UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
COMMISSION FILE NUMBER 1-13561
ENTERTAINMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 43-1790877
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
30 PERSHING ROAD, SUITE 201
KANSAS CITY, MISSOURI 64108
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (816) 472-1700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2 has been subject to such filing
requirements for the past 90 days. Yes X
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At April 29, 2005, there were 25,591,639 Common Shares of Beneficial Interest
outstanding.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
ASSETS (Unaudited)
Rental properties, net $ 1,193,421 $ 1,121,409
Property under development 18,906 23,144
Investment in joint ventures 2,508 2,541
Cash and cash equivalents 8,026 11,255
Restricted cash 12,360 12,794
Intangible assets, net 10,796 10,900
Deferred financing costs, net 11,373 12,730
Other assets 20,599 18,675
-------------- -----------------
Total assets $ 1,277,989 $ 1,213,448
============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 7,470 $ 10,070
Common dividends payable 15,657 14,097
Preferred dividends payable 2,606 1,366
Unearned rents 3,452 1,634
Long-term debt 581,991 592,892
-------------- -----------------
Total liabilities 611,176 620,059
Commitments and contingencies -- --
Minority interests 5,849 6,049
Shareholders' equity:
Common Shares, $.01 par value; 50,000,000 shares authorized; 25,587,588 and
25,578,472 shares issued at March 31,
2005 and December 31, 2004, respectively 256 256
Preferred Shares, $.01 par value; 10,000,000 shares authorized:
2,300,000 Series A shares issued at March 31, 2005
and December 31, 2004 23 23
3,200,000 and 0 Series B shares issued at March 31, 2005
and December 31, 2004, respectively 32 --
Additional paid-in-capital 696,261 618,715
Treasury shares at cost: 536,429 and 517,421 common shares
at March 31, 2005 and December 31, 2004, respectively (9,226) (8,398)
Loans to shareholders (3,525) (3,525)
Non-vested shares (1,885) (2,338)
Accumulated other comprehensive income 6,351 7,480
Distributions in excess of net income (27,323) (24,873)
-------------- -----------------
Shareholders' equity 660,964 587,340
-------------- -----------------
Total liabilities and shareholders' equity $ 1,277,989 $ 1,213,448
============== =================
</Table>
2
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
2005 2004
----------- -----------
Rental revenue $ 34,150 $ 27,539
Tenant reimbursements 2,979 2,183
Other income 814 72
----------- -----------
Total revenue 37,943 29,794
Property operating expense 3,864 2,824
Other operating expense 647 --
General and administrative expense, excluding
amortization of non-vested shares below 1,280 1,120
Interest expense, net 9,522 8,818
Depreciation and amortization 6,538 5,060
Amortization of non-vested shares 453 340
----------- -----------
Income before income from joint ventures
and minority interests 15,639 11,632
Equity in income from joint ventures 174 128
Minority interests -- (430)
----------- -----------
Net income $ 15,813 $ 11,330
Preferred dividend requirements (2,606) (1,366)
----------- -----------
Net income available to
common shareholders $ 13,207 $ 9,964
=========== ===========
Net income per common share:
Basic $ 0.53 $ 0.50
=========== ===========
Diluted $ 0.52 $ 0.49
=========== ===========
Shares used for computation (in thousands):
Basic 24,975 19,735
Diluted 25,496 21,184
</Table>
3
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED - IN THOUSANDS)
<Table>
<Caption>
ACCUMULATED
COMMON STOCK PREFERRED STOCK ADDITIONAL OTHER DISTRIBUTIONS
--------------- --------------- PAID-IN TREASURY LOANS TO NON-VESTED COMPREHENSIVE IN EXCESS OF
SHARES PAR SHARES PAR CAPITAL SHARES SHAREHOLDERS SHARES INCOME NET INCOME TOTAL
-------- ----- ------ ------- ---------- -------- ------------ ---------- ------------- ------------- -------
Balance
at
December
31, 2004 25,578 $ 256 2,300 $ 23 618,715 (8,398) (3,525) (2,338) 7,480 (24,873)587,340
Amortization
of
restricted
share
grants -- -- -- -- -- -- -- 453 -- -- 453
Stock
option
expense -- -- -- -- 29 -- -- -- -- -- 29
Foreign
currency
translation
adjustment -- -- -- -- -- -- -- -- (1,129) -- (1,129)
Net income -- -- -- -- -- -- -- -- -- 15,813 15,813
Purchase of
17,350
common
shares for
treasury -- -- -- -- -- (759) -- -- -- -- (759)
Issuances of
common
shares
in Dividend
Reinvestment
Plan 6 -- -- -- 219 -- -- -- -- -- 219
Issuance of
preferred
shares, net
of costs of
$2.7 million -- -- 3,200 32 77,229 -- -- -- -- -- 77,261
