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 March 31, 2004
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 W. 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 April 27, 2004, there were 23,530,029 Common Shares of Beneficial Interest
outstanding.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERTAINMENT PROPERTIES TRUST
Consolidated Balance Sheets
(Dollars in thousands)
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
ASSETS (UNAUDITED)
Rental properties, net $ 1,046,071 $ 870,944
Land held for development 47,121 29,152
Investment in joint ventures 2,689 1,336
Cash and cash equivalents 31,784 30,527
Restricted cash 6,495 6,495
Other assets 30,167 27,464
------------- ----------------
Total assets $ 1,164,327 $ 965,918
============= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 9,108 $ 2,864
Common dividend payable 11,512 9,829
Preferred dividend payable 1,366 1,366
Unearned rents 2,281 895
Long-term debt 669,997 506,555
------------- ----------------
Total liabilities 694,264 521,509
Commitments and contingencies - -
Minority interest in consolidated subsidiary 21,179 21,630
Shareholders' equity:
Common Shares, $.01 par value; 50,000,000 shares authorized; 20,967,848 and
20,129,749 shares issued at March 31, 2004
and December 31, 2003, respectively 209 201
Preferred Shares, $.01 par value; 5,000,000 shares authorized;
2,300,000 shares issued 23 23
Additional paid-in-capital 483,562 454,195
Treasury shares at cost: 472,200 common shares (6,533) (6,533)
Loans to shareholders (3,525) (3,525)
Non-vested shares (3,347) (1,625)
Distributions in excess of net income (21,505) (19,957)
------------- ----------------
Shareholders' equity 448,884 422,779
------------- ----------------
Total liabilities and shareholders' equity $ 1,164,327 $ 965,918
============= ================
2
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands except per share data)
Three Months Ended March 31,
2004 2003
--------- ---------
Rental revenue $ 27,539 $ 20,458
Other income 72 587
--------- ---------
Total revenue 27,611 21,045
Property operating expense 641 95
General and administrative expense, excluding
amortization of non-vested shares below 1,120 856
Interest expense, net 8,818 7,234
Depreciation and amortization 5,060 3,687
Amortization of non-vested shares 340 231
--------- ---------
Income before minority interest and income from joint ventures 11,632 8,942
Equity in income from joint ventures 128 91
Minority interest (430) (375)
--------- ---------
Net income $ 11,330 $ 8,658
Preferred dividend requirements (1,366) (1,366)
--------- ---------
Net income available to common shareholders $ 9,964 $ 7,292
========= =========
Net income per common share:
Basic $ 0.50 $ 0.43
Diluted $ 0.49 $ 0.42
Shares used for computation (in thousands):
Basic 19,735 17,074
Diluted 21,184 18,274
Dividends per common share $ 0.5625 $ 0.50
========= =========
3
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
Three Months Ended March 31,
2004 2003
---------- ---------
OPERATING ACTIVITIES
Net income $ 11,330 $ 8,658
Adjustments to reconcile net income to net cash provided by operating activities
Minority interest in net income 430 375
Equity in income from joint ventures (128) (91)
Depreciation and amortization 5,060 3,687
Non-cash compensation expense 346 237
Decrease in other assets 4,783 825
Decrease in accounts payable and accrued liabilities 6,244 130
(Increase) decrease in unearned rents 1,386 (3,810)
---------- ---------
Net cash provided by operating activities 29,451 10,011
---------- ---------
INVESTING ACTIVITIES
Acquisition of rental properties (204,325) (10,447)
Acquisition of development properties (14,902) (915)
Distributions from joint ventures 138 8,554
Proceeds from sale of equity interest in joint venture 8,240 -
Investment in secured note receivable (5,000) -
Development and capitalized costs (3,067) (229)
---------- ---------
Net cash used in investing activities (218,916) (3,037)
---------- ---------
FINANCING ACTIVITIES
Proceeds from long-term debt 246,609 175,500
Principal payments on long-term debt (68,584) (92,737)
Deferred financing fees paid (2,525) (6,906)
Proceeds from issuance of common shares, net of costs 27,298 123
Distribution to minority interest (881) (750)
Distribution to shareholders (11,195) (9,528)
---------- ---------
Net cash provided by financing activities 190,722 65,702
---------- ---------
Net increase in cash and cash equivalents 1,257 72,676
Cash and cash equivalents at beginning of period 30,527 10,091
---------- ---------
Cash and cash equivalents at end of period $ 31,784 $ 82,767
========== =========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY
Contribution of rental property and related debt to joint venture $ 9,603 $ -
Transfer of land held for development to rental property $ - $ 1,734
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during three-month period for interest $ 8,173 $ 6,678
Issuance of non-vested stock grants to management $ 2,062 $ 1,304
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
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 (ERCs).
