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, 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 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 26, 2004, there were 24,541,388 Common Shares of Beneficial Interest
outstanding.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(UNAUDITED)
ASSETS
Rental properties, net $ 1,050,596 $ 887,143
Property under development 37,315 12,953
Investment in joint ventures 2,608 1,336
Cash and cash equivalents 23,688 29,284
Restricted cash 13,258 7,738
Intangible assets, net 10,349 693
Other assets 34,004 26,771
-------------- -----------------
Total assets $ 1,171,818 $ 965,918
============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 7,253 $ 2,864
Common dividend payable 13,535 9,829
Preferred dividend payable 1,366 1,366
Unearned rents 2,600 895
Long-term debt 562,499 506,555
-------------- -----------------
Total liabilities 587,253 521,509
Commitments and contingencies - -
Minority interest in consolidated subsidiary 21,590 21,630
Shareholders' equity:
Common Shares, $.01 par value; 50,000,000 shares authorized; 24,534,065 and
20,129,749 shares issued at June 30, 2004
and December 31, 2003, respectively 245 201
Preferred Shares, $.01 par value; 5,000,000 shares authorized;
2,300,000 shares issued and outstanding 23 23
Additional paid-in-capital 600,488 454,195
Treasury shares at cost: 472,200 common shares (6,533) (6,533)
Loans to shareholders (3,525) (3,525)
Non-vested shares (3,033) (1,625)
Distributions in excess of net income (24,690) (19,957)
-------------- -----------------
Shareholders' equity 562,975 422,779
-------------- -----------------
Total liabilities and shareholders' equity $ 1,171,818 $ 965,918
============== =================
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,
2004 2003 2004 2003
---- ---- ---- ----
Rental revenue $ 31,426 $ 21,944 $ 58,964 $ 42,402
Other income 23 - 95 587
-------- -------- -------- --------
Total revenue 31,449 21,944 59,059 42,989
Property operating expense, net 484 83 1,125 178
General and administrative expense, excluding
amortization of non-vested shares below 1,486 1,150 2,606 2,006
Costs associated with loan refinancing 1,134 - 1,134 -
Interest expense, net 10,026 7,477 18,844 14,711
Depreciation and amortization 5,955 3,857 11,016 7,544
Amortization of non-vested shares 340 232 680 463
-------- -------- -------- --------
Income before income from joint ventures and minority interest 12,024 9,145 23,654 18,087
Equity in income from joint ventures 182 97 310 188
Minority interest (490) (375) (919) (750)
-------- -------- -------- --------
Net income $ 11,716 $ 8,867 $ 23,045 $ 17,525
Preferred dividend requirements (1,366) (1,366) (2,731) (2,731)
------- ------- ------- -------
Net income available to common shareholders $ 10,350 $ 7,501 $ 20,314 $ 14,794
======== ======== ======== ========
Net income per common share:
Basic $ 0.47 $ 0.44 $ 0.97 $ 0.86
Diluted $ 0.46 $ 0.43 $ 0.94 $ 0.85
Shares used for computation (in thousands):
Basic 22,211 17,137 20,969 17,106
Diluted 23,551 18,382 22,411 18,332
Dividends per common share $ 0.5625 $ 0.50 $ 1.125 $ 1.00
======== ======== ======== ========
3
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
2004 2003
--------- ---------
OPERATING ACTIVITIES
Net income $ 23,045 $ 17,525
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in net income 919 750
Equity in income from joint venture (310) (188)
Depreciation and amortization 11,016 7,544
Non-cash compensation expense to management and trustees 787 539
Costs associated with loan refinancing (non-cash portion) 729 -
Decrease in other assets 2,009 1,899
Decrease in receivable from joint venture - 8,438
Increase in accounts payable and accrued liabilities 4,359 428
Increase (decrease) in unearned rents 1,705 (3,354)
--------- ---------
Net cash provided by operating activities 44,259 33,581
--------- ---------
INVESTING ACTIVITIES
Acquisition of rental properties (208,213) (68,636)
Additions to properties under development (11,177) (6,702)
Distributions from joint venture 401 238
Proceeds from sale of equity interest in joint venture 8,240 -
Investment in secured note receivable (5,000) -
Development and capitalized costs (13,185) (573)
--------- ---------
Net cash used in investing activities (228,934) (75,673)
--------- ---------
FINANCING ACTIVITIES
Proceeds from long-term debt facilities 246,609 175,500
Principal payments on long-term debt (176,082) (95,171)
Deferred financing fees paid (5,064) (7,126)
Proceeds from issuance of common shares, net of costs 144,169 1,046
Distribution to minority interest (960) (750)
Distribution to shareholders (24,073) (19,516)
--------- ---------
