivable at June 30, 2005
was US $38.8 million, including related accrued interest receivable of US $477
thousand. Cost overruns of the project, if any, are the responsibility of the
Partnership. The Company has no obligation to fund any additional amounts, and
has no other guarantees of any kind related to the project.
8. MORTGAGE NOTE PAYABLE
On May 19, 2005, a wholly-owned subsidiary of the Company obtained a $36.0
million non-recourse mortgage loan secured by one theatre and retail mix
property in Burbank, California. The loan requires monthly principal and
interest payments of approximately $206 thousand. The mortgage note is a
ten-year fixed rate loan that bears interest at 5.56% and is due and payable on
June 6, 2015.
9. PREFERRED SHARE OFFERING
On January 19, 2005, the Company issued 3.2 million 7.75% Series B cumulative
redeemable preferred shares ("Series B preferred shares") in a registered public
offering for net proceeds of $77.5 million, before expenses. The Company pays
cumulative dividends on the Series B preferred shares from (and including) the
date of original issuance in the amount of $1.9375 per share each year, which is
equivalent to 7.75% of the $25 liquidation preference per share. Dividends on
the Series B preferred shares are payable quarterly in arrears, and began on
April 15, 2005. The Company may not redeem the Series B preferred shares before
January 19, 2010, except in limited circumstances to preserve the Company's REIT
status. On or after January 19, 2010, the Company may, at its option, redeem the
Series B preferred shares in whole at any time or in part from time to time, by
paying $25 per share, plus any accrued and unpaid dividends up to and including
the date of redemption. The Series B preferred shares generally have no stated
maturity, will not be subject to any sinking fund or
11
mandatory redemption, and are not convertible into any of the Company's other
securities. Owners of the Series B preferred shares generally have no voting
rights, except under certain dividend defaults. A portion of the proceeds from
this offering was used to repay $18.8 million in mortgage notes payable on their
due date of February 1, 2005.
10. COMMITMENTS AND CONTINGENCIES
As of June 30, 2005, the Company had six theatre development projects under
construction for which it has agreed to either finance the development costs or
purchase the theatre upon completion. The properties are being developed by the
prospective tenants. These theatres are expected to have a total of 95 screens
and their development costs (including land) are expected to be approximately
$79.0 million. Through June 30, 2005, the Company has invested $23.3 million in
these projects (including land), and has commitments to fund approximately $55.7
million of additional improvements. Development costs are advanced by the
Company either in periodic draws or upon successful completion of construction.
If the Company determines that construction is not being completed in accordance
with the terms of the development agreement, the Company can discontinue funding
construction draws or refuse to purchase the completed theatre. The Company has
agreed to lease the theatres to the operators at pre-determined rates.
12
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. The forward-looking statements included in this discussion and elsewhere
in this Form 10-Q involve risks and uncertainties, including anticipated
financial performance, business prospects, industry trends, shareholder returns,
performance of leases by tenants and other matters, which reflect management's
best judgment based on factors currently known. 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 this Item and in Item I
"Business - Risk Factors", in our annual report on Form 10-K for the year ended
December 31, 2004 and those discussed in "Risk Factors" in our prospectus filed
under Rule 424(b) of the SEC on January 12, 2005.
OVERVIEW
Our primary business strategy is to purchase real estate (land, buildings and
other improvements) that we lease to operators of destination-based
entertainment and entertainment-related properties. As of June 30, 2005, we had
invested approximately $1.3 billion (before accumulated depreciation) in 62
megaplex theatre properties and various restaurant, retail and other properties
located in 24 states and Ontario, Canada. As of June 30, 2005, we had invested
approximately $21.1 million in development land and construction in progress for
real-estate development. Also, as of June 30, 2005, we had invested
approximately US $38.8 million in mortgage note financing for the development of
a new entertainment retail center located in downtown Toronto, Ontario, Canada.
Substantially all of our single-tenant properties are leased pursuant to
long-term, triple-net leases, under which the tenants typically pay all
operating expenses of a property, including, but not limited to, all real estate
taxes, assessments and other governmental charges, insurance, utilities, repairs
and maintenance. A majority of our revenues are derived from rents received or
accrued under long-term, triple-net leases. Tenants at our multi-tenant
properties reimburse us to defray their pro rata portion of these costs.
