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 September 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 October 14, 2004, there were 25,401,267 Common Shares of Beneficial Interest
outstanding.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
ASSETS (Unaudited)
Rental properties, net $ 1,078,339 $ 887,143
Property under development 46,520 12,953
Investment in joint ventures 2,575 1,336
Cash and cash equivalents 10,252 29,284
Restricted cash 12,863 7,738
Intangible assets, net 10,624 693
Other assets 40,046 26,771
----------- -----------
Total assets $ 1,201,219 $ 965,918
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 7,759 $ 2,864
Common dividends payable 14,023 9,829
Preferred dividends payable 1,366 1,366
Unearned rents 641 895
Long-term debt 589,127 506,555
----------- -----------
Total liabilities 612,916 521,509
Commitments and contingencies - -
Minority interest in consolidated subsidiaries 6,144 21,630
Shareholders' equity:
Common Shares, $.01 par value; 50,000,000 shares authorized; 25,401,267 and
20,129,749 shares issued at September 30, 2004 and December 31, 2003,
respectively 254 201
Preferred Shares, $.01 par value; 5,000,000 shares authorized;
2,300,000 shares issued and outstanding 23 23
Additional paid-in-capital 615,735 454,195
Treasury shares at cost: 472,200 common shares (6,533) (6,533)
Loans to shareholders (3,525) (3,525)
Non-vested shares (2,686) (1,625)
Accumulated other comprehensive income 3,615 -
Distributions in excess of net income (24,724) (19,957)
----------- -----------
Shareholders' equity 582,159 422,779
----------- -----------
Total liabilities and shareholders' equity $ 1,201,219 $ 965,918
=========== ===========
2
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Rental revenue $ 32,308 $ 22,406 $ 91,273 $ 64,808
Other income 297 608 393 1,195
-------- -------- -------- --------
Total revenue 32,605 23,014 91,666 66,003
Property operating expense, net 465 220 1,590 398
General and administrative expense, excluding
amortization of non-vested shares below 1,078 929 3,685 2,935
Costs associated with loan refinancing - - 1,134 -
Interest expense, net 9,457 7,653 28,301 22,363
Depreciation and amortization 6,021 4,085 17,036 11,631
Amortization of non-vested shares 340 232 1,021 694
-------- -------- -------- --------
Income before income from joint ventures and minority
interest 15,244 9,895 38,899 27,982
Equity in income from joint ventures 172 111 482 299
Minority interest (62) (375) (982) (1,125)
-------- -------- -------- --------
Net income $ 15,354 $ 9,631 $ 38,399 $ 27,156
Preferred dividend requirements (1,366) (1,366) (4,097) (4,097)
-------- -------- -------- --------
Net income available to common shareholders $ 13,988 $ 8,265 $ 34,302 $ 23,059
======== ======== ======== ========
Net income per common share:
Basic $ 0.58 $ 0.48 $ 1.56 $ 1.34
Diluted $ 0.57 $ 0.46 $ 1.51 $ 1.31
Shares used for computation (in thousands):
Basic 24,031 17,353 21,997 17,189
Diluted 24,628 18,641 23,159 18,456
Dividends per common share $ 0.5625 $ 0.50 $ 1.6875 $ 1.50
======== ======== ======== ========
3
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2004 2003
--------- ---------
OPERATING ACTIVITIES
Net income $ 38,399 $ 27,156
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in net income 982 1,125
Equity in income from joint ventures (482) (299)
Depreciation and amortization 17,036 11,631
Non-cash compensation expense to management and trustees 1,208 776
Costs associated with loan refinancing (non-cash portion) 729 -
(Increase) decrease in other assets (6,142) 2,714
Decrease in receivable from joint venture - 8,438
Increase (decrease) in accounts payable and accrued liabilities 7,062 (441)
Decrease in unearned rents (251) (3,659)
--------- ---------
Net cash provided by operating activities 58,541 47,441
--------- ---------
INVESTING ACTIVITIES
Acquisition of rental properties (230,995) (68,709)
Additions to properties under development (39,708) (9,559)
Distributions from joint ventures 606 362
Proceeds from sale of assets 3,100 -
Proceeds from sale of equity interest in joint venture 8,240 -
Investment in secured note receivable (5,000) -
--------- ---------
Net cash used in investing activities (263,757) (77,906)
--------- ---------
FINANCING ACTIVITIES
Proceeds from long-term debt facilities 271,609 190,200
Principal payments on long-term debt (179,542) (97,665)
Deferred financing fees paid (5,086) (7,414)
Proceeds from issuance of common shares, net of costs 144,455 73,220
Distribution to minority interest (1,469) (1,125)
Distribution to shareholders (38,974) (29,528)
--------- ---------
Net cash provided by financing activities 190,993 127,688
Effect of exchange rate changes on cash 316 -
--------- ---------
Net increase (decrease) in cash and cash equivalents (13,907) 97,223
Cash and cash equivalents at beginning of period 37,022 10,091
--------- ---------
Cash and cash equivalents at end of period $ 23,115 $ 107,314
========= =========
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 $ 6,858 $ 5,509
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 28,017 $ 21,178
Issuance of non-vested stock grants to management and trustees $ 2,099 $ 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 nine-month period ended September 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.