Net cash provided by financing activities 184,599 53,983
--------- ---------
Net increase (decrease) in cash and cash equivalents (76) 11,891
Cash and cash equivalents at beginning of period 37,022 16,586
--------- ---------
Cash and cash equivalents at end of period $ 36,946 $ 28,477
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY
Contribution of rental property and related debt to joint venture $ 9,603 $ -
Transfer of property under development to rental property $ - $ 5,509
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during six-month period for interest $ 18,326 $ 13,871
Issuance of non-vested stock grants to management and trustees $ 2,090 $ 1,304
--------- ---------
4
ENTERTAINMENT PROPERTIES TRUST
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.
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, 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.
ACCOUNTING FOR ACQUISITIONS
For rental property acquisitions completed after June 30, 2001 (the effective
date of SFAS No. 141, "Business Combinations"), the Company considers the fair
values of both tangible and intangible assets or liabilities when allocating the
purchase price (plus any capitalized costs incurred during the acquisition).
Tangible assets may include land, building, tenant improvements, furniture,
fixtures and equipment. Intangible assets or liabilities may include values
assigned to in-place leases (including the separate values that may be assigned
to above-market and below-market in-place leases), the value of tenant
relationships, and any assumed financing that is determined to be above or below
market terms.
Most of the Company's rental property acquisitions do not involve in-place
leases. In such cases, the cost of the acquisition is allocated to the tangible
assets based on recent independent appraisals and management judgment. Because
the Company typically executes these leases simultaneously with the purchase of
the real estate, no value has been ascribed to in-place leases in these
transactions.
For rental property acquisitions involving in-place leases, the fair value of
the tangible assets is determined by valuing the property as if it were vacant
based on management's determination of the relative fair values of the assets.
Management determines the as if vacant fair value of a property using recent
independent appraisals or methods similar to those used by independent
appraisers. The aggregate value of intangible assets or liabilities is measured
based on the difference between the stated price plus capitalized costs and the
property as if vacant.
In determining the fair value of acquired in-place leases, the Company considers
many factors. On a lease-by-lease basis,
5
management considers the present value of the difference between the contractual
amounts to be paid pursuant to the leases and management's estimate of fair
market lease rates. For above market leases, management considers such
differences over the remaining non-cancelable lease terms and for below market
leases, management considers such differences over the remaining initial lease
terms plus any fixed rate renewal periods. The capitalized above-market lease
values are amortized as a reduction of rental income over the remaining
non-cancelable terms of the respective leases. The capitalized below market
lease values are amortized to income over the remaining initial lease terms plus
any fixed rate renewal periods. Management considers several factors in
determining the discount rate used in the present value calculations, including
the credit risks associated with the respective tenants. If debt is assumed in
the acquisition, the determination of whether it is above or below market is
based upon a comparison of similar financing terms for similar rental
properties.
The fair value of acquired in-place leases also includes management's estimate,
on a lease-by-lease basis, of the present value of the following amounts: (i)
the value associated with avoiding the cost of originating the acquired in-place
leases (i.e. the market cost to execute the leases, including leasing
commissions, legal and other related costs); (ii) the value associated with lost
revenue related to tenant reimbursable operating costs estimated to be incurred
during the assumed re-leasing period, (i.e. real estate taxes, insurance and
other operating expenses); (iii) the value associated with lost rental revenue
from existing leases during the assumed re-leasing period; and (iv) the value
associated with avoided tenant improvement costs or other inducements to secure
a tenant lease. These values are amortized over the remaining initial lease term
of the respective leases.
