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, 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 64108
KANSAS CITY, MISSOURI (Zip Code)
(Address of principal executive office)
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
---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). No 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 27, 2005, there were 25,880,663 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, 2005 DECEMBER 31, 2004
------------------ -----------------
(Unaudited)
ASSETS
Rental properties, net of accumulated depreciation of $106.0
million and $87.1 million at September 30, 2005 and
December 31, 2004, respectively $1,237,307 $1,121,409
Property under development 16,717 23,144
Mortgage note and related accrued interest receivable 42,473 --
Investment in joint ventures 2,327 2,541
Cash and cash equivalents 8,364 11,255
Restricted cash 11,712 12,794
Intangible assets, net 10,733 10,900
Deferred financing costs, net 10,905 12,730
Other assets 23,650 18,675
---------- ----------
Total assets $1,364,188 $1,213,448
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $8,271 $ 10,070
Common dividends payable 15,767 14,097
Preferred dividends payable 2,916 1,366
Unearned rents 809 1,634
Long-term debt 664,606 592,892
---------- ----------
Total liabilities 692,369 620,059
Commitments and contingencies -- --
Minority interests 5,466 6,049
Shareholders' equity:
Common Shares, $.01 par value; 50,000,000 shares authorized;
and 25,877,066 and 25,578,472 shares issued at
September 30, 2005 and December 31, 2004, respectively 259 256
Preferred Shares, $.01 par value; 10,000,000 shares authorized:
2,300,000 Series A shares issued at September 30, 2005
and December 31, 2004 23 23
3,200,000 Series B shares issued at September 30, 2005 32 --
Additional paid-in-capital 703,695 618,715
Treasury shares at cost: 649,142 and 517,421 common shares
at September 30, 2005 and December 31, 2004, respectively (14,350) (8,398)
Loans to shareholders (3,525) (3,525)
Non-vested shares (3,682) (2,338)
Accumulated other comprehensive income 13,451 7,480
Distributions in excess of net income (29,550) (24,873)
---------- ----------
Shareholders' equity 666,353 587,340
---------- ----------
Total liabilities and shareholders' equity $1,364,188 $1,213,448
========== ==========
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,
-------------------------------- ------------------------------
2005 2004 2005 2004
------- ------- -------- -------
Rental revenue $36,942 $32,308 $107,230 $91,273
Tenant reimbursements 2,783 2,549 8,853 7,135
Other income 602 297 2,489 393
Mortgage financing interest 1,498 -- 1,969 --
------- ------- -------- -------
Total revenue 41,825 35,154 120,541 98,801
Property operating expense 3,835 3,014 11,448 8,725
Other operating expense 806 -- 1,969 --
General and administrative expense, excluding
amortization of non-vested shares below 1,115 1,078 4,293 3,685
Costs associated with loan refinancing -- -- -- 1,134
Interest expense, net 11,005 9,457 30,766 28,301
Depreciation and amortization 7,011 6,021 20,381 17,036
Amortization of non-vested shares 423 340 1,282 1,021
------- ------- -------- -------
Income before income from joint ventures
and minority interests 17,630 15,244 50,402 38,899
Equity in income from joint ventures 184 172 546 482
Minority interests -- (62) -- (982)
------- ------- -------- -------
Net income $17,814 $15,354 $ 50,948 $38,399
Preferred dividend requirements (2,916) (1,366) (8,437) (4,097)
------- ------- -------- -------
Net income available to common shareholders $14,898 $13,988 $ 42,511 $34,302
======= ======= ======== =======
Net income per common share:
Basic $ 0.59 $ 0.58 $ 1.70 $ 1.56
======= ======= ======== =======
Diluted $ 0.58 $ 0.57 $ 1.67 $ 1.51
======= ======= ======== =======
Shares used for computation (in thousands):
Basic 25,086 24,031 24,995 21,997
Diluted 25,585 24,628 25,482 23,159
Dividends per common share $0.6250 $0.5625 $ 1.8750 $1.6875
======= ======= ======== =======
3
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
(DOLLARS IN THOUSANDS)
COMMON STOCK PREFERRED STOCK ADDITIONAL
------------- --------------- PAID-IN TREASURY
SHARES PAR SHARES PAR CAPITAL SHARES
------ ---- ------ ------ ---------- --------
Balance at December 31, 2004 25,578 $256 2,300 $23 $618,715 $ (8,398)
Shares issued to Trustees 4 -- -- -- 161 --
Issuance of restricted share grants 63 1 -- -- 2,625 --
Amortization of restricted share grants -- -- -- -- -- --
Stock option expense -- -- -- -- 68 --
Foreign currency translation adjustment -- -- -- -- -- --
Net income -- -- -- -- -- --
Purchase of 17,350 common shares for
treasury -- -- -- -- -- (759)
Issuances of common shares in Dividend
Reinvestment Plan 17 -- -- -- 689 --
Issuance of preferred shares, net of
costs of $2.7 million -- -- 3,200 32 77,229 --
Stock option exercise, net 215 2 -- -- 4,208 (5,193)
Dividends to common shareholders
($1.875 per share) -- -- -- -- -- --
Dividends to Series A preferred
shareholders ($1.7813 per share) -- -- -- -- -- --
Dividends to Series B preferred
shareholders ($1.3563 per share) -- -- -- -- -- --
------ ---- ----- --- -------- --------
Balance at September 30, 2005 25,877 $259 5,500 $55 $703,695 $(14,350)
====== ==== ===== === ======== ========
ACCUMULATED
OTHER DISTRIBUTIONS
LOANS TO NON-VESTED COMPREHENSIVE IN EXCESS OF