Stock option
exercise, net 3 -- -- -- 69 (69) -- -- -- -- --
Dividends to
common
shareholders
($0.625
per share) -- -- -- -- -- -- -- -- -- (15,657)(15,657)
Dividends to
Series A
preferred
shareholders
($0.59375
per share) -- -- -- -- -- -- -- -- -- (1,366) (1,366)
Dividends to
Series B
preferred
shareholders
($0.3875
per share) -- -- -- -- -- -- -- -- -- (1,240) (1,240)
-------- ----- ------ ------- ---------- ------- ----------- --------- ------------- ------------ -------
Balance at
March
31, 2005 25,587 $ 256 5,500 $ 55 696,261 (9,226) (3,525) (1,885) 6,351 (27,323)660,964
======== ===== ====== ======= ========== ======= =========== ========= ============= ============ =======
</Table>
4
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED - IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
2005 2004
----------- ------------
Net income $ 15,813 $ 11,330
Other comprehensive income:
Foreign currency translation adjustment (1,129) --
----------- ------------
Comprehensive income $ 14,684 $ 11,330
=========== ============
</Table>
5
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
2005 2004
----------- -----------
Operating activities:
Net income $ 15,813 $ 11,330
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest in net income -- 430
Equity in income from joint ventures (174) (128)
Depreciation and amortization 6,538 5,060
Amortization of deferred financing costs 736 733
Non-cash compensation expense to management and trustees 483 346
(Increase) decrease in other assets (786) 356
Increase (decrease) in accounts payable and accrued liabilities (1,009) 1,880
Increase in unearned rents 1,818 1,386
----------- -----------
Net cash provided by operating activities 23,419 21,393
----------- -----------
Investing activities:
Acquisition of rental properties (71,414) (169,543)
Acquisition of other assets (307) (12)
Additions to properties under development (6,679) (17,969)
Distributions from joint ventures 207 138
Proceeds from sale of equity interest in joint venture -- 8,240
Investment in secured note receivable -- (5,000)
----------- -----------
Net cash used in investing activities (78,193) (184,146)
----------- -----------
Financing activities:
Proceeds from long-term debt facilities 52,000 246,609
Principal payments on long-term debt (61,425) (68,584)
Deferred financing fees paid (23) (2,525)
Net proceeds from issuance of common shares 219 211
Net proceeds from issuance of preferred shares 77,261 --
Purchase of common shares for treasury (759) --
Distributions paid to minority interests (200) (506)
Dividends paid to shareholders (15,463) (11,195)
----------- -----------
Net cash provided by financing activities 51,610 164,010
Effect of exchange rate changes on cash (65) --
----------- -----------
Net increase (decrease) in cash and cash equivalents (3,229) 1,257
Cash and cash equivalents at beginning of period 11,255 30,527
----------- -----------
Cash and cash equivalents at end of period $ 8,026 $ 31,784
=========== ===========
Supplemental schedule of non-cash activity:
Contribution of rental property to joint venture $ -- $ 24,186
Debt assumed by joint venture $ -- $ 14,583
Transfer of property under development to rental property $ 10,784 $ --
Issuance of shares and share grants to management and trustees $ -- $ 2,040
Issuance of shares in acquisition of rental properties $ -- $ 27,087
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 9,564 $ 8,173
Cash paid during the period for income taxes $ 123 $ --
</Table>
6
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
DESCRIPTION OF BUSINESS
Entertainment Properties Trust (the Company) is a Maryland real estate
investment trust (REIT) organized on August 29, 1997. The Company was formed to
acquire and develop entertainment properties including megaplex theatres and
entertainment retail centers. At March 31, 2005, the Company owned 60 megaplex
theatre properties, including three joint venture properties, located in 22
states and Ontario, Canada. The Company's portfolio also includes seven
entertainment retail centers located in Westminster, Colorado, New Rochelle, New
York, Burbank, California and Ontario, Canada, other specialty properties and
land parcels leased to restaurant and retail operators adjacent to several of
its theatre properties.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 2005
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
The consolidated balance sheet as of December 31, 2004 has been derived from the
audited consolidated balance sheet at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2004.