The Company also determines the value, if any, associated with customer
relationships considering factors such as the nature and extent of the Company's
existing business relationship with the tenants, growth prospects for developing
new business with the tenants and expectation of lease renewals. The value of
customer relationship intangibles is amortized over the remaining initial lease
terms plus any renewal periods.
Management of the Company reviews the carrying value of intangible assets for
impairment on an annual basis. Intangible assets consist of the following (in
thousands):
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
In-place leases, net of
accumulated amortization of
$303 thousand and $0 $ 9,656 $ -
Goodwill 693 693
------------- ----------------
Total intangible assets, net $ 10,349 $ 693
============= ================
In-place leases, net at June 30, 2004 of approximately $9.7 million relate
solely to four entertainment retail centers in Ontario, Canada that were
purchased on March 1, 2004. Amortization expense related to in-place leases was
$303 thousand for the six months ended June 30, 2004. There was no amortization
expense related to in-place leases for the six months ended June 30, 2003.
CONCENTRATION OF RISK
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (66%)
of the megaplex theatre rental properties held by the Company at June 30, 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 61%) 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.
6
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 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):
SIX MONTHS ENDED JUNE 30,
2004 2003
---- ----
Net income available to common shareholders,
as reported $ 20,314 $ 14,794
Add: Stock-based employee compensation
expense included in reported net income 14 13
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (62) (77)
---------- -------------
Pro forma net income $ 20,266 $ 14,730
========== =============
Basic earnings per share:
As reported $ 0.97 $ 0.86
Pro forma $ 0.97 $ 0.86
Diluted earnings per share:
As reported $ 0.94 $ 0.85
Pro forma $ 0.94 $ 0.84
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 in non-vested shares were issued in the first quarter
of 2004.
During the second quarter of 2004, the Company issued 856 restricted common
shares as long-term retainers to Trustees of the Company. Based upon the market
price of the Company's common shares on the grant dates, approximately $28,000
in non-vested shares were issued in the second quarter of 2004.
7
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period amounts to conform
to the current period presentation.
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 SIX MONTHS
ENDED JUNE 30, 2004 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
========== ============ ========= ========== ============= =========
THREE MONTHS SIX MONTHS
ENDED JUNE 30, 2003 ENDED JUNE 30, 2003
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Basic earnings:
Income available to common shareholders $ 7,501 17,137 $ 0.44 $ 14,794 17,106 $ 0.86
Effect of dilutive securities:
Stock options - 264 (0.01) - 245 (0.01)
Contingent shares from conversion of
minority interest 375 857 - 750 857 -
Non-vested common share grants - 124 - - 124 -
---------- ------------ --------- ---------- ------------- ---------
Diluted earnings $ 7,876 18,382 $ 0.43 $ 15,544 18,332 $ 0.85
=========== ============ ========= ========== ============= =========
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 US $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.
8
The fair value of the real properties acquired was approximately US $152
million. In accordance with Statement of Financial Accounting Standard (SFAS)
No. 141 (described in Note 1), the Company allocated approximately $10 million
of the purchase price to in-place leases and is amortizing this value over the
remaining non-cancelable lease terms ranging from 5 to 19 years. 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 of approximately US $97 million.
The following unaudited pro forma results of operations reflects the Company's
acquisition as if it had occurred as of the beginning of the period:
PRO FORMA SIX MONTHS ENDED JUNE 30,
2004 2003
---- -----
Total revenue $ 61,654 50,719
Net income available to common shareholders $ 20,612 17,173
Basic net income per common share $ 0.98 0.96
Diluted net income per common share $ 0.96 0.94
5. COMMON STOCK OFFERINGS
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 initially to repay debt of $64.2
million, reduce borrowings under our credit line and for other corporate
purposes.