SHAREHOLDERS SHARES INCOME NET INCOME TOTAL
------------ ---------- ------------- ------------- --------
Balance at December 31, 2004 $(3,525) $(2,338) $ 7,480 $(24,873) $587,340
Shares issued to Trustees -- -- -- -- 161
Issuance of restricted share grants -- (2,626) -- -- --
Amortization of restricted share grants -- 1,282 -- -- 1,282
Stock option expense -- -- -- -- 68
Foreign currency translation adjustment -- -- 5,971 -- 5,971
Net income -- -- -- 50,948 50,948
Purchase of 17,350 common shares for
treasury -- -- -- -- (759)
Issuances of common shares in Dividend
Reinvestment Plan -- -- -- -- 689
Issuance of preferred shares, net of
costs of $2.7 million -- -- -- -- 77,261
Stock option exercise, net -- -- -- -- (983)
Dividends to common shareholders
($1.875 per share) -- -- -- (47,188) (47,188)
Dividends to Series A preferred
shareholders ($1.7813 per share) -- -- -- (4,097) (4,097)
Dividends to Series B preferred
shareholders ($1.3563 per share) -- -- -- (4,340) (4,340)
------- ------- ------- -------- --------
Balance at September 30, 2005 $(3,525) $(3,682) $13,451 $(29,550) $666,353
======= ======= ======= ======== ========
4
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
------- ------- ------- -------
Net income $17,814 $15,354 $50,948 $38,399
Other comprehensive income:
Foreign currency translation adjustment 6,692 3,615 5,971 3,615
------- ------- ------- -------
Comprehensive income $24,506 $18,969 $56,919 $42,014
======= ======= ======= =======
5
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2005 2004
--------- ---------
Operating activities:
Net income $ 50,948 $ 38,399
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest in net income -- 982
Equity in income from joint ventures (546) (482)
Depreciation and amortization 20,381 17,036
Amortization of deferred financing costs 2,405 2,492
Costs associated with loan refinancing (non-cash portion) -- 729
Non-cash compensation expense to management and trustees 1,511 1,208
Increase in mortgage note accrued interest receivable (1,947) --
Increase in other assets (2,332) (2,666)
Increase in accounts payable and accrued liabilities 160 3,627
Increase in unearned rents (826) (251)
--------- ---------
Net cash provided by operating activities 69,754 61,074
--------- ---------
Investing activities:
Acquisition of rental properties and other assets (105,400) (203,341)
Net proceeds from sale of real estate and other assets 514 --
Additions to properties under development (21,325) (39,708)
Distributions from joint ventures 644 606
Proceeds from sale of equity interest in joint venture -- 8,240
Investment in secured notes receivable (37,525) (5,000)
--------- ---------
Net cash used in investing activities (163,092) (239,203)
--------- ---------
Financing activities:
Proceeds from long-term debt facilities 174,000 271,609
Principal payments on long-term debt (105,729) (179,542)
Deferred financing fees paid (1,150) (5,086)
Net proceeds from issuance of common shares 688 117,368
Net proceeds from issuance of preferred shares 77,261 --
Impact of stock option exercises, net (983) --
Purchase of common shares for treasury (759) --
Distributions paid to minority interests (583) (1,469)
Dividends paid to shareholders (52,405) (38,974)
--------- ---------
Net cash provided by financing activities 90,340 163,906
Effect of exchange rate changes on cash 107 316
--------- ---------
Net decrease in cash and cash equivalents (2,891) (13,907)
Cash and cash equivalents at beginning of period 11,255 37,022
--------- ---------
Cash and cash equivalents at end of period $ 8,364 $ 23,115
========= =========
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 $ 27,925 $ 6,858
Issuance of shares to management and trustees $ 2,626 $ 2,090
Issuance of shares in acquisition of rental properties $ -- $ 27,087
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 30,029 $ 28,017
Cash paid (received) during the period for income taxes $ (441) $ 519
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 September 30, 2005, the Company owned 63
megaplex theatre properties, including three joint venture properties, located
in 24 states and Ontario, Canada. The Company's portfolio also includes seven
entertainment retail centers located in Westminster, Colorado, New Rochelle, New
York, Burbank, California and Ontario, Canada, other specialty properties and
land parcels leased to restaurant and retail operators adjacent to several of
its theatre properties.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended September 30,
2005 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005.
The consolidated balance sheet as of December 31, 2004 has been derived from the
audited consolidated balance sheet at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2004.
CONCENTRATION OF RISK
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (57%)
of the megaplex theatre rental properties held by the Company at September 30,
2005 as a result of a series of sale leaseback transactions pertaining to a
number of AMC megaplex theatres. A substantial portion of the Company's revenues
(approximately 57%) result from rental payments by AMC under the leases, or its
parent, AMC Entertainment, Inc. (AMCE), as the guarantor of AMC's obligations
under the leases. AMCE has publicly held debt and accordingly, their financial
information is publicly available.