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 three-month period ended March 31, 2004
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004.
The consolidated balance sheet as of December 31, 2003 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, 2003.
CONCENTRATION OF RISK
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (67%)
of the megaplex theatre rental properties held by the Company at March 31, 2004
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 65%) 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. AMC Entertainment, Inc. is a publicly held company (AMEX:AEN)
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.
5
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 123 prospectively for all employee awards granted,
modified, or settled after January 1, 2003. Awards under the Company's plan vest
either immediately or up to a period of 5 years. Therefore the cost related to
stock based employee compensation related to stock options included in the
determination of net income for 2004 and 2003 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
period (in thousands):
THREE MONTHS ENDED MARCH 31,
2004 2003
----------- -----------
Net income available to common shareholders,
as reported $ 9,964 $ 7,292
Add: Stock-based employee compensation
expense included in reported net income 6 6
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (31) (32)
----------- -----------
Pro forma net income $ 9,939 $ 7,266
=========== ===========
Basic earnings per share:
As reported $ 0.50 $ 0.43
Pro forma $ 0.50 $ 0.43
Diluted earnings per share:
As reported $ 0.49 $ 0.42
Pro forma $ 0.49 $ 0.42
Restricted Shares
During the first quarter of 2004, the Company issued 55,650 restricted common
shares as bonus compensation to executives and other employees of the Company.
During the first quarter of 2003, the Company issued 29,579 restricted common
shares as bonus compensation to executives and other employees of the Company.
Based upon the market price of the Company's common shares on the grant dates,
approximately $2.1 million was recognized as non-vested shares issued in the
first quarter of 2004.
6
3. 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 March 31, 2004
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
Basic earnings:
Income available to common shareholders $ 9,964 19,735 $ 0.50
Effect of dilutive securities:
Stock options - 468 (0.01)
Contingent shares from conversion of
minority interest 430 857 -
Non-vested common share grants - 124 -
-------- --------- --------
Diluted earnings 10,394 21,184 $ 0.49
======== ========= ========
Three months
ended March 31, 2003
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------ ---------
Basic earnings:
Income available to common shareholders $ 7,292 17,074 $ 0.43
Effect of dilutive securities:
Stock options - 219 -
Contingent shares from conversion of
minority interest 375 857 (0.01)
Non-vested common share grants - 124 -
----------- ------------ ---------
Diluted earnings $ 7,667 18,274 $ 0.42
=========== ============ =========
4. PROPERTY ACQUISITIONS
On March 1, 2004, the Company acquired, through a wholly-owned subsidiary, four
separate entertainment retail centers anchored by AMC megaplex theatres located
in Ontario, Canada for total consideration of $152 million. The properties are
the Mississauga Entertainment Centrum located in suburban Toronto, the Oakville
Entertainment Centrum located in suburban Toronto, the Whitby Entertainment
Centrum located in suburban Toronto, and the Kanata Centrum Walk located in
suburban Ottawa.
The fair value of the real properties acquired was approximately US $152
million. Other assets acquired and liabilities assumed were insignificant.