On June 28, 2004, the Company completed an offering of 1,000,000 common shares.
Net proceeds of the offering were approximately $35.4 million and were used
initially to reduce borrowings under our credit line and for other corporate
purposes.
6. AMENDMENT OF CREDIT FACILITY
In March, 2004, the Company amended its Revolving 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 Revolving 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 its iStar Credit Facility, the
Company paid a prepayment penalty of $405 thousand and recorded a non-cash
expense to write-off $729 thousand of remaining unamortized financing fees.
These amounts are included in "Costs associated with loan refinancing" in the
accompanying statements of income for the three and six months ended June 30,
2004.
7. COMMITMENTS
As of June 30, 2004, the Company has $37.3 million invested in properties under
development. The Company has outstanding commitments to fund an additional $58.4
million in improvements on certain of these properties, and it is anticipated
that such funding will be completed by December 31, 2004.
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, 2003 and those discussed in "Risk Factors" in our prospectus filed
under Rule 424(b) of the SEC on June 22, 2004.
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, 2004, we had
invested approximately $1.2 billion (before accumulated depreciation) in 52
megaplex theatre properties and various restaurant, retail and other properties
located in 20 states and Ontario, Canada. As of June 30, 2004, we had invested
approximately $37.3 million in development land and construction in progress for
theatre and theatre-related developments.
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. We also own multi-tenant properties in which we
lease space to operating tenants.
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 seven-year to 40-year period for tax and financial reporting
purposes.
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 materially from these estimates.
10
Revenue Recognition
Rents that are fixed and determinable are recognized on a straight-line basis
over the 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
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. The 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 2003 or the first
six months of 2004. 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 by 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 for 2003 or the first six months of 2004.
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 purchase price to the applicable assets and
liabilities. These estimates have a direct impact on our net income.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Revenue from property rentals was $31.4 million for the three months ended June
30, 2004 compared to $21.9 million for the three months ended June 30, 2003. The
$9.5 million increase resulted primarily from the property acquisitions
completed in 2003 and 2004 and from base rent increases and percentage rents on
existing properties. Percentage rents of $494 thousand and $243 thousand were
recognized during the three months ended June 30, 2004 and 2003, respectively,
and straight-line rents were $600 thousand for the three months ended June 30,
2004 compared to no straight-line rents in the prior year.
Our property operating expenses, net totaled $484 thousand for the three months
ended June 30, 2004 compared to $83 thousand for the three months ended June 30,
2003. These expenses, net of reimbursements, arise from the operations of our
retail centers in Greenville, SC, Westminster, CO, Southfield, MI, Suffolk, VA,
Tampa, FL, New Rochelle, NY, and Ontario, Canada.
Our general and administrative expenses totaled $1.5 million for the three
months ended June 30, 2004 compared to $1.2 million for the same period in 2003.
The increase in operating expenses is due primarily to:
- Increases in insurance expense, including premiums for both Director
and Officer insurance and property and casualty insurance due to an
overall increase in premiums in the insurance market and increases
in the size of our real estate portfolio.
- A $99 thousand expense incurred for professional fees on a project
that was ultimately not executed.
- An increase in payroll and related expenses attributable to
increases in base compensation, bonus awards, and payroll taxes
related to the vesting of stock grants and stock bonuses, and the
addition of employees.
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, 2003.
Our net interest expense increased by $2.5 million to $10 million for the three
months ended June 30, 2004 from $7.5 million for the three months ended June 30,
2003. The increase in net interest expense primarily resulted from increases in
long-term debt used to finance real estate acquisitions.
Depreciation and amortization expense, including amortization of non-vested
shares, totaled $6.3 million for the three months ended June 30, 2004 compared
to $4.1 million for the same period in 2003. The $2.2 million increase resulted
from the property acquisitions completed in 2003 and 2004 and recent grants of
restricted shares to management.