SHARE BASED COMPENSATION
Share Options
During 2002, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure," which provides alternative methods of
accounting for stock-based compensation and amends SFAS No. 123 "Accounting for
Stock-Based Compensation." The Company adopted SFAS 148 as of January 1, 2003.
Prior to 2003, the Company accounted for stock options issued under its share
incentive plan under the recognition and measurement provisions of APB Opinion
No. 25 "Accounting for Stock Issued to Employees," and related interpretations.
7
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 expense related to stock options included in the determination of net income
for the nine months ended September 30, 2005 and 2004 is less than that which
would have been recognized if the fair value based method had been applied to
all awards since the original effective date of SFAS No. 123. The following
table illustrates the effect on net income and earnings per share if the fair
value based method had been applied to all outstanding and unvested awards for
each year (in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2005 2004
------- -------
Net income available to common shareholders,
as reported $42,511 $34,302
Add: Stock option compensation expense
included in reported net income 68 87
Deduct: Total stock option compensation
expense determined under fair value
based method for all awards (125) (180)
------- -------
Pro forma net income $42,454 $34,209
======= =======
Basic earnings per share:
As reported $ 1.70 $ 1.56
Pro forma $ 1.70 $ 1.56
Diluted earnings per share:
As reported $ 1.67 $ 1.51
Pro forma $ 1.67 $ 1.51
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
During the nine months ended September 30, 2005 and 2004, the Company issued
63,048 and 55,651, respectively, of restricted common shares as bonus and
long-term incentive compensation to executives and other employees of the
Company. During the nine months ended September 30, 2004, the Company also
issued 717 restricted common shares as retainers to trustees of the Company. No
restricted common shares were issued to trustees of the Company during the nine
months ended September 30, 2005. Based upon the market price of the Company's
common shares on the grant dates, approximately $2.6 and $2.1 million were
recognized as non-vested shares issued for the nine months ended September 30,
2005 and 2004, respectively.
The holders of these restricted shares have voting rights and receive dividends
from the date of grant. These shares vest ratably over a period of one to five
years. The Company records the awards as unearned compensation when granted
using the fair value of the shares at the grant date and stock compensation
expense pertaining to these restricted shares is amortized on a straight line
basis over the period of vesting. Total stock compensation expense related to
the restricted shares recorded
8
for the nine months ended September 30, 2005 and 2004 amounted to $1.3 million
and $1.0 million, respectively. At September 30, 2005 there were 140,133
non-vested restricted shares issued and outstanding.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period amounts to conform
to the current period presentation.
3. RENTAL PROPERTIES
The following table summarizes the carrying amounts of rental properties as of
September 30, 2005 and December 31, 2004 (in thousands):
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
Buildings and improvements $1,036,882 $ 941,235
Furniture, fixtures & equipment 1,537 2,000
Land 304,838 265,276
---------- ----------
1,343,257 1,208,511
Accumulated depreciation (105,950) (87,102)
---------- ----------
Total $1,237,307 $1,121,409
========== ==========
Depreciation expense on rental properties was $19.9 million and $16.9 million
for the nine months ended September 30, 2005 and 2004, respectively.
4. UNCONSOLIDATED REAL ESTATE JOINT VENTURES
At September 30, 2005, the Company had a 20% investment interest in each of two
unconsolidated real estate joint ventures, Atlantic-EPR I and Atlantic-EPR II.
The Company accounts for its investment in these joint ventures under the equity
method of accounting.
The Company recognized income of $325 and $307 (in thousands) from its
investment in the Atlantic-EPR I joint venture during the first nine months of
2005 and 2004, respectively. The Company also received distributions from
Atlantic-EPR I of $381 and $388 (in thousands) during the first nine months of
2005 and 2004, respectively. Condensed financial information for Atlantic-EPR I
is as follows as of and for the nine months ended September 30, 2005 and 2004
(in thousands):
2005 2004
------- ------
Rental properties, net $30,050 30,694
Cash 141 141
Long-term debt 16,548 16,840
Partners' equity 13,538 14,353
Rental revenue 3,112 3,054
Net income 1,540 1,458
The Atlantic-EPR II joint venture was formed on March 1, 2004. The Company
recognized income of $221 and $175 (in thousands) from its investment in this
joint venture during the first nine months of 2005 and 2004, respectively. The
Company also received distributions from Atlantic-EPR II of $263 and $218 (in
thousands) during the first nine months of 2005 and 2004, respectively.
Condensed financial information for Atlantic-EPR II is as follows as of and for
the nine months ended September 30, 2005 and 2004 (in thousands):
9
2005 2004
------- ------
Rental properties, net $23,456 23,917
Cash 130 113
Long-term debt 14,215 14,467
Partners' equity 9,037 9,370
Rental revenue 2,083 1,620
Net income 977 736
The joint venture agreements allow Atlantic to exchange up to a maximum of 10%
of its ownership interest per year in Atlantic-EPR I, beginning in 2005, and in
Atlantic-EPR II, beginning in 2007, for common shares of the Company or, at the
discretion of the Company, the cash value of those shares as defined in the
partnership agreements.