Approximately US $27 million of the purchase price consisted of 747,243
restricted common shares of EPR valued at US $36.25 per share. The cash portion
of the purchase price was paid in Canadian dollars and financed in part through
Canadian-dollar non-recourse fixed-rate mortgage loans provided by GMAC
Commercial Mortgage of Canada, Limited
7
of approximately US $97 million.
The following unaudited pro forma result of operations reflects the Company's
acquisition as if it had occurred as of the beginning of the period:
PRO FORMA THREE MONTHS
ENDED MARCH 31,
2004 2003
---------- ----------
Total revenue $ 30,135 23,656
Net income available to common shareholders $ 11,585 8,677
Basic net income per common share $ 0.59 0.51
Diluted net income per common share $ 0.57 0.50
On March 30, 2004, the Company acquired three movie theatres previously owned by
AMC: AMC Hamilton 24 in suburban Trenton, New Jersey and AMC Deer Valley 30 and
AMC Mesa Grand 24 in suburban Phoenix, AZ. These theatres were acquired for a
total acquisition price of $64.2 million using borrowed funds. The properties
were in turn leased back to AMC under triple-net leases, and the funds borrowed
were repaid with proceeds of the offering of common shares completed on April
26, 2004.
5. COMMON STOCK OFFERING
On April 26, 2004, the Company completed an offering of 2,250,000 common shares.
In addition the underwriters exercised the over-allotment option of 337,500
shares for a total issuance of 2,587,500 shares. Net proceeds of the offering
were approximately $81.7 million and were used to repay debt of $64.2 million
(see note 4), reduce borrowings under our credit line and for other corporate
purposes.
6. AMENDMENT OF CREDIT FACILITY
In March, 2004, the Company amended its Fleet Bank Credit Facility to increase
the amount of the Facility to $150 million, extend the term to 3 years plus a
one year extension and reduce the cost of the facility to a pricing grid of
LIBOR plus 175 to 250 basis points. During April, 2004, and in conjunction with
the terms of the Fleet Bank Credit Facility amendment, the Company repaid all
amounts outstanding under the iStar Credit Facility and terminated the iStar
facility. As a result of terminating the iStar Credit Facility, we paid a
prepayment penalty of $400 thousand and the Company will record a one-time
non-cash expense during the second quarter to write-off approximately $729
thousand of unamortized financing fees related to the iStar facility.
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 the Company's 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 the Company's Annual Report on Form
10-K for the year ended December 31, 2003 and those discussed in "Risk Factors"
in the Company's prospectus filed under Rule 424(b) of
8
the SEC on April 21, 2004.
OVERVIEW
Our primary business strategy is to purchase real estate (land, buildings and
other improvements) leased to operators of destination based entertainment and
entertainment related properties under long-term, triple-net leases. As of March
31, 2004, we had invested approximately $1.1 million (before accumulated
depreciation) in 52 megaplex theatre properties and various restaurant, retail
and other properties located in 20 states and Ontario, Canada. As of March 31,
2004, we had invested approximately $47.1 million in development land, for which
we actively develop or pursue development projects that we feel would add value
to the overall entertainment experience of theatre patrons.
A majority of our 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 government charges, insurance, utilities, repairs and maintenance. A
majority of our revenues are derived from rents received or accrued under
long-term, triple-net leases.
The Company incurs 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 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 seven-year to 40-year period for tax purposes and primarily a 40-year
period for financial reporting purposes.
CRITICAL ACCOUNTING POLICIES
There have been no changes from the policies discussed in our Annual Report on
Form 10-K for the year ended December 31, 2003.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Rental revenue was 27.6 million for the three months ended March 31, 2004
compared to $20.5 million for the three months ended March 31, 2003. The $7.1
million increase resulted primarily from rental income associated with the
property acquisitions completed in 2003 and 2004, base rent increases,
percentage rents on existing properties and straight-line rents. In addition,
other income decreased by $515 thousand due to a payment received in the first
quarter of 2003 related to the claims we filed in the Loews Cineplex bankruptcy
proceedings. Percentage rents of $572 thousand and $454 thousand were recognized
during the three months ended March 31, 2004 and March 31, 2003, respectively,
and straight-line rents were $369 thousand for the three months ended March 31,
2004 compared to no straight-line rents in the prior year.
