UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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 W. PERSHING ROAD, SUITE 201
KANSAS CITY, MISSOURI 64108
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (816) 472-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Class Name of each exchange on which registered
Common Shares of Beneficial Interest, New York Stock Exchange
par value $.01 per share
9.50% Series A Cumulative Redeemable Preferred New York Stock Exchange
Shares, par value $.01 per share
7.75% Series B Cumulative Redeemable Preferred New York Stock Exchange
Shares, par value $.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
INDICATE BY CHECK MARK IF THE REGISTRANT IS A WELL-KNOWN SEASONED ISSUER, AS
DEFINED IN RULE 405 OF THE SECURITIES ACT. YES [X] NO [ ]
INDICATE BY CHECK MARK IF THE REGISTRANT IS NOT REQUIRED TO FILE REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE ACT. YES [ ] NO [X]
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] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN
ACCELERATED FILER OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED
FILER AND LARGE ACCELERATED FILER" IN RULE 12B-2 OF THE EXCHANGE ACT.
LARGE ACCELERATED FILER [X] ACCELERATED FILER [ ] NON-ACCELERATED FILER [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN
RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
THE AGGREGATE MARKET VALUE OF THE COMMON SHARES OF BENEFICIAL INTEREST ("COMMON
SHARES") OF THE REGISTRANT HELD BY NON-AFFILIATES, BASED ON THE CLOSING PRICE ON
THE LAST BUSINESS DAY OF THE REGISTRANT'S MOST RECENTLY COMPLETED SECOND FISCAL
QUARTER, AS REPORTED ON THE NEW YORK STOCK EXCHANGE, WAS $1,212,828,686. AT
FEBRUARY 24, 2006, THERE WERE 26,365,841 COMMON SHARES OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2006 Annual
Meeting of Shareholders to be filed with the Commission pursuant to Regulation
14A are incorporated by reference in Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
Investors should review the Risk Factors commencing on page 4 of this report for
a discussion of risks that may impact our financial condition, business or share
price.
GENERAL
Entertainment Properties Trust ("we," "us," "EPR" or the "Company") was formed
on August 22, 1997 as a Maryland real estate investment trust ("REIT") to
capitalize on the opportunities created by the development of destination
entertainment and entertainment-related properties, including megaplex movie
theatre complexes. We completed an initial public offering of our common shares
of beneficial interest ("common shares") on November 18, 1997.
We are a self-administered REIT. As of December 31, 2005, our real estate
portfolio was comprised of over $1.4 billion in assets and consisted of 67
megaplex theatre properties (including three joint venture properties) located
in 24 states and Ontario, Canada, six additional theatre properties under
development, seven entertainment retail centers (including one joint venture
property) 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 our theatre
properties. Our theatre properties are leased to leading theatre operators,
including American Multi-Cinema, Inc. ("AMC"), a subsidiary of AMC
Entertainment, Inc. ("AMCE"), Muvico Entertainment, LLC ("Muvico"), Regal
Cinemas, Inc. ("Regal"), Consolidated Theatres ("Consolidated"), Loews Cineplex
Entertainment ("Loews"), Rave Motion Pictures ("Rave"), AmStar Cinemas, LLC
("AmStar") , Wallace Theatres ("Wallace"), Crown Theatres ("Crown"), Southern
Theatres ("Southern") and Kerasotes Theatres ("Kerasotes"). Approximately 54% of
our megaplex theatre properties are leased to AMC.
During the year ended December 31, 2005, approximately $31.8 million, or 19.3%
of our total revenue was derived from our four entertainment retail centers in
Ontario, Canada which we acquired on March 1, 2004, and our mortgage note
receivable, funded on June 1, 2005, which is secured by property also in
Ontario, Canada. The Canadian entertainment retail centers represent
approximately $174.6 million, or 13.6% of our total rental properties at
December 31, 2005, and combined with the carrying value of our mortgage note
receivable, represent approximately $218.6 million or 15.5% of our total assets
at December 31, 2005. (See "Risk Factors - There are risks in owning assets
outside the U.S." and "Changes in foreign currency exchange rates may have an
impact on the value of our shares.")
For a discussion of material property acquisitions during the year ended
December 31, 2005, see Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Developments."
We aggregate the financial information of all our properties into one reportable
segment because the properties all have similar economic characteristics and
provide similar services to similar types and classes of customers.