5. EARNINGS PER SHARE
The following table summarizes the Company's common shares used for computation
of basic and diluted earnings per share (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, 2005 NINE MONTHS ENDED SEPTEMBER 30, 2005
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
Basic earnings:
Income available to common shareholders $14,898 25,086 $ 0.59 $42,511 24,995 $ 1.70
Effect of dilutive securities:
Stock options -- 359 (0.01) -- 347 (0.02)
Non-vested common share grants -- 140 -- -- 140 (0.01)
------- ------ ------ ------- ------ ------
Diluted earnings $14,898 25,585 $ 0.58 $42,511 25,482 $ 1.67
======= ====== ====== ======= ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2004 NINE MONTHS 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 24,031 $ 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
======= ====== ====== ======= ====== ======
6. PROPERTY ACQUISITIONS
During the three months ended September 30, 2005, the Company completed
development of a megaplex theatre property in Hattiesburg, Mississippi. The
Hattiesburg Grand Theatre 14 is operated by Southern Theatres and was completed
for a total development cost (including land and building) of approximately $9.7
million. The land was purchased in 2005 by the Company for $2.0 million. This
theatre is leased under a long-term triple-net lease.
10
7. INVESTMENT IN MORTGAGE NOTE
On June 1, 2005, a wholly-owned subsidiary of the Company provided a secured
mortgage construction loan of $47 million Canadian (US $ 37.5 million) to
Metropolis Limited Partnership (the Partnership). The Partnership was formed for
the purpose of developing a 13 level entertainment center in downtown Toronto,
Ontario, Canada. The Partnership consists of the developer of the center as
general partner and two limited partner pension funds. It is anticipated that
the development will be completed by the end of 2007 at a total cost of
approximately $248 million Canadian, including all capitalized costs, and will
contain approximately 360,000 square feet of net rentable area (excluding
signage).
This mortgage note receivable bears interest at 15% and is senior to all other
debt and equity in the Partnership at September 30, 2005. The Partnership has an
agreement with a bank to provide a first mortgage construction loan to the
Partnership of up to $106 million. The bank construction financing will be
senior to the Company's mortgage note. The Company's mortgage note has a stated
maturity of five years from issuance. No principal or interest payments are due
prior to the end of 30 months from the date of the note. A 25% principal payment
is due 30 months from the date of the note along with all accrued interest to
date (defined as the "Option Due Date Amount"). The Partnership also has an
option at the end of 30 months (the "Option Date") to either pay off the note in
full including all accrued interest, without penalty, or to extend the Option
Due Date Amount by an additional 12 months, in which case the Option Date will
be at the end of 42 months. The Partnership can also prepay the note (in full
only, including all accrued interest) at any other time with prepayment
penalties as defined in the agreement. It is anticipated that permanent
financing will be obtained upon project completion at the end of 30 months
(November 2007) to replace the then existing construction financing.
On the maturity date or any other date that the Partnership elects to prepay the
note in full to the Company, the Company has the option to purchase a 50% equity
interest in the Partnership or alternative joint venture vehicle that is
established. The purchase price stipulated in the option is based on estimated
fair market value of the entertainment center at the time of exercise, defined
as the then existing stabilized net operating income capitalized at a
pre-determined rate. A subscription agreement governs the terms of the cash flow
sharing with the other partners should the Company elect to become an owner.
The carrying value of the Company's mortgage note receivable at September 30,
2005 was US $42.5 million, including related accrued interest receivable of US
$2.0 million. Cost overruns of the project, if any, are the responsibility of
the Partnership. The Company has no obligation to fund any additional amounts,
and has no other guarantees of any kind related to the project.
8. MORTGAGE NOTE PAYABLE
On May 19, 2005, a wholly-owned subsidiary of the Company obtained a $36.0
million non-recourse mortgage loan secured by a theatre and retail mix property
in Burbank, California. The loan requires monthly principal and interest
payments of approximately $206 thousand. The mortgage note is a ten-year fixed
rate loan that bears interest at 5.56% and is due and payable on June 6, 2015.
9. PREFERRED SHARE OFFERING
On January 19, 2005, the Company issued 3.2 million 7.75% Series B cumulative
redeemable preferred shares ("Series B preferred shares") in a registered public
offering for net proceeds of $77.5 million, before expenses. The Company pays
cumulative dividends on the Series B preferred shares from (and including) the
date of original issuance in the amount of $1.9375 per share each year, which is
equivalent to 7.75% of the $25 liquidation preference per share. Dividends on
the Series B preferred shares are payable quarterly in arrears, and began on
April 15, 2005. The Company may not redeem the Series B preferred shares before
January 19, 2010, except in limited circumstances to preserve the Company's REIT
status. On or after January 19, 2010, the Company may, at its option, redeem the
Series B preferred shares in whole at any time or in part from time to time, by
paying $25 per share, plus any accrued and unpaid dividends up to and including
the date of redemption. The Series B preferred shares generally have no stated
maturity, will not be subject to any sinking fund or
11
mandatory redemption, and are not convertible into any of the Company's other
securities. Owners of the Series B preferred shares generally have no voting
rights, except under certain dividend defaults. A portion of the proceeds from
this offering was used to repay $18.8 million in mortgage notes payable on their
due date of February 1, 2005.
10. COMMITMENTS AND CONTINGENCIES
As of September 30, 2005, the Company had five 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 81 screens and their development costs (including land) are expected to
be approximately $69.4 million. Through September 30, 2005, the Company has
invested $18.9 million in these projects (including land), and has commitments
to fund approximately $50.5 million of additional improvements. Development
costs are advanced by the Company either in periodic draws or upon successful
completion of construction. If the Company determines that construction is not
being completed in accordance with the terms of the development agreement, the
Company can discontinue funding construction draws or refuse to purchase the
completed theatre. The Company has agreed to lease the theatres to the operators
at pre-determined rates.