5
In determining the fair value of acquired in-place leases, the Company considers
many factors. On a lease-by-lease basis, 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):
SEPTEMBER 30, 2004 DECEMBER 31,2003
------------------ ----------------
In-place leases, net of
accumulated amortization of
$558 thousand and $0 $ 9,931 $ -
Goodwill 693 693
------- -------
Total intangible assets, net $10,624 $ 693
======= =======
In-place leases, net at September 30, 2004 of approximately $9.9 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
$558 thousand for the nine months ended September 30, 2004. There was no
amortization expense related to in-place leases for the nine months ended
September 30, 2003.
CONCENTRATION OF RISK
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (65%)
of the megaplex theatre rental properties held by the Company at September 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 60%) 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 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 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):
NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
---------- -------------
Net income available to common shareholders,
as reported $ 34,302 $ 23,059
Add: Stock-based compensation expense
included in reported net income 87 19
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards (180) (115)
---------- -------------
Pro forma net income $ 34,209 $ 22,963
========== =============
Basic earnings per share:
As reported $ 1.56 $ 1.34
Pro forma $ 1.56 $ 1.34
Diluted earnings per share:
As reported $ 1.51 $ 1.31
Pro forma $ 1.51 $ 1.31
Restricted Shares
During the first quarter of 2004, the Company issued 55,650 restricted common
shares as bonus compensation and long-term incentive 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 first quarter of 2003, the
Company issued 53,606 restricted common shares as bonus compensation and
long-term incentive to executives and other employees of the Company.
7
During the second quarter of 2004, the Company issued 717 restricted common
shares as retainers to Trustees of the Company. Based upon the market price of
the Company's common shares on the grant dates, approximately $23,303 in
non-vested shares were issued in the second quarter of 2004.
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 NINE MONTHS
ENDED SEPTEMBER 30, 2004 ENDED SEPTEMBER 30, 2004
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
Basic earnings:
Income available to common shareholders $ 13,988 4,031 $ 0.58 $ 34,302 21,997 $ 1.56
Effect of dilutive securities:
Stock options - 466 (0.01) - 460 (0.03)
Contingent shares from conversion of
minority interest - - - 750 571 (0.01)
Non-vested common share grants - 131 - - 131 (0.01)
--------- ------ ------- -------- ------ -------
Diluted earnings $ 13,988 24,628 $ 0.57 $ 35,052 23,159 $ 1.51
========= ====== ======= ======== ====== =======
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, 2004 ENDED SEPTEMBER 30, 2004
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
Basic earnings:
Income available to common shareholders $ 8,265 17,353 $ 0.48 $23,059 17,189 $ 1.34
Effect of dilutive securities:
Stock options - 307 (0.01) - 286 (0.02)
Contingent shares from conversion of
minority interest 375 857 - 1,125 857 -
Non-vested common share grants - 124 (0.01) - 124 (0.01)
------- ------ -------- ------- ------ --------
Diluted earnings $ 8,640 18,641 $ 0.46 $24,184 18,456 $ 1.31
======= ====== ======== ======= ====== ========
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
8
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. In accordance with Statement of Financial Accounting Standard (SFAS)
No. 141 (described in Note 2), 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 NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2004 2003
-------- ------
Total revenue $ 93,866 75,130
Net income available to common shareholders $ 34,860 25,430
Basic net income per common share $ 1.58 1.42
Diluted net income per common share $ 1.53 1.38
During the third quarter of 2004, the Company completed two megaplex theatre
acquisitions totaling approximately $19.5 million, consisting of the Grand
Prairie Theatre located in Peoria, Illinois, leased to Rave Motion Pictures, and
the Palace Theatre in Lafayette, Louisiana leased to Southern Theatres. Lease
terms for both theatres include a 20 year base term with optional extension
periods all on a triple-net basis.