We believe entertainment is an important sector of the retail real estate
industry and that, as a result of our focus on properties in this sector and the
industry relationships of our management, we have a competitive advantage in
providing capital to operators of these types of properties. Our principal
business strategy is to be the nation's leading entertainment real estate
company by continuing to acquire high-quality properties leased to entertainment
and entertainment-related business operators, generally under long-term
triple-net leases that require the tenant to pay substantially all expenses
associated with the operation and maintenance of the property.
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Megaplex theatres typically have at least 12 screens with stadium-style seating
(seating with elevation between rows to provide unobstructed viewing) and are
equipped with amenities that significantly enhance the audio and visual
experience of the patron. We believe the development of megaplex theatres has
accelerated the obsolescence of many of the previous generation of multiplex
movie theatres by setting new standards for moviegoers, who, in our experience,
have demonstrated their preference for the more attractive surroundings, wider
variety of films and superior customer service typical of megaplex theatres (see
"Risk Factors - Operating risks in the entertainment industry may affect the
ability of our tenants to perform under their leases" and "Market prices for our
shares may be affected by perceptions about the financial health or share value
of our tenants or the performance of REIT stocks generally.")
We expect the development of megaplex theatres to continue in the United States
and abroad for the foreseeable future. With the development of the stadium style
megaplex theatre as the preeminent format for cinema exhibition, the older
generation of smaller flat-floor theatres has generally experienced a
significant downturn in attendance and performance. As a result of the
significant capital commitment involved in building megaplex theatres and the
experience and industry relationships of our management, we believe we will
continue to have opportunities to provide capital to businesses that seek to
develop and operate these properties but would prefer to lease rather than own
the properties. We believe our ability to finance these properties will enable
us to continue to grow and diversify our asset base (See Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
discussion of capital requirements necessary for the Company's continued
growth).
BUSINESS OBJECTIVES AND STRATEGIES
Our primary business objective is to continue to enhance shareholder value by
achieving predictable and increasing Funds From Operations ("FFO") per Share
(See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Funds From Operations" for a discussion of FFO), through
the acquisition of high-quality properties leased primarily to entertainment and
entertainment-related business operators. We intend to achieve this objective by
continuing to execute the Growth Strategies, Operating Strategies and
Capitalization Strategies described below:
GROWTH STRATEGIES
FUTURE INVESTMENTS
We intend to pursue acquisitions of high-quality properties from operators with
a strong market presence. As a part of our growth strategy, we will consider
developing additional megaplex theatre properties, and developing or acquiring
single-tenant entertainment, entertainment-related or specialty properties. We
will also consider developing or acquiring additional entertainment retail
centers ("ERC's"), centers generally anchored by an entertainment component such
as a megaplex theatre and containing other entertainment-related properties. In
lieu of acquisition or development, we may also pursue opportunities to provide
mortgage financing for these same property types. To accomplish our growth
strategies, we will consider entering into additional joint ventures with other
developers or investors (see "Capitalization Strategies - Joint Ventures").
OPERATING STRATEGIES
LEASE RISK MINIMIZATION
To avoid initial lease-up risks and produce a predictable income stream, we
typically acquire single-tenant properties that are leased under long-term
leases. We believe our willingness to make long-term investments in properties
offers our tenants financial flexibility and allows tenants to allocate capital
to their core businesses. Although we will continue to emphasize single-tenant
properties, we have acquired and may continue to acquire multi-tenant properties
we believe add value to our shareholders.
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LEASE STRUCTURE
We have structured our property acquisitions and leasing arrangements to achieve
a positive spread between our cost of capital and the rentals paid by our
tenants. We typically structure leases on a triple-net basis under which the
tenants bear the principal portion of the financial and operational
responsibility for the properties. During each lease term and any renewal
periods, the leases typically provide for periodic increases in rent and/or
percentage rent based upon a percentage of the tenant's gross sales over a
pre-determined level. In our multi-tenant property leases and some of our
theatre leases, we require the tenant to pay a common area maintenance (CAM)
charge to defray its pro rata share of insurance, taxes and maintenance costs.
TENANT RELATIONSHIPS
We intend to continue developing and maintaining long-term working relationships
with theatre, restaurant, retail, and other entertainment-related and specialty
business operators and developers by providing capital for multiple properties
on a national or regional basis, thereby enhancing efficiency and value to those
operators and to the Company.