We incur general and administrative expenses including compensation expense for
our executive officers and other employees, professional fees and various
expenses incurred in the process of identifying, evaluating and acquiring
additional properties. We are self-administered and managed by our trustees,
executive officers and other employees. Our primary non-cash expense is the
depreciation of our properties. We depreciate buildings and improvements on our
properties over a five-year to 40-year period for tax purposes and financial
reporting purposes.
Our property acquisitions and development financing commitments are financed by
cash from operations, borrowings under our secured revolving variable rate
credit facility, long-term mortgage debt and the sale of equity securities. It
has been our strategy to structure leases and financings to ensure a positive
spread between our cost of capital and the rentals 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 do not
typically develop or acquire properties on a speculative basis or that are not
significantly pre-leased. We have also entered into joint ventures formed to own
and lease single properties, and provided mortgage note financing as described
above. We intend to continue entering into some or all of these types of
arrangements in the foreseeable future.
Our primary challenges have been locating suitable properties, negotiating
favorable lease and financing terms, and managing our portfolio as we have
continued to grow. Because of our emphasis on the entertainment sector of the
real estate industry and the knowledge and industry relationships of our
management, we have enjoyed favorable opportunities to acquire, finance and
lease properties. We believe those opportunities will continue during the
remainder of 2005.
13
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. The most
significant assumptions and estimates relate to revenue recognition, depreciable
lives of the real estate, the valuation of real estate and accounting for real
estate acquisitions. Application of these assumptions requires the exercise of
judgment as to future uncertainties and, as a result, actual results could
differ from these estimates.
Revenue Recognition
Rents that are fixed and determinable are recognized on a straight-line basis
over the minimum term of the lease. Base rent escalation in most of our leases
is dependent upon increases in the Consumer Price Index (CPI) and accordingly,
management does not include any future base rent escalation amounts on these
leases in current revenue. Most of our leases provide for percentage rents based
upon the level of sales achieved by the tenant. These percentage rents are
recognized once the required sales level is achieved.
Real Estate Useful Lives
We are required to make subjective assessments as to the useful lives of our
properties for the purpose of determining the amount of depreciation to reflect
on an annual basis with respect to those properties. These assessments have a
direct impact on our net income. Depreciation and amortization are provided on
the straight-line method over the useful lives of the assets, as follows:
Buildings 40 years
Tenant improvements Base term of
lease or useful
life, whichever
is shorter
Furniture, fixtures and equipment 3 to 7 years
Impairment of Real Estate Values
We are required to make subjective assessments as to whether there are
impairments in the value of our rental properties. These estimates of impairment
may have a direct impact on our consolidated financial statements.
We apply the provisions of Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We
assess the carrying value of our rental properties whenever events or changes in
circumstances indicate that the carrying amount of a property may not be
recoverable. Certain factors that may occur and indicate that impairments may
exist include, but are not limited to: underperformance relative to projected
future operating results, tenant difficulties and significant adverse industry
or market economic trends. No such indicators existed during in the first six
months of 2005. If an indicator of possible impairment exists, a property is
evaluated for impairment by comparing the carrying amount of the property to the
estimated undiscounted future cash flows expected to be generated by the
property. If the carrying amount of a property exceeds its estimated future cash
flows on an undiscounted basis, an impairment charge is recognized in the amount
by which the carrying amount of the property exceeds the fair value of the
property. Management estimates fair value of our rental properties based on
projected discounted cash flows using a discount rate determined by management
to be commensurate with the risk inherent in the Company. Management did not
record any impairment charges in the first six months of 2005.
14
Real Estate Acquisitions
Upon acquisitions of real estate properties, we make subjective estimates of the
fair value of acquired tangible assets (consisting of land, building, tenant
improvements, and furniture, fixtures and equipment) and identified intangible
assets and liabilities (consisting of above and below market leases, in-place
leases, tenant relationships and assumed financing that is determined to be
above or below market terms) in accordance with Statement of Financial
Accounting Standards (SFAS) No.141, Business Combinations. We utilize methods
similar to those used by independent appraisers in making these estimates. Based
on these estimates, we allocate the purchase price to the applicable assets and
liabilities. These estimates have a direct impact on our net income.