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in this quarterly report on Form
10-Q. The forward-looking statements included in this discussion and elsewhere
in this Form 10-Q involve risks and uncertainties, including anticipated
financial performance, business prospects, industry trends, shareholder returns,
performance of leases by tenants and other matters, which reflect management's
best judgment based on factors currently known. Actual results and experience
could differ materially from the anticipated results and other expectations
expressed in our forward-looking statements as a result of a number of factors
including but not limited to those discussed in this Item and in Item I
"Business - Risk Factors", in our annual report on Form 10-K for the year ended
December 31, 2004 and those discussed in "Risk Factors" in our prospectus filed
under Rule 424(b) of the SEC on January 12, 2005.
OVERVIEW
Our primary business strategy is to purchase real estate (land, buildings and
other improvements) that we lease to operators of destination-based
entertainment and entertainment-related properties. As of September 30, 2005, we
had invested approximately $1.3 billion (before accumulated depreciation) in 63
megaplex theatre properties and various restaurant, retail and other properties
located in 24 states and Ontario, Canada. As of September 30, 2005, we had
invested approximately $16.7 million in development land and construction in
progress for real-estate development. Also, as of September 30, 2005, we had
invested approximately US $42.5 million in mortgage note financing for the
development of a new entertainment retail center located in downtown Toronto,
Ontario, Canada.
Substantially all of our single-tenant properties are leased pursuant to
long-term, triple-net leases, under which the tenants typically pay all
operating expenses of a property, including, but not limited to, all real estate
taxes, assessments and other governmental charges, insurance, utilities, repairs
and maintenance. A majority of our revenues are derived from rents received or
accrued under long-term, triple-net leases. Tenants at our multi-tenant
properties reimburse us to defray their pro rata portion of these costs.
We incur general and administrative expenses including compensation expense for
our executive officers and other employees, professional fees and various
expenses incurred in the process of identifying, evaluating, acquiring and
financing additional properties. We are self-administered and managed by our
trustees, executive officers and other employees. Our primary non-cash expense
is the depreciation of our properties. We depreciate buildings and improvements
on our properties over a five-year to 40-year period for tax purposes and
financial reporting purposes.
Our property acquisitions and development financing commitments are financed by
cash from operations, borrowings under our secured revolving variable rate
credit facility, long-term mortgage debt and the sale of equity securities. It
has been our strategy to structure leases and financings to ensure a positive
spread between our cost of capital and the rentals paid by our tenants. We have
primarily acquired or developed new properties that are pre-leased to a single
tenant or multi-tenant properties that have a high occupancy rate. We do not
typically develop or acquire properties on a speculative basis or that are not
significantly pre-leased. We have also entered into joint ventures formed to own
and lease single properties, and provided mortgage note financing for a new
development in Canada as described above. We intend to continue entering into
some or all of these types of arrangements in the foreseeable future.
Our primary challenges have been locating suitable properties, negotiating
favorable lease and financing terms, and managing our portfolio as we have
continued to grow. Because of our emphasis on the entertainment sector of the
real estate industry and the knowledge and industry relationships of our
management, we have enjoyed favorable opportunities to acquire, finance and
lease properties. We believe those opportunities will continue during the
remainder of 2005.
13
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements and related notes. In preparing
these financial statements, management has made its best estimates and
assumptions that affect the reported assets and liabilities. The most
significant assumptions and estimates relate to revenue recognition, depreciable
lives of the real estate, the valuation of real estate and accounting for real
estate acquisitions. Application of these assumptions requires the exercise of
judgment as to future uncertainties and, as a result, actual results could
differ from these estimates.
Revenue Recognition
Rents that are fixed and determinable are recognized on a straight-line basis
over the minimum terms of the leases. Base rent escalation in other 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 the first nine
months of 2005. If an indicator of possible impairment exists, a property is
evaluated for impairment by comparing the carrying amount of the property to the
estimated undiscounted future cash flows expected to be generated by the
property. If the carrying amount of a property exceeds its estimated future cash
flows on an undiscounted basis, an impairment charge is recognized in the amount
by which the carrying amount of the property exceeds the fair value of the
property. Management estimates fair value of our rental properties based on
projected discounted cash flows using a discount rate determined by management
to be commensurate with the risk inherent in the Company. Management did not
record any impairment charges in the first nine months of 2005.
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
14
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 September 30, 2005, we completed development of a
megaplex theatre property in Hattiesburg, Mississippi. The Hattiesburg Grand
Theatre 14 is operated by Southern Theatres and was completed for a total
development cost (including land and building) of approximately $9.7 million. We
purchased the land in 2005 for $2.0 million. This theatre is leased under a
long-term triple-net lease.
The hurricane events of September 2005 in the Gulf States region of the United
States impacted five of our theatres located in the New Orleans, Louisiana area,
totaling 68 screens. These five theatres are all operated by AMC. Two of the
theatres, totaling 20 screens, have reopened. The remaining three theatres,
totaling 48 screens, remain closed for repair. One theatre is expected to reopen
a majority of its screens by the end of October and be fully operational within
three months. The two remaining locations, totaling 36 screens, are expected to
remain closed for a period of three to six months while repairs to the theatres
are made.