PORTFOLIO DIVERSIFICATION
We will endeavor to further diversify our asset base by property type,
geographic location and tenant. In pursuing this diversification strategy, we
will target theatre, restaurant, retail and other entertainment-related business
operators which management views as leaders in their market segments and which
have the financial strength to compete effectively and perform under their
leases with the Company. We may also consider the acquisition of other specialty
properties if they add value to our shareholders.
CAPITALIZATION STRATEGIES
DEBT AND EQUITY FINANCING
We finance the acquisition of properties with a combination of debt and
preferred and common equity financing (See "Risk Factors - There is risk in
using debt to fund property acquisitions" and "We must obtain new financing in
order to grow"). We expect to maintain a debt to total capitalization ratio
(i.e., total debt of the Company as a percentage of shareholders' equity plus
total debt) of approximately 50% to 55%.
On January 31, 2006, we amended and restated our secured revolving variable rate
credit facility to increase the size of the facility to $200 million from $150
million, extend its term, improve the pricing and convert from a secured to an
unsecured facility.
The amended facility (referred to in this report as the "unsecured revolving
variable rate credit facility") carries an interest rate ranging from LIBOR plus
130 to 175 basis points, compared to LIBOR plus 175 to 250 basis points
previously paid. The unsecured revolving variable rate credit facility has a
three year term expiring in 2009 with a one-year extension available at our
option.
JOINT VENTURES
We will examine and may pursue potential additional joint venture opportunities
with institutional investors or developers if they are considered to add value
to our shareholders. We may employ higher leverage in joint ventures (See "Risk
Factors - Joint ventures may limit flexibility with jointly owned investments").
PAYMENT OF REGULAR DISTRIBUTIONS
We have paid and expect to continue paying quarterly dividend distributions to
our common and preferred shareholders. Our Series A preferred shares have a
dividend rate of 9.50% and our Series B preferred shares have a dividend rate of
7.75%. Among the factors the Board of Trustees considers in setting the
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common share distribution rate are the applicable REIT tax rules and regulations
that apply to distributions, the Company's results of operations, including FFO
per share, and the Company's Cash Available for Distribution (defined as net
cash flow available for distribution after payment of operating expenses, debt
service, and other obligations). We expect to periodically increase
distributions on our common shares as FFO and Cash Available for Distribution
increase and as other considerations and factors warrant (See "Risk Factors - We
cannot assure you we will continue paying dividends at historical rates").
COMPETITION
We compete for real estate financing opportunities with other companies that
invest in real estate, as well as traditional financial sources such as banks
and insurance companies. While we were the first publicly traded REIT formed to
specialize in entertainment-themed properties, other REITs have financed and may
continue to seek to finance entertainment properties as new properties are
developed or become available for acquisition.
EMPLOYEES
As of December 31, 2005, we had thirteen full time employees.
WEBSITE ACCESS TO EXCHANGE ACT REPORTS AND OTHER DOCUMENTS
Our internet website address is www.eprkc.com. We make available through our
website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after we electronically file such material with, or furnish it to the SEC. You
may also view our Code of Business Conduct and Ethics, Company Governance
Guidelines, Independence Standards for Trustees and the charters of our audit,
nominating/company governance and compensation committees on our website. Copies
of these documents are also available in print to any shareholder who requests
them.
ITEM 1A. RISK FACTORS
There are many risks and uncertainties that can affect our future business,
financial performance or share price. Some of these are beyond our control. Here
is a brief description of some of the important factors which could cause our
future business, operating results, financial condition or share price to be
materially different than our expectations. This discussion includes a number of
forward-looking statements. You should refer to the description of the
qualifications and limitations on forward-looking statements on page 28 of this
report.
RISKS THAT MAY IMPACT OUR FINANCIAL CONDITION OR PERFORMANCE
WE COULD BE ADVERSELY AFFECTED BY A TENANT'S BANKRUPTCY
If a tenant becomes bankrupt or insolvent, that could diminish the income we
expect from that tenant's leases. We may not be able to evict a tenant solely
because of its bankruptcy. On the other hand, a bankruptcy court might authorize
the tenant to terminate its leases with us. If that happens, our claim against
the bankrupt tenant for unpaid future rent would be subject to statutory
limitations that might be substantially less than the remaining rent owed under
the leases. In addition, any claim we have for unpaid past rent would likely not
be paid in full and we would also have to take a charge against earnings for any
accrued straight-line rent receivable related to the leases. Two of our tenants,
Edwards Theatre Circuit, Inc. (now part of the Regal Entertainment Group), which
operates two of our theatre properties, and Loews
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Cineplex Entertainment (now merged with AMC), which operates two of our
theatres, filed for, and emerged from, bankruptcy reorganization in 2002. We did
not incur any significant expenses or loss of revenue as a result of those
bankruptcy reorganizations.