CONCENTRATION OF RISK
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (60%)
of the megaplex theatre rental properties held by the Company at March 31, 2005
as a result of a series of sale leaseback transactions pertaining to a number of
AMC megaplex theatres. A substantial portion of the Company's revenues
(approximately 57%) result from rental payments by AMC under the leases, or its
parent, AMC Entertainment, Inc. (AMCE), as the guarantor of AMC's obligations
under the leases. AMCE has publicly held debt and accordingly, their financial
information is publicly available.
SHARE BASED COMPENSATION
Share Options
During 2002, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure," which provides alternative methods of
accounting for stock-based compensation and amends SFAS No. 123 "Accounting for
Stock-Based Compensation." The Company adopted SFAS 148 as of January 1, 2003.
Prior to
7
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. Stock option expense for options
issued after January 1, 2003 is recognized on a straight-line basis over the
vesting period.
The cost related to stock based compensation related to stock options included
in the determination of net income for the three months ended March 31, 2005 and
2004 is less than that which would have been recognized if the fair value based
method had been applied to all awards since the original effective date of SFAS
No. 123. The following table illustrates the effect on net income and earnings
per share if the fair value based method had been applied to all outstanding and
unvested awards for each year (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
2005 2004
------------- -----------
Net income available to common shareholders,
as reported $ 13,207 $ 9,964
Add: Stock option compensation expense
included in reported net income 29 6
Deduct: Total stock option compensation
expense determined under fair value
based method for all awards (48) (37)
------------- -----------
Pro forma net income $ 13,188 $ 9,933
============= ===========
Basic earnings per share:
As reported $ 0.53 $ 0.50
Pro forma $ 0.53 $ 0.50
Diluted earnings per share:
As reported $ 0.52 $ 0.49
Pro forma $ 0.52 $ 0.49
</Table>
SFAS No. 123 was revised in December 2004 by FASB. SFAS No. 123R establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. SFAS No. 123R will be
effective for the Company beginning January 1, 2006. The adoption of SFAS No.
123R is not expected to have a material impact on the Company's financial
statements.
Restricted Shares
Restricted share awards, which vest over time, are recorded as unearned
compensation when granted using the fair value of the stock at the grant date,
and amortized on a straight-line basis over the vesting period.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period amounts to conform
to the current period presentation.
8
3. RENTAL PROPERTIES
The following table summarizes the carrying amounts of rental properties as of
March 31, 2005 and December 31, 2004 (in thousands):
<Table>
<Caption>
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
Buildings and improvements $ 1,007,329 $ 941,235
Furniture, fixtures & equipment 1,554 2,000
Land 277,349 265,276
-------------- -----------------
1,286,232 1,208,511
Accumulated depreciation (92,811) (87,102)
-------------- -----------------
Total $ 1,193,421 $ 1,121,409
============== =================
</Table>
Depreciation expense on rental properties was $6.5 million and $5.0 million for
the quarters ended March 31, 2005 and 2004, respectively.
4. EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted earnings
per common share for the quarters ended March 31, 2005 and 2004 (amounts in
thousands except per share information):
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31, 2005
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- ------------ ---------
Basic earnings:
Income available to common shareholders $ 13,207 24,975 $ 0.53
Effect of dilutive securities:
Stock options -- 443 (0.01)
Non-vested common share grants -- 78 --
---------- ------------ ---------
Diluted earnings $ 13,207 25,496 $ 0.52
========== ============ =========
</Table>
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31, 2004
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- ------------ ---------
Basic earnings:
Income available to common shareholders $ 9,964 19,735 $ 0.50
Effect of dilutive securities:
Stock options -- 468 (0.01)
Contingent shares from conversion of
minority interest 375 857 --
Non-vested common share grants -- 124 --
---------- ------------ ---------
Diluted earnings $ 10,339 21,184 $ 0.49
========== ============ =========
</Table>
9
5. PROPERTY ACQUISITIONS
On March 31, 2005, the Company acquired, through a wholly-owned subsidiary, an
entertainment retail center anchored by an AMC megaplex theatre located in
downtown Burbank, California for $51.4 million. The fair value of the real
property acquired was approximately $51.9 million. In accordance with Statement
of Financial Accounting Standard (SFAS) No. 141, the Company allocated
approximately $0.3 million of the purchase price to in-place leases and is
amortizing this value over the remaining non-cancelable lease terms of
approximately nine years.