5. CONVERSION OF PREFERRED INTEREST IN EPT GULF STATES, LLC
On September 20, 2004, 100% of the preferred interest in EPT Gulf States, LLC
was converted to 857,145 restricted common shares of the Company. As a result,
$15 million of minority interest in a consolidated subsidiary was converted to
common shares and additional paid-in-capital. The shares were subsequently
registered with the SEC under the Securities Act of 1933.
6. COMMITMENTS
As of September 30, 2004, the Company has $46.5 million invested in property
under development. The Company has outstanding commitments to fund an additional
$33.3 million in improvements on certain of these properties.
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
9
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 October 14, 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 September 30, 2004, we
had invested approximately $1.2 billion (before accumulated depreciation) in 54
megaplex theatre properties and various restaurant, retail and other properties
located in 21 states and Ontario, Canada. As of September 30, 2004, we had
invested approximately $46.5 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.
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:
10
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. 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 2003 or the first
nine 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 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 for 2003 or the first nine 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
Revenue from property rentals was $32.3 million for the three months ended
September 30, 2004 compared to $22.4 million for the three months ended
September 30, 2003. The $9.9 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 $520 thousand
and $265 thousand were recognized during the three months ended September 30,
2004 and 2003, respectively, and straight-line rents were $665 thousand for the
three months ended September 30, 2004 compared to no straight-line rents in the
prior year.
Our property operating expenses, net totaled $465 thousand for the three months
ended September 30, 2004 compared to $220 thousand for the three months ended
September 30, 2003. These expenses, net of tenant 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.
11
Our general and administrative expenses totaled $1.1 million for the three
months ended September 30, 2004 compared to $0.9 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.
- 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.
Our net interest expense increased by $1.8 million to $9.5 million for the three
months ended September 30, 2004 from $7.7 million for the three months ended
September 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 September 30, 2004
compared to $4.3 million for the same period in 2003. The $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 $172 thousand for the three months ended
September 30, 2004 compared to $111 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 September 30, 2004 minority interest in net income
was $62 thousand as compared to $375 thousand for the three months ended
September 30, 2003. The decrease is due 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. The minority interest for third quarter 2004 relates
solely to the minority interest in New Roc Associates, L.P. which was acquired
as of October 27, 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
Revenue from property rentals was $91.3 million for the nine months ended
September 30, 2004 compared to $64.8 million for the nine months ended September
30, 2003. The $26.5 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 $1.7 million and
$872 thousand were recognized during the nine months ended September 30, 2004
and 2003, respectively, and straight-line rents were $1.6 million for the nine
months ended September 30, 2004 compared to no straight-line rents in the prior
year.
Our property operating expenses, net totaled $1.6 million for the nine months
ended September 30, 2004 compared to $398 thousand for the nine months ended
September 30, 2003. These expenses, net of tenant 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 $3.7 million for the nine months
ended September 30, 2004 compared to $2.9 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.
12
- 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 nine months ended September 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 nine months ended September 30, 2003.