WE COULD BE ADVERSELY AFFECTED BY A MORTGAGOR'S BANKRUPTCY OR DEFAULT
If a mortgagor becomes bankrupt or insolvent or defaults under its mortgage,
that could force us to declare a default and foreclose on the underlying
property. There is a risk that the fair value of the property will be less than
the carrying value of the property's debt at the time of the foreclosure and we
may have to take a charge against earnings. We may experience costs and delays
in recovering a property in foreclosure or finding a substitute operator for the
property. If the mortgage we hold is subordinated to senior financing secured by
the property, our recovery would be limited to any amount remaining after
satisfaction of all amounts due to the holder of the senior financing. We have
agreed to subordinate our Canadian mortgage financing to any bank construction
financing to be obtained by the borrower.
OUR THEATRE TENANTS MAY BE ADVERSELY AFFECTED BY THE OBSOLESCENCE OF ANY OLDER
MULTIPLEX THEATRES THEY OWN OR BY ANY OVERBUILDING OF MEGAPLEX THEATRES IN THEIR
MARKETS.
The development of megaplex movie theatres has rendered many older multiplex
theatres obsolete. To the extent our tenants own a substantial number of
multiplexes, they have been, or may in the future be, required to take
significant charges against their earnings resulting from the impairment of
these assets. Megaplex theatre operators have also been and could in the future
be adversely affected by any overbuilding of megaplex theatres in their markets
and the cost of financing, building and leasing megaplex theatres.
OPERATING RISKS IN THE ENTERTAINMENT INDUSTRY MAY AFFECT THE ABILITY OF OUR
TENANTS TO PERFORM UNDER THEIR LEASES
The ability of our tenants to operate successfully in the entertainment industry
and remain current on their lease obligations depends on a number of factors,
including the availability and popularity of motion pictures, the performance of
those pictures in tenants' markets, the allocation of popular pictures to
tenants and the terms on which the pictures are licensed. Neither we nor our
tenants control the operations of motion picture distributors. Megaplex theatres
represent a greater capital investment, and generate higher rents, than the
previous generation of multiplex theatres. For this reason, the ability of our
tenants to operate profitably and perform under their leases could be dependent
on their ability to generate higher revenues per screen than multiplex theatres
typically produce.
The success of "out-of-home" entertainment venues such as megaplex theatres and
entertainment retail centers also depends on general economic conditions and the
willingness of consumers to spend time and money on out-of-home entertainment.
A SINGLE TENANT REPRESENTS A SUBSTANTIAL PORTION OF OUR LEASE REVENUES
Approximately 54% of our megaplex theatre properties are leased to AMC, one of
the nation's largest movie exhibition companies. AMCE has guaranteed AMC's
performance under substantially all of their leases. We have diversified and
expect to continue to diversify our real estate portfolio by entering into lease
transactions with a number of other leading operators. Nevertheless, our
revenues and our continuing ability to pay shareholder dividends are currently
substantially dependent on AMC's performance under its leases and AMCE's
performance under its guaranty.
We believe AMC occupies a strong position in the industry and we intend to
continue acquiring and leasing back AMC theatres. However, if for any reason AMC
failed to perform under its lease obligations and AMCE did not perform under its
guaranty, we could be required to reduce or suspend our shareholder dividends
and may not have sufficient funds to support operations until substitute tenants
are obtained. If that happened, we cannot predict when or whether we could
obtain substitute quality tenants on acceptable terms.
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THERE IS RISK IN USING DEBT TO FUND PROPERTY ACQUISITIONS
We have used leverage to acquire properties and expect to continue to do so in
the future. Although the use of leverage is common in the real estate industry,
our use of debt to acquire properties does expose us to some risks. If a
significant number of our tenants fail to make their lease payments and we don't
have sufficient cash to pay principal and interest on the debt, we could default
on our debt obligations. A substantial amount of our debt financing is secured
by mortgages on our properties. If we fail to meet our mortgage payments, the
lenders could declare a default and foreclose on those properties. Our unsecured
revolving variable rate credit facility also exposes us to the risk of higher
interest rates on amounts borrowed under that facility. If the tenants of
properties in the borrowing base for our unsecured revolving variable rate
credit facility default on their lease obligations or the properties otherwise
fail to qualify for inclusion in the borrowing base, that could limit the amount
we could borrow under the facility.