On March 11, 2005, the Company completed the acquisition of a megaplex theatre
property in Chattanooga, Tennessee. The Chattanooga 18 in Chattanooga, Tennessee
is operated by Rave Motion Pictures and was acquired for a total cost (including
land and building) of approximately $14.3 million. The land was purchased in
2003 by the Company for $2.8 million. This theatre is leased under a long-term
triple-net lease.
During the three months ended March 31, 2005, the Company also completed
development of a megaplex theatre property in Wilmington, North Carolina. The
Mayfaire Cinema 16 is operated by Consolidated Theatres and was completed for a
total development cost (including land and building) of approximately $8.7
million. The land was purchased in 2004 by the Company for $1.7 million. This
theatre is leased under a long-term triple-net lease.
6. PREFERRED SHARE OFFERING
On January 19, 2005, the Company issued 3.2 million 7.75% Series B cumulative
redeemable preferred shares ("Series B preferred shares") in a registered public
offering for net proceeds of $77.5 million, before expenses. The Company pays
cumulative dividends on the Series B preferred shares from (and including) the
date of original issuance in the amount of $1.9375 per share each year, which is
equivalent to 7.75% of the $25 liquidation preference per share. Dividends on
the Series B preferred shares are payable quarterly in arrears, beginning on
April 15, 2005. The Company may not redeem the Series B preferred shares before
January 19, 2010, except in limited circumstances to preserve the Company's REIT
status. On or after January 19, 2010, the Company may, at its option, redeem the
Series B preferred shares in whole at any time or in part from time to time, by
paying $25 per share, plus any accrued and unpaid dividends up to and including
the date of redemption. The Series B preferred shares generally have no stated
maturity, will not be subject to any sinking fund or mandatory redemption, and
are not convertible into any of the Company's other securities. Owners of the
Series B preferred shares generally have no voting rights, except under certain
dividend defaults. A portion of the proceeds from this offering was used to
repay $18.8 million in mortgage notes payable on their due date of February 1,
2005.
7. COMMITMENTS AND CONTINGENCIES
As of March 31, 2005, the Company had four theatre development projects under
construction for which it has agreed to either finance the development costs or
purchase the theatre upon completion. The properties are being developed by the
prospective tenants. These theatres are expected to have a total of 54 screens
and their development costs (including land) are expected to be approximately
$33.3 million. Through March 31, 2005, the Company has invested $9.3 million in
these projects (including land), and has commitments to fund approximately $24.0
million of additional improvements. Development costs are advanced by the
Company either in periodic draws or upon successful completion of construction.
If the Company determines that construction is not being completed in accordance
with the terms of the development agreement, the Company can discontinue funding
construction draws or refuse to purchase the completed theatre. The Company has
agreed to lease the theatres to the operators at pre-determined rates.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in this quarterly report on Form
10-Q. The forward-looking statements included in this discussion and elsewhere
in this Form 10-Q involve risks and uncertainties, including anticipated
financial performance, business prospects, industry trends, shareholder returns,
performance of leases by tenants and other matters, which reflect management's
best judgment based on factors currently known. Actual results and experience
could differ materially from the anticipated results and other expectations
expressed in our forward-looking statements as a result of a number of factors
including but not limited to those discussed in this Item and in Item I
"Business - Risk Factors", in our annual report on Form 10-K for the year ended
December 31, 2004 and those discussed in "Risk Factors" in our prospectus filed
under Rule 424(b) of the SEC on January 12, 2005.
OVERVIEW
Our primary business strategy is to purchase real estate (land, buildings and
other improvements) that we lease to operators of destination-based
entertainment and entertainment-related properties. As of March 31, 2005, we had
invested approximately $1.2 billion (before accumulated depreciation) in 60
megaplex theatre properties and various restaurant, retail and other properties
located in 22 states and Ontario, Canada. As of March 31, 2005, we had invested
approximately $18.9 million in development land and construction in progress for
theatre and theatre-related development.
Substantially all of our single-tenant properties are leased pursuant to
long-term, triple-net leases, under which the tenants typically pay all
operating expenses of a property, including, but not limited to, all real estate
taxes, assessments and other governmental charges, insurance, utilities, repairs
and maintenance. A majority of our revenues are derived from rents received or
accrued under long-term, triple-net leases. Tenants at our multi-tenant
properties pay CAM charges to defray their pro rata portion of these costs.