One of our theatres located in Biloxi, Mississippi also suffered minor damage,
but has been repaired and is currently open for business. The Biloxi theatre is
operated by Southern Theatres.
All six of the theatres impacted by the hurricane events are leased under
long-term triple-net leases which require tenants to maintain a minimum of 18
months of business interruption insurance, and provide that repair of damage to
the theatres is the responsibility of the tenants and/or the tenants' insurance
providers. In addition, the tenants remain responsible for paying base rent
during any repair period. Percentage rent of $197,000 has been collected in 2005
related to one of the closed theatres. Prior to the hurricanes, no additional
percentage rents had been anticipated related to this theatre or any of the
other five theatres for the remainder of 2005. We expect no percentage rent will
be received in 2006 related to any of these six theatres.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2004
Rental revenue was $36.9 million for the three months ended September 30, 2005
compared to $32.3 million for the three months ended September 30, 2004. The
$4.6 million increase resulted primarily from the property acquisitions
completed in 2004 and 2005 and base rent increases on existing properties.
Percentage rents of $395 thousand and $520 thousand were recognized during the
three months ended September 30, 2005 and 2004, respectively. Straight line
rents of $602 thousand and $665 thousand were recognized during the three months
ended September 30, 2005 and 2004, respectively.
Tenant reimbursements totaled $2.8 million for the three months ended September
30, 2005 compared to $2.5 million for the three months ended September 30, 2004.
These tenant reimbursements arise from the operations of our retail centers. The
$0.3 million increase is due primarily to the acquisition of the retail center
in Burbank, CA on March 31, 2005.
Other income was $602 thousand for the three months ended September 30, 2005
compared to $297 thousand for the three months ended September 30, 2004. The
increase of $305 thousand relates to revenues from a family bowling center in
Westminster, Colorado opened in November 2004 and a restaurant in Southfield,
Michigan opened in September 2005. Both are operated through a wholly-owned
taxable REIT subsidiary.
15
Mortgage financing interest for the three months ended September 30, 2005 was
$1.5 million and related solely to interest income from the mortgage note
financing we provided in Canada in June of 2005 (described in Note 7 to the
consolidated financial statements in this Form 10-Q). No such revenue was
recognized in the third quarter of 2004.
Our property operating expense totaled $3.8 million for the three months ended
September 30, 2005 compared to $3.0 million for the three months ended September
30, 2004. These property operating expenses arise from the operations of our
retail centers. The $0.8 million increase is due primarily to the acquisition of
the retail center in Burbank, CA on March 31, 2005, and increases in property
taxes and maintenance at certain of these properties.
Other operating expense totaled $806 thousand for the three months ended
September 30, 2005 and related solely to the operations of the family bowling
center in Westminster, Colorado and a restaurant in Southfield, Michigan. Both
are operated through a wholly-owned taxable REIT subsidiary. No such costs were
incurred in the third quarter of 2004.
Our net interest expense increased by $1.5 million to $11.0 million for the
three months ended September 30, 2005 from $9.5 million for the three months
ended September 30, 2004. The increase in net interest expense primarily
resulted from increases in long-term debt used to finance real estate
acquisitions and an increase in the LIBOR and prime interest rates associated
with our borrowings under our secured revolving variable rate credit facility.
Depreciation and amortization expense, including amortization of non-vested
shares, totaled $7.4 million for the three months ended September 30, 2005
compared to $6.4 million for the same period in 2004. The $1.0 million increase
resulted primarily from the property acquisitions completed in 2005 and 2004 and
the addition of employees in 2004.
Preferred dividend requirements for the three months ended September 30, 2005
were $2.9 million compared to $1.4 million for the same period in 2004. The $1.5
million increase is due to the issuance of 3.2 million Series B preferred shares
in January of 2005 (described in Note 9 to the consolidated financial statements
in this Form 10-Q).
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2004
Rental revenue was $107.2 million for the nine months ended September 30, 2005
compared to $91.3 million for the nine months ended September 30, 2004. The
$15.9 million increase resulted primarily from the property acquisitions
completed in 2004 and 2005 and base rent increases on existing properties.
Percentage rents of $1.4 million and $1.7 million were recognized during the
nine months ended September 30, 2005 and 2004, respectively. Straight line rents
of $1.6 million were recognized for both the nine months ended September 30,
2005 and 2004. As of September 30, 2005 and 2004, the receivable for straight
line rents was $4.1 million and $1.7 million, respectively.
Tenant reimbursements totaled $8.9 million for the nine months ended September
30, 2005 compared to $7.1 million for the nine months ended September 30, 2004.
These tenant reimbursements arise from the operations of our retail centers. The
$1.8 million increase is due primarily to the acquisitions of the retail centers
in Burbank, CA on March 31, 2005 and Ontario, Canada on March 1, 2004.
Other income was $2.5 million for the nine months ended September 30, 2005
compared to $393 thousand for the nine months ended September 30, 2004. The
increase of $2.1 million relates to revenues from a family bowling center in
Westminster, Colorado opened in November 2004 and a restaurant in Southfield,
Michigan opened in September 2005. Both are operated through a wholly-owned
taxable REIT subsidiary.