A PORTION OF OUR SECURED DEBT HAS A "HYPER-AMORTIZATION" PROVISION WHICH MAY
REQUIRE US TO REFINANCE THE DEBT OR SELL THE PROPERTIES SECURING THE DEBT PRIOR
TO MATURITY
As of December 31, 2005, we had approximately $94.9 million outstanding under a
single secured mortgage loan agreement that contains a "hyper-amortization"
feature, in which the principal payment schedule is rapidly accelerated, and our
principal payments are substantially increased, if we fail to pay the balance on
the anticipated prepayment date of July 11, 2008. We undertook this debt on the
assumption that we will be able to refinance the debt prior to these
hyper-amortization payments becoming due. If we cannot obtain acceptable
refinancing at the appropriate time, the hyper-amortization payments will
require substantially all of the revenues from those properties securing the
debt to be applied to the debt repayment, which could substantially reduce our
common share dividend rate and could adversely affect our financial condition
and liquidity.
WE MUST OBTAIN NEW FINANCING IN ORDER TO GROW
As a REIT, we are required to distribute at least 90% of our taxable net income
to shareholders in the form of dividends. This means we are limited in our
ability to use internal capital to acquire properties and must continually raise
new capital in order to continue to grow and diversify our real estate
portfolio. Our ability to raise new capital depends in part on factors beyond
our control, including conditions in equity and credit markets, conditions in
the industries in which our tenants are engaged and the performance of real
estate investment trusts generally. We continually consider and evaluate a
variety of potential transactions to raise additional capital, but we cannot
assure that attractive alternatives will always be available to us, nor that our
share price will increase or remain at a level that will permit us to continue
to raise equity capital publicly or privately.
IF WE FAIL TO QUALIFY AS A REIT, WE WOULD BE TAXED AS A CORPORATION, WHICH WOULD
SUBSTANTIALLY REDUCE FUNDS AVAILABLE FOR PAYMENT OF DIVIDENDS TO OUR
SHAREHOLDERS
If we fail to qualify as a REIT for federal income tax purposes, we will be
taxed as a corporation. We are organized and believe we qualify as a REIT, and
intend to operate in a manner that will allow us to continue to qualify as a
REIT. However, we cannot assure you that we will remain qualified in the future.
This is because qualification as a REIT involves the application of highly
technical and complex provisions of the Internal Revenue Code on which there are
only limited judicial and administrative interpretations, and depends on facts
and circumstances not entirely within our control. In addition, future
legislation, new regulations, administrative interpretations or court decisions
may significantly change the tax laws, the application of the tax laws to our
qualification as a REIT or the federal income tax consequences of that
qualification.
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If we fail to qualify as a REIT we will face tax consequences that will
substantially reduce the funds available for payment of dividends:
- We would not be allowed a deduction for dividends paid to
shareholders in computing our taxable income and would be subject to
federal income tax at regular corporate rates
- We could be subject to the federal alternative minimum tax and
possibly increased state and local taxes
- Unless we are entitled to relief under statutory provisions, we
could not elect to be treated as a REIT for four taxable years
following the year in which we were disqualified
- We could be subject to tax penalties and interest
In addition, if we fail to qualify as a REIT, we will no longer be required to
pay dividends. As a result of these factors, our failure to qualify as a REIT
could adversely affect the market price for our shares.
OUR DEVELOPMENT FINANCING ARRANGEMENTS EXPOSE US TO FUNDING AND PURCHASE RISKS
Our ability to meet our construction financing obligations which we have
undertaken or may enter into in the future depends on our ability to obtain
equity or debt financing in the required amounts. There is no assurance we can
obtain this financing at rates which will ensure a spread between our cost of
capital and the rent payable to us under the leases to be entered into upon
completion of construction. We will be obligated to purchase and lease-back the
theatres that are subject to our development financing at predetermined rates
(See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Liquidity
Requirements").