We incur general and administrative expenses including compensation expense for
our executive officers and other employees, professional fees and various
expenses incurred in the process of identifying, evaluating and acquiring
additional properties. We are self-administered and managed by our trustees,
executive officers and other employees. Our primary non-cash expense is the
depreciation of our properties. We depreciate buildings and improvements on our
properties over a seven-year to 40-year period for tax purposes and financial
reporting purposes.
Our property acquisitions and development financing commitments are financed by
cash from operations, borrowings under our secured revolving variable rate
credit facility, long-term mortgage debt and the sale of equity securities. It
has been our strategy to structure leases and financings to ensure a positive
spread between our cost of capital and the rentals paid by our tenants. We have
primarily acquired new properties that are pre-leased to a single tenant or
multi-tenant properties that have a high occupancy rate. We do not typically
develop or acquire properties on a speculative basis or that are not
significantly pre-leased. We have recently become more involved in development
financing arrangements, in which we acquire the underlying land, finance the
construction of a theatre on the land and lease the theatre upon completion of
construction to the operator on a triple net basis. We have also entered into
joint ventures formed to own and lease single properties. We intend to continue
entering into some or all of these types of arrangements in the foreseeable
future.
Our primary challenges have been locating suitable properties, negotiating
favorable lease and financing terms, and managing our portfolio as we have
continued to grow. Because of our emphasis on the entertainment sector of the
real estate industry and the knowledge and industry relationships of our
management, we have enjoyed favorable opportunities to acquire, finance and
lease properties. We believe those opportunities will continue during 2005.
11
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements and related notes. In preparing
these financial statements, management has made its best estimates and
assumptions that affect the reported assets and liabilities. The most
significant assumptions and estimates relate to revenue recognition, depreciable
lives of the real estate, the valuation of real estate and accounting for real
estate acquisitions. Application of these assumptions requires the exercise of
judgment as to future uncertainties and, as a result, actual results could
differ from these estimates.
Revenue Recognition
Rents that are fixed and determinable are recognized on a straight-line basis
over the minimum term of the lease. Base rent escalation in most of our leases
is dependent upon increases in the Consumer Price Index (CPI) and accordingly,
management does not include any future base rent escalation amounts on these
leases in current revenue. Most of our leases provide for percentage rents based
upon the level of sales achieved by the tenant. These percentage rents are
recognized once the required sales level is achieved.
Real Estate Useful Lives
We are required to make subjective assessments as to the useful lives of our
properties for the purpose of determining the amount of depreciation to reflect
on an annual basis with respect to those properties. These assessments have a
direct impact on our net income. Depreciation and amortization are provided on
the straight-line method over the useful lives of the assets, as follows:
Buildings 40 years
Tenant improvements Base term of
lease or useful
life, whichever
is shorter
Furniture, fixtures and equipment 3 to 7 years
Impairment of Real Estate Values
We are required to make subjective assessments as to whether there are
impairments in the value of our rental properties. These estimates of impairment
may have a direct impact on our consolidated financial statements.
We apply the provisions of Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We
assess the carrying value of our rental properties whenever events or changes in
circumstances indicate that the carrying amount of a property may not be
recoverable. Certain factors that may occur and indicate that impairments may
exist include, but are not limited to: underperformance relative to projected
future operating results, tenant difficulties and significant adverse industry
or market economic trends. No such indicators existed during 2004 or in the
first three months of 2005. If an indicator of possible impairment exists, a
property is evaluated for impairment by comparing the carrying amount of the
property to the estimated undiscounted future cash flows expected to be
generated by the property. If the carrying amount of a property exceeds its
estimated future cash flows on an undiscounted basis, an impairment charge is
recognized in the amount by which the carrying amount of the property exceeds
the fair value of the property. Management estimates fair value of our rental
properties based on projected discounted cash flows using a discount rate
determined by management to be commensurate with the risk inherent in the
Company. Management did not record any impairment charges for 2004 or in the
first three months of 2005.
12
Real Estate Acquisitions
Upon acquisitions of real estate properties, we make subjective estimates of the
fair value of acquired tangible assets (consisting of land, building, tenant
improvements, and furniture, fixtures and equipment) and identified intangible
assets and liabilities (consisting of above and below market leases, in-place
leases, tenant relationships and assumed financing that is determined to be
above or below market terms) in accordance with Statement of Financial
Accounting Standards (SFAS) No.141, Business Combinations. We utilize methods
similar to those used by independent appraisers in making these estimates. Based
on these estimates, we allocate the purchase price to the applicable assets and
liabilities. These estimates have a direct impact on our net income.