Our property operating expenses totaled $641 thousand for the three months ended
March 31, 2004 compared to $95 thousand for the three months ended March 31,
2003. These expenses arise from our non-triple net retail property operations in
Detroit, Michigan; Greenville, South Carolina; Westminster, Colorado; New
Rochelle, New York (acquired October 27, 2003); Suffolk, Virginia (acquired
November 12, 2003); and Ontario, Canada (acquired March 1, 2004).
Our general and administrative expenses totaled $1.5 million for the three
months ended March 31, 2004 compared to $0.9 million for the same period in
2003. Generally, the increase in our operating expenses resulted from the
significant growth in our real estate portfolio during 2003 and 2004 and reflect
the cost of operating a larger business. A discussion of specific
expense categories which affected our operating costs is as follows:
o Increases in insurance expense, including premiums for both Director
and Officer insurance and property and casualty
9
insurance compared to the same quarter in 2003 due to an overall
increase in premiums in the insurance market and increases in the size
of our real estate portfolio.
o An increase in fees paid for professional services, primarily for
legal and accounting fees related to both the increase in the size of
our operations and to compliance with the Sarbanes Oxley Act.
o An increase in payroll and related expenses attributable to increases
in base compensation, bonus awards, payroll taxes related to the
vesting of stock grants and stock bonuses, and the addition of two
employees.
o Increases in franchise and other miscellaneous taxes paid.
Our net interest expense increased by $1.6 million to $8.8 million for the three
months ended March 31, 2004 from $7.2 million for the three months ended March
31, 2003. The increase in net interest expense resulted from increases in
long-term debt used to finance real estate acquisitions.
Depreciation and amortization expenses totaled $5.1 million for the three months
ended March 31, 2004 compared to $3.9 million for the same period in 2003. The
$1.2 million increase resulted from the property acquisitions completed in 2003
and 2004.
Income from joint venture totaled $128 thousand for the three months ended March
31, 2004 compared to $91 thousand for the same period in 2003. The increase was
due to the addition of the Atlantic-EPR II joint venture on March 1, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $31.8 million at March 31, 2004. In addition, the
Company had restricted cash of $6.5 million available for debt service in
connection with the $120.5 million mortgage debt due in February 2006.
Mortgage Debt and Credit Facilities
As of March 31, 2004, we had total debt outstanding of $670 million. All of our
debt is mortgage debt secured by a substantial portion of our rental properties.
Of this debt, $104.2 million was variable rate debt and $565.8 million was fixed
rate debt. The $670 million aggregate principal amount of indebtedness had a
weighted average interest rate of approximately 6.4% as of March 31, 2004.
At March 31, 2004, we had $20 million in debt outstanding under our $50 million
Fleet Bank Credit Facility. The Fleet Bank credit facility is secured and at
March 31, 2004, there were six real estate properties pledged. The Fleet Bank
credit facility was amended on April 1, 2004 to increase the facility to $150
million.
At March 31, 2004, we had $20 million of debt outstanding under our iSTAR $75
million credit facility. This facility was repaid and terminated on April 1,
2004 with proceeds borrowed under the amended Fleet Credit Facility.
At March 31, 2004, we had $64.2 million of debt outstanding under our
acquisition term loan facility used for the purpose of acquiring 3 megaplex
theatres in a sale-leaseback transaction on March 30, 2004. This facility was
repaid on April 26, 2004 with proceeds from our common share offering (see note
5).