RISKS THAT APPLY TO OUR REAL ESTATE BUSINESS
THERE ARE RISKS ASSOCIATED WITH OWNING AND LEASING REAL ESTATE
Although our lease terms obligate the tenants to bear substantially all of the
costs of operating the properties, investing in real estate involves a number of
risks, including:
- The risk that tenants will not perform under their leases, reducing
our income from the leases or requiring us to assume the cost of
performing obligations (such as taxes, insurance and maintenance)
that are the tenant's responsibility under the lease
- The risk that changes in economic conditions or real estate markets
may adversely affect the value of our properties
- The risk that local conditions could adversely affect the value of
our properties
- We may not always be able to lease properties at favorable rates
- We may not always be able to sell a property when we desire to do so
at a favorable price
- Changes in tax, zoning or other laws could make properties less
attractive or less profitable
If a tenant fails to perform on its lease covenants, that would not excuse us
from meeting any debt obligation secured by the property and could require us to
fund reserves in favor of our lenders, thereby reducing funds available for
payment of dividends. We cannot be assured that tenants will elect to renew
their leases when the terms expire. If a tenant does not renew its lease or if a
tenant defaults on its lease obligations, there is no assurance we could obtain
a substitute tenant on acceptable terms. If we cannot obtain another quality
movie exhibitor to lease a megaplex theatre property, we may be required to
modify the property for a different use, which may involve a significant capital
expenditure and a delay in re-leasing the property.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE
Our leases require the tenants to carry comprehensive liability, casualty,
workers' compensation, extended coverage and rental loss insurance on our
properties. We believe the required coverage is of the type, and amount,
customarily obtained by an owner of similar properties. We believe all of our
properties are
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adequately insured. However, there are some types of losses, such
as catastrophic acts of nature, for which we or our tenants cannot obtain
insurance at an acceptable cost. If there is an uninsured loss or a loss in
excess of insurance limits, we could lose both the revenues generated by the
affected property and the capital we have invested in the property. We would,
however, remain obligated to repay any mortgage indebtedness or other
obligations related to the property. Since September 11, 2001, the cost of
insurance protection against terrorist acts has risen dramatically. There can be
no assurance our tenants will be able to obtain terrorism insurance coverage, or
that any coverage they do obtain will adequately protect our properties against
loss from terrorist attack.
JOINT VENTURES MAY LIMIT FLEXIBILITY WITH JOINTLY OWNED INVESTMENTS
We may continue to acquire or develop properties in joint ventures with third
parties when those transactions appear desirable. We would not own the entire
interest in any property acquired by a joint venture. Major decisions regarding
a joint venture property may require the consent of our partner. If we have a
dispute with a joint venture partner, we may feel it necessary or become
obligated to acquire the partner's interest in the venture. However, we cannot
ensure that the price we would have to pay or the timing of the acquisition
would be favorable to us. If we own less than a 50% interest in any joint
venture, or if the venture is jointly controlled, the assets and financial
results of the joint venture may not be reportable by us on a consolidated
basis. To the extent we have commitments to, or on behalf of, or are dependent
on, any such "off-balance sheet" arrangements, or if those arrangements or their
properties or leases are subject to material contingencies, our liquidity,
financial condition and operating results could be adversely affected by those
commitments or off-balance sheet arrangements.
OUR MULTI-TENANT PROPERTIES EXPOSE US TO ADDITIONAL RISKS
Our entertainment retail centers in Westminster, Colorado, New Rochelle, New
York, Burbank, California and Ontario, Canada, and similar properties we may
seek to acquire or develop in the future, involve risks not typically
encountered in the purchase and lease-back of megaplex theatres which are
operated by a single tenant. The ownership or development of multi-tenant retail
centers could expose us to the risk that a sufficient number of suitable tenants
may not be found to enable the center to operate profitably and provide a return
to us. Retail centers are also subject to tenant turnover and fluctuations in
occupancy rates, which could affect our operating results. Multi-tenant retail
centers also expose us to the risk of potential "CAM slippage," which may occur
when CAM fees paid by tenants are exceeded by the actual cost of taxes,
insurance and maintenance at the property.
FAILURE TO COMPLY WITH THE AMERICANS WITH DISABILITIES ACT AND OTHER LAWS COULD
RESULT IN SUBSTANTIAL COSTS
Our theatres must comply with the Americans with Disabilities Act (ADA). The ADA
requires that public accommodations reasonably accommodate individuals with
disabilities and that new construction or alterations be made to commercial
facilities to conform to accessibility guidelines. Failure to comply with the
ADA can result in injunctions, fines, damage awards to private parties and
additional capital expenditures to remedy noncompliance. Our leases require the
tenants to comply with the ADA.