RECENT DEVELOPMENTS
On May 19, 2005, a wholly-owned subsidiary of the Company obtained a $36.0
million non-recourse mortgage loan. This loan is secured by one theatre and
retail mix property in Burbank, California and requires monthly principal and
interest payments of approximately $206 thousand. The mortgage note is a
ten-year fixed rate loan that bears interest at 5.56% and is due and payable on
June 6, 2015.
As further described in Note 7 to the consolidated financial statements in this
Form 10-Q, on June 1, 2005 a wholly-owned subsidiary of the Company provided a
secured mortgage construction loan of $47 million Canadian (US $ 37.5 million)
to Metropolis Limited Partnership (the Partnership). The Partnership was formed
for the purpose of developing a 13 level entertainment center in downtown
Toronto, Ontario, Canada. It is anticipated that the development will be
completed by the end of 2007 at a total cost of approximately $241 million
Canadian, including all capitalized costs, and will contain approximately
360,000 square feet of net rentable area (excluding signage). The expected
rentable area excluding signage is approximately 70% pre-leased as of June 30,
2005. This mortgage note receivable bears interest at 15% and is senior to all
other debt of and equity in the Partnership at June 30, 2005. The Partnership
has a written commitment from a bank to provide a first mortgage construction
loan to the Partnership of up to $107 million. The bank construction financing
will be senior to our mortgage note. The mortgage note has a stated maturity of
five years from issuance. A 25% principal payment is due 30 months from the date
of the note along with all accrued interest to date. As further described in
Note 7 to the consolidated financial statements in this Form 10-Q, the note
agreement provides certain pre-payment privileges to the Partnership and also
provides us with an option, at certain times as defined, to purchase a 50%
equity interest in the Partnership or alternative joint venture vehicle that is
established.
On June 28, 2005, we completed the acquisition of a megaplex theatre property in
Indianapolis, Indiana. The ShowPlace 12 is operated by Kerasotes Showplace
Theatres and was acquired for a total cost (including land and building) of
approximately $6.0 million. This theatre is leased under a long-term triple-net
lease.
During the three months ended June 30, 2005, we also completed development of a
megaplex theatre property in Conroe, Texas. The Grand Theatre 14 is operated by
Southern Theatres and was completed for a total development cost (including land
and building) of approximately $9.8 million. We purchased the land in 2004 for
$1.8 million. This theatre is leased under a long-term triple-net lease.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
Rental revenue was $36.1 million for the three months ended June 30, 2005
compared to $31.4 million for the three months ended June 30, 2004. The $4.7
million increase resulted primarily from the property acquisitions completed in
2004 and 2005 and base rent increases on existing properties. Percentage rents
of $471 thousand and $494 thousand were recognized during the three months ended
June 30, 2005 and 2004, respectively. Straight line rents of $533 thousand and
$600 thousand were recognized during the three months ended June 30, 2005 and
2004, respectively.
15
Tenant reimbursements totaled $3.1 million for the three months ended June 30,
2005 compared to $2.6 million for the three months ended June 30, 2004. These
tenant reimbursements arise from the operations of our retail centers in
Greenville, SC, Westminster, CO, Southfield, MI, Suffolk, VA, Tampa, FL, New
Rochelle, NY, Burbank, CA and Ontario, Canada. The $0.5 million increase is due
primarily to increases in tenant reimbursement rates and the acquisition of the
retail center in Burbank, CA on March 31, 2005.
Other income was $1.1 million for the three months ended June 30, 2005 compared
to $23 thousand for the three months ended March 31, 2004. The increase of $1.1
million relates to revenues from a family bowling center in Westminster,
Colorado opened in November 2004 and operated through a wholly-owned taxable
REIT subsidiary, and to development fees received of $500 thousand during the
quarter.
Mortgage financing interest for the three months ended June 30, 2005 was $472
thousand and related solely to interest income from the mortgage note we entered
into in June of 2005 (described in Note 7 to the consolidated financial
statements in this Form 10-Q and in "Recent Developments" above). No such
revenue was recognized in the second quarter of 2004.
Our property operating expense totaled $3.8 million for the three months ended
June 30, 2005 compared to $3.1 million for the three months ended June 30, 2004.