Mortgage financing interest for the nine months ended September 30, 2005 was
$2.0 million and related solely to interest income from the mortgage note
financing we provided in Canada in June of 2005 (described in Note 7 to the
consolidated financial statements in this Form 10-Q). No such revenue was
recognized during the first nine months of 2004.
16
Our property operating expense totaled $11.4 million for the nine months ended
September 30, 2005 compared to $8.7 million for the nine months ended September
30, 2004. These property operating expenses arise from the operations of our
retail centers. The $2.7 million increase is due primarily to the acquisitions
of the retail centers in Burbank, CA on March 31, 2005 and Ontario, Canada on
March 1, 2004, and increases in property taxes and maintenance at certain of
these properties.
Other operating expense totaled $2.0 million for the nine months ended September
30, 2005 and related solely to the operations of the family bowling center in
Westminster, Colorado and a restaurant in Southfield, Michigan. Both are
operated through a wholly-owned taxable REIT subsidiary. No such costs were
incurred in the first nine months of 2004.
Our general and administrative expenses totaled $4.3 million for the nine months
ended September 30, 2005 compared to $3.7 million for the same period in 2004.
The $0.6 million increase is due primarily to the following:
- An increase in franchise taxes due to an increase in the size of our
real estate portfolio.
- Payroll and related expenses attributable to increases in base
compensation, bonus awards, and payroll taxes related to the vesting
of stock grants and the exercise of stock options, and the addition of
employees.
- An increase in legal and accounting fees related to both the increase
in the size of our operations and to compliance with the
Sarbanes-Oxley Act.
Costs associated with loan refinancing for the 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, 2005.
Our net interest expense increased by $2.5 million to $30.8 million for the nine
months ended September 30, 2005 from $28.3 million for the nine months ended
September 30, 2004. The increase in net interest expense primarily resulted from
increases in long-term debt used to finance real estate acquisitions and an
increase in the interest rate associated with our borrowings under our secured
revolving variable rate credit facility.
Depreciation and amortization expense, including amortization of non-vested
shares, totaled $21.7 million for the nine months ended September 30, 2005
compared to $18.1 million for the same period in 2004. The $3.6 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 $546 thousand for the nine months ended
September 30, 2005 compared to $482 thousand for the same period in 2004. The
increase is primarily due to the addition of the Atlantic-EPR II joint venture
as of March 1, 2004.
For the nine months ended September 30, 2005 there were no minority interests in
net income as compared to $982 thousand for the nine months ended September 30,
2004. The decrease is due primarily to the conversion of the preferred interest
in EPT Gulf States, LLC as of September 20, 2004 to 857,145 common shares of the
Company.
Preferred dividend requirements for the nine months ended September 30, 2005
were $8.4 million compared to $4.1 million for the same period in 2004. The $4.3
million increase is due to the issuance of 3.2 million Series B preferred shares
in January of 2005 (described in Note 9 to the consolidated financial statements
in this Form 10-Q).
17
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $8.4 million at September 30, 2005. In addition,
we had restricted cash of $11.7 million at September 30, 2005 required in
connection with debt service, payment of real estate taxes and capital
improvements.
Mortgage Debt and Credit Facilities
As of September 30, 2005, we had total debt outstanding of $664.6 million. All
of our debt is mortgage debt secured by a substantial portion of our rental
properties. As of September 30, 2005, $575.6 million of debt outstanding was
fixed rate debt with a weighted average interest rate of approximately 6.3%.
At September 30, 2005, we had $89.0 million in debt outstanding under our $150.0
million secured revolving variable rate credit facility that bears interest at a
floating rate and is secured by thirteen theatre properties, two theatre and
retail mix properties and one retail mix property. The credit facility matures
in March of 2007.
Our principal investing activity is the purchase and development of rental
property, which is generally financed with mortgage debt and the proceeds from
equity offerings. Continued growth of our rental property portfolio will depend
in part on our continued ability to access funds through additional borrowings
and equity security offerings.
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 $69.8 million
for the nine months ended September 30, 2005 and $61.1 million for the nine
months ended September 30, 2004. We anticipate that our cash on hand, cash from
operations, and funds available under our secured revolving variable rate credit
facility will provide adequate liquidity to fund our operations, make interest
and principal payments on our debt, and allow distributions to our shareholders
and avoidance of corporate level federal income or excise tax in accordance with
Internal Revenue Code requirements for qualification as a REIT.
We had five theatre projects under construction at September 30, 2005. The
properties are being developed by and have been pre-leased to the prospective
tenants under long-term triple-net leases. The cost of development is paid by us
either in periodic draws or upon successful completion of construction. The
related timing and amount of rental payments to be received by us from tenants
under the leases correspond to the timing and amount of funding by us of the
cost of development. These theatres will have a total of 81 screens and their
total development costs (including land) will be approximately $69.4 million.
Through September 30, 2005, we have invested $18.9 million in these projects
(including land), and have commitments to fund an additional $50.5 million in
improvements. We plan to fund development primarily with funds generated by debt
financing and/or equity offerings. If we determine that construction is not
being completed in accordance with the terms of the development agreement, we
can discontinue funding construction draws or refuse to purchase the completed
theatre.
As further described in Note 9 to the consolidated financial statements in this
Form 10-Q, we completed an offering of Series B preferred shares in January
2005, generating net proceeds (before expenses) of $77.5 million. We used
proceeds from this offering to payoff $18.8 million in mortgage debt which
matured on February 1, 2005.