Recent rulings in lawsuits brought by the United States Department of Justice
have found AMC, our most significant tenant, to be in violation of certain
provisions of the ADA. AMC has advised us it estimates that it will cost
approximately $63 million over the next five years to remedy these conditions. A
portion of the rulings is being appealed by AMC. Regardless of the outcome of
such appeal, the cost of remediation is the responsibility of AMC.
Our properties are also subject to various other federal, state and local
regulatory requirements. With the exception of the ADA issues discussed above,
we believe our properties are in material compliance with all applicable
regulatory requirements. However, we do not know whether existing requirements
will change or whether compliance with future requirements will involve
significant unanticipated expenditures. Although these expenditures would be the
responsibility of our tenants, if tenants fail to perform these obligations, we
may be required to do so.
8
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONTAMINATION COULD RESULT IN SUBSTANTIAL
COSTS
Under federal, state and local environmental laws, we may be required to
investigate and clean up any release of hazardous or toxic substances or
petroleum products at our properties, regardless of our knowledge or actual
responsibility, simply because of our current or past ownership of the real
estate. If unidentified environmental problems arise, we may have to make
substantial payments, which could adversely affect our cash flow and our ability
to make distributions to our shareholders. This is so because:
- As owner we may have to pay for property damage and for
investigation and clean-up costs incurred in connection with the
contamination
- The law may impose clean-up responsibility and liability regardless
of whether the owner or operator knew of or caused the contamination
- Even if more than one person is responsible for the contamination,
each person who shares legal liability under environmental laws may
be held responsible for all of the clean-up costs
- Governmental entities and third parties may sue the owner or
operator of a contaminated site for damages and costs
These costs could be substantial and in extreme cases could exceed the value of
the contaminated property. The presence of hazardous substances or petroleum
products or the failure to properly remediate contamination may adversely affect
our ability to borrow against, sell or lease an affected property. In addition,
some environmental laws create liens on contaminated sites in favor of the
government for damages and costs it incurs in connection with a contamination.
Most of our loan agreements require the Company or a subsidiary to indemnify the
lender against environmental liabilities. Our leases require the tenants to
operate the properties in compliance with environmental laws and to indemnify us
against environmental liability arising from the operation of the properties. We
believe all of our properties are in material compliance with environmental
laws. However, we could be subject to strict liability under environmental laws
because we own the properties. There is also a risk that tenants may not satisfy
their environmental compliance and indemnification obligations under the leases.
Any of these events could substantially increase our cost of operations, require
us to fund environmental indemnities in favor of our lenders, limit the amount
we could borrow under our unsecured revolving variable rate credit facility, and
reduce our ability to service our debt and pay dividends to shareholders.
REAL ESTATE INVESTMENTS ARE RELATIVELY NON-LIQUID
We may desire to sell a property in the future because of changes in market
conditions, poor tenant performance or default of any mortgage we hold, or to
avail ourselves of other opportunities. We may also be required to sell a
property in the future to meet debt obligations or avoid a default. Specialty
real estate projects such as megaplex theatres cannot always be sold quickly,
and we cannot assure you that we could always obtain a favorable price. We may
be required to invest in the restoration or modification of a property before we
can sell it.
THERE ARE RISKS IN OWNING ASSETS OUTSIDE THE UNITED STATES
Our properties in Canada and the property securing our Canadian mortgage
financing are subject to the risks normally associated with international
operations. The rentals under our Canadian leases, the debt service on our
Canadian mortgage financing and the payments to be received on our Canadian
mortgage receivable are payable or collectible (as applicable) in Canadian
dollars, which could expose us to losses resulting from fluctuations in exchange
rates. Canadian real estate and tax laws are complex and subject to change, and
we cannot assure you we will always be in compliance with those laws or that
compliance will not expose us to additional expense. We may also be subject to
fluctuations in Canadian real estate values or markets or the Canadian economy
as a whole, which may adversely affect our Canadian investments.
9
RISKS THAT MAY AFFECT THE MARKET PRICE OF OUR SHARES
WE CANNOT ASSURE YOU WE WILL CONTINUE PAYING DIVIDENDS AT HISTORICAL RATES
Our ability to continue paying dividends on our common shares at historical
rates, to pay dividends on our preferred shares at their stated rates or to
increase our common share dividend rate will depend on a number of factors,
including our financial condition and results of future operations, the
performance of lease terms by tenants, our ability to acquire, finance and lease
additional properties at attractive rates, and provisions in our loan covenants.