These property operating expenses arise from the operations of our retail
centers in Greenville, SC, Westminster, CO, Southfield, MI, Suffolk, VA, Tampa,
FL, New Rochelle, NY, Burbank, CA and Ontario, Canada. The $0.7 million increase
is due primarily to increases in property taxes and maintenance at certain of
these properties and the acquisition of the retail center in Burbank, CA on
March 31, 2005.
Other operating expense totaled $516 thousand for the three months ended June
30, 2005 and related solely to the operations of the family bowling center in
Westminster, Colorado, that is operated through a wholly-owned taxable REIT
subsidiary. No such costs were incurred in the second quarter of 2004.
Our general and administrative expenses totaled $1.9 million for the three
months ended June 30, 2005 compared to $1.5 million for the same period in 2004.
The $0.4 million increase is due primarily to the following:
- An increase in franchise taxes due to an increase in the size of our
real estate portfolio.
- Payroll and related expenses attributable to increases in base
compensation, bonus awards, and payroll taxes related to the vesting
of stock grants and the exercise of stock options, and the addition
of employees.
- An increase in legal and accounting fees related to both the
increase in the size of our operations and to compliance with the
Sarbanes-Oxley Act.
Costs associated with loan refinancing for the three months ended June 30, 2004
were $1.1 million. These costs related to the termination of our iStar Credit
Facility and consisted of a prepayment penalty of $405 thousand and the
write-off of $729 thousand of remaining unamortized financing fees. No such
costs were incurred for the three months ended June 30, 2005.
Our net interest expense increased by $0.2 million to $10.2 million for the
three months ended June 30, 2005 from $10.0 million for the three months ended
June 30, 2004. The increase in net interest expense primarily resulted from
increases in long-term debt used to finance real estate acquisitions and an
increase in the interest rate associated with our borrowings under our secured
revolving variable rate credit facility.
Depreciation and amortization expense, including amortization of non-vested
shares, totaled $7.2 million for the three months ended June 30, 2005 compared
to $6.3 million for the same period in 2004. The $0.9 million increase resulted
primarily from the property acquisitions completed in 2005 and 2004 and the
addition of employees in 2004.
16
Income from joint ventures totaled $188 thousand for the three months ended June
30, 2005 compared to $182 thousand for the same period in 2004. The increase is
due to a base rent increase and an increase in tenant reimbursements for the
joint venture properties.
For the three months ended June 30, 2005 there were no minority interests in net
income as compared to $490 thousand for the three months ended June 30, 2004.
The decrease is due primarily to the conversion of the preferred interest in EPT
Gulf States, LLC as of September 20, 2004 to 857,145 common shares of the
Company.
Preferred dividend requirements for the three months ended June 30, 2005 were
$2.9 million compared to $1.4 million for the same period in 2004. The $1.5
million increase is due to the issuance of 3.2 million Series B preferred shares
in January of 2005 (described in Note 9 to the consolidated financial statements
in this Form 10-Q).
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
Rental revenue was $70.3 million for the six months ended June 30, 2005 compared
to $59.0 million for the six months ended June 30, 2004. The $11.3 million
increase resulted primarily from the property acquisitions completed in 2004 and
2005 and base rent increases on existing properties. Percentage rents of $1.0
million and $1.2 million were recognized during the six months ended June 30,
2005 and 2004, respectively. Straight line rents of $1.0 million were recognized
for both the six months ended June 30, 2005 and 2004.
Tenant reimbursements totaled $6.1 million for the six months ended June 30,
2005 compared to $4.8 million for the six months ended June 30, 2004. These
tenant reimbursements arise from the operations of our retail centers in
Greenville, SC, Westminster, CO, Southfield, MI, Suffolk, VA, Tampa, FL, New
Rochelle, NY, Burbank, CA and Ontario, Canada. The $1.3 million increase is due
primarily to increases in tenant reimbursements, and the acquisitions of the
retail centers in Burbank, CA on March 31, 2005 and Ontario, Canada on March 1,
2004.
Other income was $1.9 million for the six months ended June 30, 2005 compared to
$95 thousand for the six months ended June 30, 2004. The increase of $1.8
million relates to revenues from a family bowling center in Westminster,
Colorado opened in November 2004 and operated through a wholly-owned taxable
REIT subsidiary, and to development fees received of $500 thousand during the
quarter.