Net interest expense increased to $28.3 million for the nine months ended
September 30, 2004 from $22.4 million for the nine months ended September 30,
2003. The $5.9 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 $18.1 million for the nine months ended September 30, 2004
compared to $12.3 million for the same period in 2003. The $5.8 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 $482 thousand for the nine months ended
September 30, 2004 compared to $299 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 nine months ended September 30, 2004 minority interest in net income was
$982 thousand as compared to $1.1 million in the prior year period. The decrease
is due 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. The minority
interest for third quarter 2004 relates solely to the minority interest in New
Roc Associates, L.P. which was acquired as of October 27, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $10.3 million at September 30, 2004. In addition,
we had restricted cash of $12.9 million at September 30, 2004 to be used only
for payment of certain property taxes and capital improvements.
Mortgage Debt and Credit Facilities
As of September 30, 2004, we had total debt outstanding of $589.1 million. All
of our debt is mortgage debt secured by a substantial portion of our rental
properties. As of September 30, 2004, $564.1 million of debt outstanding was
fixed rated debt with a weighted average interest rate of approximately 6.5%.
As of September 30, 2004, we had $25 million in debt outstanding under our $150
million Revolving Bank Credit Facility that bears interest at a floating rate
and is secured by eleven 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 $58.5 million
for the nine months ended September 30, 2004 and $47.4 million for the nine
months ended September 30, 2003. We anticipate that our cash on hand, cash from
operations, and funds available under our revolving debt facility will provide
adequate liquidity to fund our operations, make interest and principal payments
on our debt,
13
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 six theatre
projects under construction at September 30, 2004. The properties are being
developed by and have 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 96 screens and their total
development costs (including land) will be approximately $70.9 million. Through
September 30, 2004, we have invested $37.6 million in these projects (including
land), and have commitments to fund an additional $33.3 million in improvements.
Upon successful completion of construction, we have agreed to lease these
theatres to the theatre operators under long-term triple-net leases.
Off Balance Sheet Arrangements
At September 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.
We account for our investment in Atlantic-EPR I under the equity method of
accounting. We recognized income of $307 thousand and $299 thousand from our
investment in this joint venture during the first nine 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 $175 thousand from our investment in this
joint venture during the first nine 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
14
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 nine month periods
ended September 30, 2004 and September 30, 2003 (in thousands):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2004 2003 2004 2003
------- ------- ------- -------
Net income available to common shareholders $13,988 $ 8,265 $34,302 $23,059
Add: Real estate depreciation and amortization 5,778 4,042 16,347 11,496
Add: Allocated share of joint venture depreciation 59 33 163 97
------- ------- ------- -------
Basic Funds From Operations 19,825 12,340 50,812 34,652
------- ------- ------- -------
Add: minority interest in net income - 375 750 1,125
------- ------- ------- -------
Diluted Funds From Operations $19,825 $12,715 $51,562 $35,777
------- ------- ------- -------
FFO per common share:
Basic $ 0.82 $ 0.71 $ 2.31 $ 2.02
Diluted $ 0.80 $ 0.68 $ 2.23 $ 1.94
Shares used for computation (in thousands):
Basic 24,031 17,353 21,997 17,189
Diluted 24,628 18,641 23,159 18,456
Other financial information:
Straight-lined rental revenue $ 665 $ - $ 1,635 $ -
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.
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
15
been deferred indefinitely for certain other types of mandatory redeemable
financial instruments. As of September 30, 2004, our financial statements have
not been impacted by the issuance of FASB Statement No. 150.
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, 2003 AND OUR PROSPECTUS
FILED UNDER RULE 424(b) OF THE SEC ON OCTOBER 14, 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 also have a $150 million line of credit
that bears interest at a floating rate that we use to acquire properties.
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
16
September 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 . UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
See Note 5 to the financial statements included in Part I, Item 1 of this
report.
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.
8-K current report item 7, filed on July 27, 2004 in connection with
the release of the Company's earnings for the quarter ended June 30,
2004
8-K, current report item 7, filed on September 27, 2004 in order to
file as an exhibit the opinion of Sonnenschein Nath & Rosenthal LLP
as to the legality of the shares registered under the Registrant's
Registration Statement on Form S-3, Registration No. 333-119160.
17
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: October 29, 2004 By /s/ David M. Brain
------------------------
David M. Brain,
President - Chief Executive Officer and Trustee
Dated: October 29, 2004 By /s/ Fred L. Kennon
------------------------
Fred L. Kennon,
Vice President - Chief Financial Officer
18