10
Liquidity Requirements
Short-term liquidity requirements consist primarily of normal recurring
corporate operating expenses, debt service requirements and distributions to
shareholders. Cash provided by operating activities was $29.7 million for the
three months ended March 31, 2004 and $18.5 million for the three months ended
March 31, 2003. We anticipate that our cash on hand and cash from operations
will provide adequate liquidity to fund the operations of the Company, make
interest and principal payments on our debt, and allow distributions to the
Company's shareholders and avoidance of corporate level federal income or excise
tax in accordance with Internal Revenue Code requirements for qualification as a
REIT.
In addition to long term debt and operating lease obligations, EPR had seven
theatre projects under construction at March 31, 2004. These theatres will have
a total of 116 screens and their total development costs (including land) will
be approximately $81.8 million. The Company has already purchased the land for
$21.9 million as of March 31, 2004, and plans to fund the remaining estimated
development costs of these properties through debt facilities and additional
equity. The properties are being developed by the prospective tenants. The cost
of development is paid by the Company either in periodic draws or upon
successful completion of construction. If management of the Company determines
the construction is not being completed in accordance with terms of the
development agreements, the Company can discontinue funding of periodic draws or
refuse to purchase the completed theatre. Upon successful completion of
construction, the Company will lease these theatres to already established
theatre operators for approximately $7.6 million in annual rentals.
Off Balance Sheet Arrangements
At March 31, 2004, the Company had a 20% investment interest in two
non-consolidated 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. The following is a brief
description of the joint ventures:
On May 11, 2000, the Company completed the formation of a joint venture
partnership, Atlantic-EPR I, a Delaware general partnership, with Atlantic of
Hamburg, Germany (Atlantic), whereby the Company contributed the AMC Cantera 30
theatre with a carrying value of $33.5 million in exchange for cash proceeds
from mortgage financing of $17.8 million and a 100% interest in Atlantic-EPR I.
During 2000 through 2002, the Company sold to Atlantic a total of an 80%
interest in Atlantic-EPR I in exchange for $14.3 million in cash. The final
payment by Atlantic of $8.4 million was paid to the Company in January 2003. The
joint venture agreement allows Atlantic to exchange up to a maximum of 10% of
its ownership interest in Atlantic-EPR I per year, beginning in 2005, for common
shares of the Company or, at the discretion of the Company, cash.
The Company accounts for its investment in Atlantic-EPR I under the equity
method of accounting. The Company recognized income of $98.2 thousand and
$91 thousand from its investment in this joint venture during the first quarter
of 2004 and 2003, respectively.
On March 1, 2004, the Company completed the formation of the second joint
venture partnership, Atlantic-EPR II, a Delaware general partnership, with
Atlantic, whereby the Company contributed the AMC Tampa Veterans 24 theatre with
a carrying value of $24.2 million and related mortgage debt of $14.6 million for
a 100% interest in Atlantic-EPR II. Simultaneously on March 1, 2004, the Company
sold to Atlantic an 80% interest in Atlantic-EPR II in exchange for $8.2 million
in cash. The joint venture agreement allows Atlantic to exchange up to a maximum
of 10% of its ownership interest in Atlantic-EPR II per year, beginning in 2007,
for common shares of the Company or, at the discretion of the Company, cash.
11
The Company accounts for its investment in Atlantic-EPR II under the equity
method of accounting. The Company recognized income of $29.8 thousand from its
investment in this joint venture during first quarter of 2004.
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 the
Company's operations or the Company's cash flows or liquidity as defined by
GAAP.