Mortgage financing interest for the six months ended June 30, 2005 was $472
thousand and related solely to interest income from the mortgage note we entered
into in June of 2005 (described in Note 7 to the consolidated financial
statements in this Form 10-Q and in "Recent Developments" above). No such
revenue was recognized during the first six months of 2004.
Our property operating expense totaled $7.6 million for the six months ended
June 30, 2005 compared to $5.9 million for the six months ended June 30, 2004.
These property operating expenses arise from the operations of our retail
centers in Greenville, SC, Westminster, CO, Southfield, MI, Suffolk, VA, Tampa,
FL, New Rochelle, NY, Burbank, CA and Ontario, Canada. The $1.7 million increase
is due primarily to increases in property taxes and maintenance at certain of
these properties, and the acquisitions of the retail centers in Burbank, CA on
March 31, 2005 and Ontario, Canada on March 1, 2004.
Other operating expense totaled $1.2 million for the six months ended June 30,
2005 and related solely to the operations of the family bowling center in
Westminster, Colorado, that is operated through a wholly-owned taxable REIT
subsidiary. No such costs were incurred during the first six months of 2004.
Our general and administrative expenses totaled $3.2 million for the six months
ended June 30, 2005 compared to $2.6 million for the same period in 2004. The
$0.6 million increase is due primarily to the following:
- An increase in franchise taxes due to an increase in the size of our
real estate portfolio.
17
- Payroll and related expenses attributable to increases in base
compensation, bonus awards, and payroll taxes related to the vesting
of stock grants and the exercise of stock options, and the addition
of employees.
- An increase in legal and accounting fees related to both the
increase in the size of our operations and to compliance with the
Sarbanes-Oxley Act.
Costs associated with loan refinancing for the six months ended June 30, 2004
were $1.1 million. These costs related to the termination of our iStar Credit
Facility and consisted of a prepayment penalty of $405 thousand and the
write-off of $729 thousand of remaining unamortized financing fees. No such
costs were incurred for the six months ended June 30, 2005.
Our net interest expense increased by $1.0 million to $19.8 million for the six
months ended June 30, 2005 from $18.8 million for the six months ended June 30,
2004. The increase in net interest expense primarily resulted from increases in
long-term debt used to finance real estate acquisitions and an increase in the
interest rate associated with our borrowings under our secured revolving
variable rate credit facility.
Depreciation and amortization expense, including amortization of non-vested
shares, totaled $14.2 million for the six months ended June 30, 2005 compared to
$11.7 million for the same period in 2004. The $2.5 million increase resulted
primarily from the property acquisitions completed in 2005 and 2004 and the
addition of employees in 2004.
Income from joint ventures totaled $362 thousand for the six months ended June
30, 2005 compared to $310 thousand for the same period in 2004. The increase is
primarily due to the addition of the Atlantic-EPR II joint venture as of March
1, 2004.
For the six months ended June 30, 2005 there were no minority interests in net
income as compared to $919 thousand for the six months ended June 30, 2004. The
decrease is due primarily to the conversion of the preferred interest in EPT
Gulf States, LLC as of September 20, 2004 to 857,145 common shares of the
Company.
Preferred dividend requirements for the six months ended June 30, 2005 were $5.5
million compared to $2.7 million for the same period in 2004. The $2.8 million
increase is due to the issuance of 3.2 million Series B preferred shares in
January of 2005 (described in Note 9 to the consolidated financial statements in
this Form 10-Q).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $7.2 million at June 30, 2005. In addition, we
had restricted cash of $11.7 million at June 30, 2005 required in connection
with debt service, payment of real estate taxes and capital improvements.
Mortgage Debt and Credit Facilities
As of June 30, 2005, we had total debt outstanding of $644.9 million. All of our
debt is mortgage debt secured by a substantial portion of our rental properties.
As of June 30, 2005, $573.9 million of debt outstanding was fixed rate debt with
a weighted average interest rate of approximately 6.4%.
At June 30, 2005, we had $71.0 million in debt outstanding under our $150.0
million secured revolving variable rate credit facility that bears interest at a
floating rate and is secured by sixteen theatre properties, two theatre and
retail mix properties and one retail mix property. The credit facility matures
in March of 2007.