Income from joint ventures totaled $182 thousand for the three months ended June
30, 2004 compared to $97 thousand for the same period in 2003. The increase is
due to the addition of the Atlantic-EPR II joint venture as of March 1, 2004.
For the three months ended June 30, 2004 minority interest in net income was
$490 thousand as compared to $375 thousand in the prior year period. The
increase is due to the acquisition of our 71.4% ownership in New Roc Associates,
L.P. as of October 27, 2003.
12
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Revenue from property rentals was $59 million for the six months ended June 30,
2004 compared to $42.4 million for the six months ended June 30, 2003. The $16.6
million increase resulted primarily from the property acquisitions completed in
2003 and 2004 and from base rent increases and percentage rents on existing
properties. Percentage rents of $1.2 million and $607 thousand were recognized
during the six months ended June 30, 2004 and 2003, respectively, and
straight-line rents were $969 thousand for the six months ended June 30, 2004
compared to no straight-line rents in the prior year.
Our property operating expenses, net totaled $1.1 million for the six months
ended June 30, 2004 compared to $178 thousand for the six months ended June 30,
2003. These expenses, net of reimbursements, arise from the operations of our
retail centers in Greenville, SC, Westminster, CO, Southfield, MI, Suffolk, VA,
Tampa, FL, New Rochelle, NY, and Ontario, Canada.
General and administrative expenses totaled $2.6 million for the six months
ended June 30, 2004 compared to $2 million for the same period in 2003. The
increase in operating expenses is due primarily to:
- Increases in insurance expense, including premiums for both Director
and Officer insurance and property and casualty insurance due to an
overall increase in premiums in the insurance market and increases
in the size of our real estate portfolio.
- A $99 thousand expense incurred for professional fees on a project
that was ultimately not executed.
- An increase in payroll and related expenses attributable to
increases in base compensation, bonus awards, and payroll taxes
related to the vesting of stock grants and stock bonuses, and the
addition of employees.
- Increases in franchise and other miscellaneous taxes paid.
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, 2003.
Net interest expense increased to $18.8 million for the six months ended June
30, 2004 from $14.7 million for the six months ended June 30, 2003. The $4.1
million increase in net interest expense resulted primarily from increases in
long-term debt used to finance real estate acquisitions.
Our depreciation and amortization expense, including amortization of non-vested
shares, totaled $11.7 million for the six months ended June 30, 2004 compared to
$8 million for the same period in 2003. The $3.7 million increase resulted
primarily from the property acquisitions completed in 2003 and 2004 and recent
grants of restricted shares to management.
Income from joint ventures totaled $310 thousand for the six months ended June
30, 2004 compared to $188 thousand for the same period in 2003. The increase is
due to the addition of the Atlantic-EPR II joint venture as of March 1, 2004.
For the six months ended June 30, 2004 minority interest in net income was $919
thousand as compared to $750 thousand in the prior year period. The increase is
due to the acquisition of our 71.4% ownership in New Roc Associates, L.P. as of
October 27, 2003.
13
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $23.7 million at June 30, 2004. In addition, we
had restricted cash of $13.3 million at June 30, 2004.
Mortgage Debt and Credit Facilities
As of June 30, 2004, we had total debt outstanding of $562.5 million. All of our
debt is mortgage debt secured by a substantial portion of our rental properties.
All of our outstanding debt as of June 30, 2004 was fixed rated debt with a
weighted average interest rate of approximately 6.6%.
As of June 30, 2004, we had no debt outstanding under our $150 million Revolving
Bank Credit Facility that bears interest at a floating rate and is secured by
nine rental properties.
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 $44.3 million
for the six months ended June 30, 2004 and $33.6 million for the six months
ended June 30, 2003. We anticipate that our cash on hand and cash from
operations 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 make real estate acquisitions and fund development primarily with funds
generated by debt financings and/or equity offerings. EPR had seven theatre
projects under construction at June 30, 2004. The properties are being developed
by and been pre-leased to the prospective tenants. The cost of development is
paid by us either in periodic draws or upon successful completion of
construction. These theatres will have a total of 116 screens and their total
development costs (including land) will be approximately $87.3 million. Through
June 30, 2004, we have invested $28.9 million on these projects (including
land), and have commitments to fund an additional $58.4 million in improvements.