RECENT DEVELOPMENTS
During the three months ended March 31, 2005, we completed development of a
megaplex theatre property in Wilmington, North Carolina. The Mayfaire Cinema 16
is operated by Consolidated Theatres and was completed for a total development
cost (including land and building) of approximately $8.7 million. This theatre
is leased under a long-term triple-net lease.
On March 11, 2005, we completed the acquisition of a megaplex theatre property
in Chattanooga, Tennessee. The Chattanooga 18 in Chattanooga, Tennessee is
operated by Rave Motion Pictures and was acquired for a total cost (including
land and building) of approximately $14.3 million. This theatre is leased under
a long-term triple-net lease.
On March 31, 2005, we also completed the acquisition of an entertainment retail
center anchored by an AMC megaplex theatre located in downtown Burbank,
California for a total cost of approximately $51.4 million. The theatre is
leased under a long-term lease and the retail shops have an average remaining
lease life of approximately nine years.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
Rental revenue was $34.2 million for the three months ended March 31, 2005
compared to $27.5 million for the three months ended March 31, 2004. The $6.7
million increase resulted primarily from the property acquisitions completed in
2004 and 2005 and base rent increases on existing properties. Percentage rents
of $558 thousand and $572 thousand were recognized during the three months ended
March 31, 2005 and 2004, respectively. Straight line rents of $512 thousand and
$369 thousand were recognized during the three months ended March 31, 2005 and
2004, respectively.
Tenant reimbursements totaled $3.0 million for the three months ended March 31,
2005 compared to $2.2 million for the three months ended March 31, 2004. These
tenant reimbursements arise from the operations of our retail centers in
Greenville, SC, Westminster, CO, Southfield, MI, Suffolk, VA, Tampa, FL, New
Rochelle, NY, Burbank, California and Ontario, Canada. The $0.8 million increase
is due primarily to three months of operations for the four retail centers in
Ontario, Canada during the first quarter of 2005 versus only one month of
operations during the first quarter of 2004. The four retail centers in Ontario,
Canada were purchased on March 1, 2004.
Other income was $814 thousand for the three months ended March 31, 2005
compared to $72 thousand for the three months ended March 31, 2004. The increase
of $742 thousand relates primarily to revenues from a family bowling center in
Westminster, Colorado opened in November 2004 and operated through a
wholly-owned taxable REIT subsidiary.
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Our property operating expense totaled $3.9 million for the three months ended
March 31, 2005 compared to $2.8 million for the three months ended March 31,
2004. These property operating expenses arise from the operations of our retail
centers in Greenville, SC, Westminster, CO, Southfield, MI, Suffolk, VA, Tampa,
FL, New Rochelle, NY, Burbank, California and Ontario, Canada. The $1.1 million
increase is due primarily to three months of operations for the four retail
centers in Ontario, Canada during the first quarter of 2005 versus only one
month of operations during the first quarter of 2004. The four retail centers in
Ontario, Canada were purchased on March 1, 2004.
Other operating expense totaled $647 thousand for the three months ended March
31, 2005 and related solely to the operations of the family bowling center in
Westminster, Colorado. No such costs were incurred in the first quarter of 2004.
Our general and administrative expenses totaled $1.3 million for the three
months ended March 31, 2005 compared to $1.1 million for the same period in
2004. The $0.2 million increase is due primarily to the following:
o An increase in legal and accounting fees related to both the
increase in the size of our operations and to compliance with
the Sarbanes-Oxley Act.
o 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 $0.7 million to $9.5 million for the three
months ended March 31, 2005 from $8.8 million for the three months ended March
31, 2004. 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 $7.0 million for the three months ended March 31, 2005 compared
to $5.4 million for the same period in 2004. The $1.6 million increase resulted
primarily from the property acquisitions completed in 2005 and 2004 and the
addition of employees in 2004.
Income from joint ventures totaled $174 thousand for the three months ended
March 31, 2005 compared to $128 thousand for the same period in 2004. The
increase is due to the addition of the Atlantic-EPR II joint venture as of March
1, 2004.
For the three months ended March 31, 2005 there was no minority interest in net
income as compared to $430 thousand for the three months ended March 31, 2004.
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.