Our principal investing activity is the purchase and development of rental
property, which is generally financed with mortgage debt and the proceeds from
equity offerings. Continued growth of our rental property portfolio will depend
in part on our continued ability to access funds through additional borrowings
and equity security offerings.
18
Liquidity Requirements
Short-term liquidity requirements consist primarily of normal recurring
corporate operating expenses, debt service requirements and distributions to
shareholders. We meet these requirements primarily through cash provided by
operating activities. Cash provided by operating activities was $45.9 million
for the six months ended June 30, 2005 and $41.6 million for the six months
ended June 30, 2004. We anticipate that our cash on hand, cash from operations,
and funds available under our secured revolving variable rate credit facility
will provide adequate liquidity to fund our operations, make interest and
principal payments on our debt, and allow distributions to our shareholders and
avoidance of corporate level federal income or excise tax in accordance with
Internal Revenue Code requirements for qualification as a REIT.
We had six theatre projects under construction at June 30, 2005. The properties
are being developed by and have been pre-leased to the prospective tenants under
long-term triple-net leases. The cost of development is paid by us either in
periodic draws or upon successful completion of construction. The related timing
and amount of rental payments to be received by us from tenants under the leases
correspond to the timing and amount of funding by us of the cost of development.
These theatres will have a total of 95 screens and their total development costs
(including land) will be approximately $79.0 million. Through June 30, 2005, we
have invested $23.3 million in these projects (including land), and have
commitments to fund an additional $55.7 million in improvements. We plan to fund
development primarily with funds generated by debt financing and/or equity
offerings. If we determine that construction is not being completed in
accordance with the terms of the development agreement, we can discontinue
funding construction draws or refuse to purchase the completed theatre.
As further described in Note 9 to the consolidated financial statements in this
Form 10-Q, we completed an offering of Series B preferred shares in January
2005, generating net proceeds (before expenses) of $77.5 million. We used
proceeds from this offering to payoff $18.8 million in mortgage debt which
matured on February 1, 2005.
Off Balance Sheet Arrangements
At June 30, 2005, we had a 20% investment interest in two unconsolidated real
estate joint ventures, Atlantic-EPR I and Atlantic-EPR II, which are accounted
for under the equity method of accounting. We do not anticipate any material
impact on our liquidity as a result of any commitments that may arise involving
those joint ventures. We recognized income of $215 thousand and $203 thousand
from our investment in the Atlantic-EPR I joint venture during the first six
months of 2005 and 2004, respectively. We also recognized income of $147
thousand and $107 thousand from our investment in the Atlantic-EPR II joint
venture during the first six months of 2005 and 2004, respectively.
19
FUNDS FROM OPERATIONS (FFO)
The National Association of Real Estate Investment Trusts (NAREIT) developed FFO
as a relative non-GAAP financial measure of performance and liquidity of an
equity REIT in order to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. FFO is a widely used
measure of the operating performance of real estate companies and is provided
here as a supplemental measure to Generally Accepted Accounting Principles
(GAAP) net income available to common shareholders and earnings per share. FFO,
as defined under the revised NAREIT definition and presented by us, is net
income, computed in accordance with GAAP, excluding gains and losses from sales
of depreciable operating properties, 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. FFO is a non-GAAP financial measure. FFO does not represent cash flows
from operations as defined by GAAP and is not indicative that cash flows are
adequate to fund all cash needs and is not to be considered an alternative 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.
The following tables summarize our FFO for the three and six month periods ended
June 30, 2005 and June 30, 2004 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2005 2004 2005 2004
------- ------- ------- -------
Net income available to common shareholders $14,406 $10,350 $27,613 $20,314
Add: Real estate depreciation and amortization 6,751 5,906 13,212 10,919
Add: Allocated share of joint venture depreciation 61 62 120 105
------- ------- ------- -------
Basic Funds From Operations 21,218 16,318 40,945 31,338
Add: Minority interest in net income -- 375 -- 750
------- ------- ------- -------
Diluted Funds From Operations $21,218 $16,693 $40,945 $32,088
======= ======= ======= =======
FFO per common share:
Basic $ 0.85 $ 0.73 $ 1.64 $ 1.49
Diluted 0.83 0.71 1.61 1.43
Shares used for computation (in thousands):
Basic 24,984 22,211 24,949 20,969
Diluted 25,475 23,551 25,429 22,411
Other financial information:
Straight-lined rental revenue $ 533 $ 600 $ 1,045 $ 969
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
FASB Statement No. 123, Accounting for Stock-Based Compensation, was revised in
December 2004 by FASB Statement No. 123R. FASB Statement No. 123R, Share Based
Payment, also supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. FASB Statement No. 123R
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. For EPR, FASB
Statement No. 123R will be effective January 1, 2006. The adoption of FASB
Statement No. 123R is not expected to have a material impact on our financial
statements.