The following tables summarize the Company's FFO for the three month periods
ended March 31, 2004 and March 31, 2003 (in thousands):
Three months
ended March 31,
2004 2003
------- -------
Net income available to common shareholders $ 9,964 $ 7,292
Add: Real estate depreciation 5,013 3,641
Add: Allocated share of joint ventures depreciation 42 32
------- -------
Basic Funds From Operations 15,019 10,965
------- -------
Add: minority interest in net income 430 375
------- -------
Diluted Funds From Operations $15,449 $11,340
======= =======
FFO per common share:
Basic $ 0.76 $ 0.64
Diluted $ 0.73 $ 0.62
Shares used for computation (in thousands):
Basic 19,735 17,074
Diluted 21,184 18,274
Other financial information:
Straight-lined rental revenue $ 369 $ -
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity
12
through means other than voting rights and accordingly should consolidate the
entity. FIN 46R replaced FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, which was issued in January 2003. The Company adopted FIN 46R
on March 31, 2004. The adoption did not have any effect on the Company's 2004
financial statements. Further, the Company does not expect any impact on the
financial statements in the future. FASB Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, was issued in May 2003. This Statement establishes standards for the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. The Statement also includes
required disclosures for financial instruments within its scope. For the
Company, the Statement was effective for instruments entered into or modified
after May 31, 2003 and otherwise was effective as of January 1, 2004, except for
mandatory redeemable financial instruments. For certain mandatory redeemable
financial instruments, the Statement will be effective for the Company on
January 1, 2005. The effective date has been deferred indefinitely for certain
other types of mandatory redeemable financial instruments. As of March 31, 2004,
the Company's financial statements have not been impacted by the issuance of
FASB Statement No. 150. Further, the Company does not expect any impact on the
financial statements in the future.
INFLATION
Investments by the Company are financed with a combination of equity and secured
mortgage indebtedness. During inflationary periods, which are generally
accompanied by rising interest rates, the Company's 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 the Company's megaplex theatre leases provide for base and participating
rent features. To the extent inflation causes tenant revenues at the Company's
properties to increase over baseline amounts, the Company would participate in
those revenue increases through its right to receive annual percentage rent. The
Company's 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.
The Company's theatre leases are triple-net leases requiring the tenants to pay
substantially all expenses associated with the operation of the properties,
thereby minimizing the Company's exposure to increases in costs and operating
expenses resulting from inflation. A portion of the Company's 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, the
Company may be subject to increases in costs resulting from inflation.
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. THE COMPANY'S 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 THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003 AND
ITS PROSPECTUS FILED UNDER RULE 424(b) OF THE SEC ON APRIL 21, 2004. INVESTORS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, primarily relating to potential losses
due to changes in interest rates. The Company seeks 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.
13
The Company is 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 the Company's borrowings are subject to mortgages or contractual
agreements which limit the amount of indebtedness the Company may incur.
Accordingly, if the Company is unable to raise additional equity or borrow money
due to these limitations, the Company's ability to acquire additional properties
may be limited.
ITEM 4. CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management, including the
Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of March 31, 2004, the end of the period
covered by this report. Based on that review and evaluation, the CEO and CFO
have concluded that the Company's current disclosure controls and procedures, as
designed and implemented, were effective. There have been no significant changes
in the Company's internal controls subsequent to the date of their evaluation.
There were no significant material weaknesses identified in the course of such
review and evaluation and, therefore, no corrective measures were taken by the
Company in the Company's 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, the Company is not presently involved in any
litigation nor, to its knowledge, is any litigation threatened against the
Company or its properties, which is reasonably likely to have a material adverse
effect on the liquidity or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
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 AND REPORTS ON FORM 8-K
A. Exhibits.
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act
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.
B. Reports on Form 8-K.
14
Form 8-K filed April 21, 2004 in order to file as an exhibit the
Underwriting Agreement with RBC Capital Markets Corporation and J.P.
Morgan Securities, Inc.. entered into by the Company in connection with
the public offering of the Company's common shares which closed on
April 26, 2004.
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: May 6, 2004 By /s/ David M. Brain
------------------------------------
David M. Brain, President - Chief
Executive Officer and Trustee
Dated: May 6, 2004 By /s/ Fred L. Kennon
------------------------------------
Fred L. Kennon, Vice President -
Chief Financial Officer
15