Preferred dividend requirements for the three months ended March 31, 2005 were
$2.6 million compared to $1.4 million for the same period in 2004. The $1.2
million increase is due to the issuance of 3.2 million Series B preferred shares
in January of 2005 (described in Note 6 to the consolidated financial statements
in this Form 10-Q).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $8.0 million at March 31, 2005. In addition, we
had restricted cash of $12.4 million at March 31, 2005 required in connection
with debt service, payment of real estate taxes and capital improvements.
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Mortgage Debt and Credit Facilities
As of March 31, 2005, we had total debt outstanding of $582.0 million. All of
our debt is mortgage debt secured by a substantial portion of our rental
properties. As of March 31, 2005, $542.0 million of debt outstanding was fixed
rate debt with a weighted average interest rate of approximately 6.5%.
At March 31, 2005, we had $40 million in debt outstanding under our $150 million
secured revolving variable rate credit facility that bears interest at a
floating rate and is secured by twelve theatre properties, two theatre and
retail mix properties and one retail mix property. The credit facility matures
in March of 2007.
Our principal investing activity is the purchase of rental property, which is
generally financed with mortgage debt and the proceeds from equity offerings.
Continued growth of our rental property portfolio will depend in part on our
continued ability to access funds through additional borrowings and equity
security offerings.
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 $23.4 million
for the three months ended March 31, 2005 and $21.4 million for the three months
ended March 31, 2004. We anticipate that our cash on hand, cash from operations,
and funds available under our secured revolving variable rate credit facility
will provide adequate liquidity to fund our operations, make interest and
principal payments on our debt, and allow distributions to our shareholders and
avoidance of corporate level federal income or excise tax in accordance with
Internal Revenue Code requirements for qualification as a REIT.
We had four theatre projects under construction at March 31, 2005. 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 54
screens and their total development costs (including land) will be approximately
$33.3 million. Through March 31, 2005, we have invested $9.3 million in these
projects (including land), and have commitments to fund an additional $24.0
million in improvements. We plan to fund development primarily with funds
generated by debt financing and/or equity offerings. If we determine that
construction is not being completed in accordance with the terms of the
development agreement, we can discontinue funding construction draws or refuse
to purchase the completed theatre. Upon successful completion of construction,
we have agreed to lease these theatres to the theatre operators under long-term
triple-net leases at pre-determined rates.
As further described in Note 6 to the consolidated financial statements in this
Form 10-Q, we completed an offering of Series B preferred shares in January
2005, generating net proceeds (before expenses) of $77.5 million. We used
proceeds from this offering to payoff $18.8 million in mortgage debt which
matured on February 1, 2005.
Off Balance Sheet Arrangements
At March 31, 2005, we had a 20% investment interest in two unconsolidated real
estate joint ventures, Atlantic-EPR I and Atlantic-EPR II, which are accounted
for under the equity method of accounting. We do not anticipate any material
impact on our liquidity as a result of any commitments that may arise involving
those joint ventures. 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
15
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, the cash value of those shares as defined in the
partnership agreement.
We account for our investment in Atlantic-EPR I under the equity method of
accounting. We recognized income of $106 thousand and $98 thousand from our
investment in this joint venture during the first quarter of 2005 and 2004,
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, the cash value of those shares as defined
in the partnership agreement.
We account for our investment in Atlantic-EPR II under the equity method of
accounting. We recognized income of $68 thousand and $30 thousand from our
investment in this joint venture during the first quarter of 2005 and 2004,
respectively.
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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 the Company's FFO for the quarters ended March
31, 2005 and March 31, 2004 (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2005 2004
------------ ------------
Net income available to common shareholders $ 13,207 $ 9,964
Add: Real estate depreciation and amortization 6,460 5,013
Add: Allocated share of joint venture depreciation 59 42
------------ ------------
Basic Funds From Operations 19,726 15,019
Add: minority interest in net income -- 375
------------ ------------
Diluted Funds From Operations $ 19,726 $ 15,394
============ ============
FFO per common share:
Basic $ 0.79 $ 0.76
Diluted 0.77 0.73
Shares used for computation (in thousands):
Basic 24,975 19,735
Diluted 25,496 21,184
Other financial information:
Straight-lined rental revenue $ 512 $ 369
</Table>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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 was effective for EPR on January 1, 2005. The effective date has been
deferred
17
indefinitely for certain other types of mandatory redeemable financial
instruments. As of March 31, 2005, our financial statements have not been
impacted by the issuance of FASB Statement No. 150.