20
INFLATION
Investments by EPR are financed with a combination of equity and secured
mortgage indebtedness. During inflationary periods, which are generally
accompanied by rising interest rates, our ability to grow may be adversely
affected because the yield on new investments may increase at a slower rate than
new borrowing costs.
All of our megaplex theatre leases provide for base and participating rent
features. To the extent inflation causes tenant revenues at our properties to
increase over baseline amounts, we would participate in those revenue increases
through our right to receive annual percentage rent. Our leases also generally
provide for escalation in base rents in the event of increases in the Consumer
Price Index, with a limit of 2% per annum, or fixed periodic increases.
Our theatre leases are triple-net leases requiring the tenants to pay
substantially all expenses associated with the operation of the properties,
thereby minimizing our exposure to increases in costs and operating expenses
resulting from inflation. A portion of our retail and restaurant leases are
non-triple-net leases. These retail leases represent less than 15% of our total
real estate square footage. To the extent any of those leases contain fixed
expense reimbursement provisions or limitations, we may be subject to increases
in costs resulting from inflation that are not fully passed through to tenants.
FORWARD LOOKING INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
WITH THE EXCEPTION OF HISTORICAL INFORMATION, THIS REPORT ON FORM 10-Q CONTAINS
FORWARD-LOOKING STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 AND IDENTIFIED BY SUCH WORDS AS "WILL BE," "INTEND,"
"CONTINUE," "BELIEVE," "MAY," "EXPECT," "HOPE," "ANTICIPATE," "GOAL,"
"FORECAST," OR OTHER COMPARABLE TERMS. OUR ACTUAL FINANCIAL CONDITION, RESULTS
OF OPERATIONS OR BUSINESS MAY VARY MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD- LOOKING STATEMENTS AND INVOLVE VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED UNDER "RISK FACTORS" IN OUR ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004 AND OUR PROSPECTUS
FILED UNDER RULE 424(B) OF THE SEC ON JANUARY12, 2005. INVESTORS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS.
21
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. 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. We also have a $150 million secured revolving
line of credit that bears interest at a floating rate that we use to acquire
properties and finance our development commitments.
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 mortgages or contractual agreements
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 acquire additional properties may be limited.
ITEM 4. CONTROLS AND PROCEDURES
A review and evaluation was performed by our management, including our Chief
Executive Officer (the "CEO") and Chief Financial Officer (the "CFO"), of the
effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2005, the end of the period covered by this report.
Based on that review and evaluation, the CEO and CFO have concluded that our
current disclosure controls and procedures, as designed and implemented, were
effective. There have been no significant changes in our internal controls
subsequent to the date of their evaluation. There were no material weaknesses
identified in the course of such review and evaluation and, therefore, no
corrective measures were taken by us in our internal control over financial
reporting.
Effective January 1, 2005, we implemented a new automated lease administration
system. As part of the implementation, we modified our internal control over
financial reporting to align our internal controls with the new technology. This
new technology improves the efficiency of our operations and further strengthens
our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than routine litigation and administrative proceedings arising in the
ordinary course of business, we are not presently involved in any litigation
nor, to our knowledge, is any litigation threatened against us or our
properties, which is reasonably likely to have a material adverse effect on our
liquidity or results of operations.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act
22
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act
32 Certifications furnished pursuant to Section 906 of the
Sarbanes-Oxley Act.
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.
ENTERTAINMENT PROPERTIES TRUST
Dated: July 29, 2005 By /s/ David M. Brain
David M. Brain, President -
Chief Executive Officer and Trustee
Dated: July 29, 2005 By /s/ Fred L. Kennon
Fred L. Kennon, Vice President -
Chief Financial Officer
23