Off Balance Sheet Arrangements
At September 30, 2005, we had a 20% investment interest in two unconsolidated
real estate joint ventures, Atlantic-EPR I and Atlantic-EPR II, which are
accounted for under the equity method of accounting. We do not anticipate any
material impact on our liquidity as a result of any commitments that may arise
involving those joint ventures. We recognized income
18
of $325 thousand and $307 thousand from our investment in the Atlantic-EPR I
joint venture during the first nine months of 2005 and 2004, respectively. We
also recognized income of $221 thousand and $175 thousand from our investment in
the Atlantic-EPR II joint venture during the first nine months of 2005 and 2004,
respectively.
FUNDS FROM OPERATIONS (FFO)
The National Association of Real Estate Investment Trusts (NAREIT) developed FFO
as a relative non-GAAP financial measure of performance and liquidity of an
equity REIT in order to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. FFO is a widely used
measure of the operating performance of real estate companies and is provided
here as a supplemental measure to Generally Accepted Accounting Principles
(GAAP) net income available to common shareholders and earnings per share. FFO,
as defined under the revised NAREIT definition and presented by us, is net
income, computed in accordance with GAAP, excluding gains and losses from sales
of depreciable operating properties, plus real estate related depreciation and
amortization, and after adjustments for unconsolidated partnerships, joint
ventures and other affiliates. Adjustments for unconsolidated partnerships,
joint ventures and other affiliates are calculated to reflect FFO on the same
basis. FFO is a non-GAAP financial measure. FFO does not represent cash flows
from operations as defined by GAAP and is not indicative that cash flows are
adequate to fund all cash needs and is not to be considered an alternative to
net income or any other GAAP measure as a measurement of the results of our
operations or our cash flows or liquidity as defined by GAAP.
The following tables summarize our FFO for the three and nine month periods
ended September 30, 2005 and September 30, 2004 (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
------- ------- ------- -------
Net income available to common shareholders $14,898 $13,988 $42,511 $34,302
Add: Real estate depreciation and amortization 6,844 5,778 20,057 16,347
Add: Allocated share of joint venture depreciation 61 59 181 163
------- ------- ------- -------
Basic Funds From Operations 21,803 19,825 62,749 50,812
Add: Minority interest in net income -- -- -- 750
------- ------- ------- -------
Diluted Funds From Operations $21,803 $19,825 $62,749 $51,562
======= ======= ======= =======
FFO per common share:
Basic $ 0.87 $ 0.82 $ 2.51 $ 2.31
Diluted 0.85 0.80 2.46 2.23
Shares used for computation (in thousands):
Basic 25,086 24,031 24,995 21,997
Diluted 25,585 24,628 25,482 23,159
Other financial information:
Straight-lined rental revenue $ 602 $ 665 $ 1,647 $ 1,635
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
FASB Statement No. 123, Accounting for Stock-Based Compensation, was revised in
December 2004 by FASB Statement No. 123R. FASB Statement No. 123R, Share Based
Payment, also supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. FASB Statement No. 123R
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
19
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 approximately 20% of our
total real estate square footage. To the extent any of those leases contain
fixed expense reimbursement provisions or limitations, we may be subject to
increases in costs resulting from inflation that are not fully passed through to
tenants.
FORWARD LOOKING INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
WITH THE EXCEPTION OF HISTORICAL INFORMATION, THIS REPORT ON FORM 10-Q CONTAINS
FORWARD-LOOKING STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 AND IDENTIFIED BY SUCH WORDS AS "WILL BE," "INTEND,"
"CONTINUE," "BELIEVE," "MAY," "EXPECT," "HOPE," "ANTICIPATE," "GOAL,"
"FORECAST," OR OTHER COMPARABLE TERMS. OUR ACTUAL FINANCIAL CONDITION, RESULTS
OF OPERATIONS OR BUSINESS MAY VARY MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD- LOOKING STATEMENTS AND INVOLVE VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED UNDER "RISK FACTORS" IN OUR ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004 AND OUR PROSPECTUS
FILED UNDER RULE 424(B) OF THE SEC ON JANUARY12, 2005. INVESTORS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS.
20
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 September 30, 2005, the end of the period covered by this
report. Based on that review and evaluation, the CEO and CFO have concluded that
our current disclosure controls and procedures, as designed and implemented,
were effective. There 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. In addition, there were no
significant changes in our internal control over financial reporting during the
quarter.
Effective January 1, 2005, we implemented a new automated lease administration
system. As part of the implementation, we modified our internal control over
financial reporting to align our internal controls with the new technology. This
new technology improves the efficiency of our operations and further strengthens
our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 . LEGAL PROCEEDINGS
Other than routine litigation and administrative proceedings arising in the
ordinary course of business, we are not presently involved in any litigation
nor, to our knowledge, is any litigation threatened against us or our
properties, which is reasonably likely to have a material adverse effect on our
liquidity or results of operations.
ITEM 2 . UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3 . DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 . SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 . OTHER INFORMATION
None.
ITEM 6 . EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act
21
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: October 27, 2005 By /s/ David M. Brain
-------------------------------------
David M. Brain, President - Chief
Executive Officer and Trustee
Dated: October 27, 2005 By /s/ Fred L. Kennon
-------------------------------------
Fred L. Kennon, Vice President -
Chief Financial Officer
22