FASB Statement No. 123, Accounting for Stock-Based Compensation, was revised in
December 2004 by FASB Statement No. 123R. FASB Statement No. 123R, Share Based
Payment, also supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. FASB Statement No. 123R
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. For EPR, FASB
Statement No. 123R will be effective January 1, 2006. The adoption of FASB
Statement No. 123R is not expected to have a material impact on our financial
statements.
INFLATION
Investments by EPR are financed with a combination of equity and secured
mortgage indebtedness. During inflationary periods, which are generally
accompanied by rising interest rates, our ability to grow may be adversely
affected because the yield on new investments may increase at a slower rate than
new borrowing costs.
All of our megaplex theatre leases provide for base and participating rent
features. To the extent inflation causes tenant revenues at our properties to
increase over baseline amounts, we would participate in those revenue increases
through our right to receive annual percentage rent. Our leases also generally
provide for escalation in base rents in the event of increases in the Consumer
Price Index, with a limit of 2% per annum, or fixed periodic increases.
Our theatre leases are triple-net leases requiring the tenants to pay
substantially all expenses associated with the operation of the properties,
thereby minimizing our exposure to increases in costs and operating expenses
resulting from inflation. A portion of our retail and restaurant leases are
non-triple-net leases. These retail leases represent less than 15% of our total
real estate square footage. To the extent any of those leases contain fixed
expense reimbursement provisions or limitations, we may be subject to increases
in costs resulting from inflation that are not fully passed through to tenants.
FORWARD LOOKING INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
WITH THE EXCEPTION OF HISTORICAL INFORMATION, THIS REPORT ON FORM 10-Q CONTAINS
FORWARD-LOOKING STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 AND IDENTIFIED BY SUCH WORDS AS "WILL BE," "INTEND,"
"CONTINUE," "BELIEVE," "MAY," "EXPECT," "HOPE," "ANTICIPATE," "GOAL,"
"FORECAST," OR OTHER COMPARABLE TERMS. OUR ACTUAL FINANCIAL CONDITION, RESULTS
OF OPERATIONS OR BUSINESS MAY VARY MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD- LOOKING STATEMENTS AND INVOLVE VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED UNDER "RISK FACTORS" IN OUR ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004 AND OUR PROSPECTUS
FILED UNDER RULE 424(b) OF THE SEC ON JANUARY 12, 2005. INVESTORS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, primarily relating to potential losses due to
changes in interest rates. We seek to mitigate the effects of fluctuations in
interest rates by matching the term of new investments with new long-term fixed
rate borrowings whenever possible. We also have a $150 million secured revolving
line of credit that bears interest at a floating rate that we use to acquire
properties and finance our development commitments.
We are subject to risks associated with debt financing, including the risk that
existing indebtedness may not be refinanced or that the terms of such
refinancing may not be as favorable as the terms of current indebtedness. The
majority of our borrowings are subject to mortgages or contractual agreements
which limit the amount of indebtedness we may incur. Accordingly, if we are
unable to raise additional equity or borrow money due to these limitations, our
ability to acquire additional properties may be limited.
ITEM 4. CONTROLS AND PROCEDURES
A review and evaluation was performed by our management, including our Chief
Executive Officer (the "CEO") and Chief Financial Officer (the "CFO"), of the
effectiveness of the design and operation of our disclosure controls and
procedures as of March 31, 2005, the end of the period covered by this report.
Based on that review and evaluation, the CEO and CFO have concluded that our
current disclosure controls and procedures, as designed and implemented, were
effective. There have been no significant changes in our internal controls
subsequent to the date of their evaluation. There were no material weaknesses
identified in the course of such review and evaluation and, therefore, no
corrective measures were taken by us in our internal control over financial
reporting.
Effective January 1, 2005, we implemented a new automated lease administration
system. As part of the implementation, we modified our internal control over
financial reporting to align our internal controls with the new technology. This
new technology improves the efficiency of our operations and further strengthens
our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than routine litigation and administrative proceedings arising in the
ordinary course of business, we are not presently involved in any litigation
nor, to our knowledge, is any litigation threatened against us or our
properties, which is reasonably likely to have a material adverse effect on our
liquidity or results of operations.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
19
ITEM 6. 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.
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: April 29, 2005 By /s/ David M. Brain
-------------------------------------------
David M. Brain, President - Chief Executive
Officer and Trustee
Dated: April 29, 2005 By /s/ Fred L. Kennon
-------------------------------------------
Fred L. Kennon, Vice President - Chief
Financial Officer
20