It is anticipated that such funding will be completed by December 31, 2004
through debt facilities and/or additional equity. Upon successful completion of
construction, we have agreed to lease these theatres to the theatre operators
for approximately $9.6 million in annual rentals.
Off Balance Sheet Arrangements
At June 30, 2004, we 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, we completed the formation of a joint venture partnership,
Atlantic-EPR I, a Delaware general partnership, with Atlantic of Hamburg,
Germany (Atlantic), whereby we 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, we 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 us 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 EPR or, at our
discretion, cash.
14
We account for our investment in Atlantic-EPR I under the equity method of
accounting. We recognized income of $203 thousand and $188 thousand from our
investment in this joint venture during the first six months of 2004 and 2003,
respectively.
On March 1, 2004, we completed the formation of the second joint venture
partnership, Atlantic-EPR II, a Delaware general partnership, with Atlantic,
whereby we 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, we 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 EPR or, at our discretion, cash.
We account for our investment in Atlantic-EPR II under the equity method of
accounting. We recognized income of $107 thousand from our investment in this
joint venture during the first six months 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 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, 2004 and June 30, 2003 (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income available to common shareholders $10,350 $ 7,501 $20,314 $14,794
Add: Real estate depreciation 5,906 3,813 10,919 7,454
Add: Allocated share of joint venture depreciation 62 32 105 64
------- ------- ------- -------
Basic Funds From Operations 16,318 11,346 31,338 22,312
------- ------- ------- -------
Add: minority interest in net income 375 375 750 750
------- ------- ------- -------
Diluted Funds From Operations $16,693 $11,721 $32,088 $23,062
======= ======= ======= =======
FFO per common share:
Basic $ 0.73 $ 0.66 $ 1.49 $ 1.30
Diluted $ 0.71 $ 0.64 $ 1.43 $ 1.26
Shares used for computation (in thousands):
Basic 22,211 17,137 20,969 17,106
Diluted 23,551 18,382 22,411 18,332
Other financial information:
Straight-lined rental revenue $ 600 $ - $ 969 $ -
15
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board (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 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. We adopted FIN 46R on March 31,
2004. The adoption did not have any effect on our 2004 interim financial
statements, and we do not expect any impact on our 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 EPR, 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 EPR on January 1, 2005. The effective date has
been deferred indefinitely for certain other types of mandatory redeemable
financial instruments. As of June 30, 2004, our financial statements have not
been impacted by the issuance of FASB Statement No. 150, and we do not expect
any impact on the financial statements in the future.
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
16
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, 2003
AND OUR PROSPECTUS FILED UNDER RULE 424(B) OF THE SEC ON JUNE 22, 2004.
INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING
STATEMENTS.
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 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, 2004, 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 significant 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.
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 . 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.
17
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.
8-K, current report item 5 and 7, filed on April 5, 2004 in order to file
as an exhibit the Amended and Restated Master Credit Agreement with Fleet
National Bank, Royal Bank of Canada and JP Morgan Chase Bank entered into
by the Company on March 29, 2004
8-K, current report item 7, 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.
8-K, current report item 7, filed on May 6, 2004 in connection with the
release of the Company's earnings for the quarter ended March 31, 2004
8-K, current report item 7, filed on June 23, 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
June 28, 2004.
8-K, current report item 7, filed on June 25, 2004 in order to file as an
exhibit the opinion of Sonnenschein Nath & Rosenthal LLP as to the
legality of the shares issued pursuant to 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 June 28, 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: August 3, 2004 By /s/ David M. Brain
-----------------------
David M. Brain, President -
Chief Executive Officer and Trustee
Dated: August 3, 2004 By /s/ Fred L. Kennon
------------------------
18
Fred L. Kennon, Vice President - Chief Financial Officer
19