If we do not maintain or increase our common share dividend rate, that could
have an adverse effect on the market price of our common shares and possibly our
preferred shares.
MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR SHARES
One of the factors that investors may consider in deciding whether to buy or
sell our common shares or preferred shares is our dividend rate as a percentage
of our share price, relative to market interest rates. If market interest rates
increase, prospective investors may desire a higher dividend on our common
shares or seek securities paying higher dividends or interest.
MARKET PRICES FOR OUR SHARES MAY BE AFFECTED BY PERCEPTIONS ABOUT THE FINANCIAL
HEALTH OR SHARE VALUE OF OUR TENANTS OR THE PERFORMANCE OF REIT STOCKS GENERALLY
To the extent any of our tenants or other movie exhibitors report losses or
slower earnings growth, take charges against earnings resulting from the
obsolescence of multiplex theatres or enter bankruptcy proceedings, the market
price for our shares could be adversely affected. The market price for our
shares could also be affected by any weakness in movie exhibitor stocks
generally. We believe these trends had an adverse impact on our common share
price during 2001 and 2000.
LIMITS ON CHANGES IN CONTROL MAY DISCOURAGE TAKEOVER ATTEMPTS WHICH MAY BE
BENEFICIAL TO OUR SHAREHOLDERS
There are a number of provisions in our Declaration of Trust, Maryland law and
agreements we have with others which could make it more difficult for a party to
make a tender offer for our shares or complete a takeover of the Company which
is not approved by our Board of Trustees. These include:
- A staggered Board of Trustees that can be increased in number
without shareholder approval
- A limit on beneficial ownership of our shares, which acts as a
defense against a hostile takeover or acquisition of a significant
or controlling interest, in addition to preserving our REIT status
- The ability of the Board of Trustees to issue preferred or common
shares, to reclassify preferred or common shares, and to increase
the amount of our authorized preferred or common shares, without
shareholder approval
- Limits on the ability of shareholders to remove trustees without
cause
- Requirements for advance notice of shareholder proposals at annual
shareholder meetings
- Provisions of Maryland law restricting business combinations and
control share acquisitions not approved by the Board of Trustees
- Provisions of Maryland law protecting corporations (and by extension
REITs) against unsolicited takeovers by limiting the duties of the
trustees in unsolicited takeover situations
- Provisions in Maryland law providing that the trustees are not
subject to any higher duty or greater scrutiny than that applied to
any other director under Maryland law in transactions relating to
the acquisition or potential acquisition of control
- Provisions of Maryland law creating a statutory presumption that an
act of the trustees satisfies the applicable standards of conduct
for trustees under Maryland law
10
- Provisions in loan or joint venture agreements putting the Company
in default upon a change in control
- Provisions of employment agreements with our officers calling for
share purchase loan forgiveness, severance compensation and vesting
of equity compensation upon a change in control
Any or all of these provisions could delay or prevent a change in control of the
Company, even if the change was in our shareholders' interest or offered a
greater return to our shareholders.
CHANGES IN FOREIGN CURRENCY EXCHANGE RATES MAY HAVE AN IMPACT ON THE VALUE OF
OUR SHARES
The functional currency for our Canadian operations and mortgage note receivable
is the Canadian dollar. As a result, our future earnings could be affected by
fluctuations in the exchange rate between U.S. and Canadian dollars, which in
turn could affect our share price. We have attempted to mitigate our exposure to
Canadian currency exchange risk by having both our Canadian lease rentals and
the debt service on our Canadian mortgage financing payable in the same
currency. We may also from time to time enter into foreign exchange contracts to
hedge our transaction exposures. We had no outstanding foreign exchange
contracts as of December 31, 2005 and 2004. If we enter into any such contracts
in the future, we could be subject to the risk of loss on those contracts. We do
not engage in purchasing forward exchange contracts for speculative purposes.
TAX REFORM COULD ADVERSELY AFFECT THE VALUE OF OUR SHARES
There have been a number of proposals in Congress for major revision of the
federal income tax laws, including proposals to adopt a flat tax or replace the
income tax system with a national sales tax or value-added tax. Any of these
proposals, if enacted, could change the federal income tax laws applicable to
REITS, subject us to federal tax or reduce or eliminate the current deduction
for dividends paid to our shareholders, any of which could negatively affect the
market for our shares.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
11
ITEM 2. PROPERTIES
As of December 31, 2005, our real estate portfolio consisted of 67 megaplex
theatre properties and various restaurant, retail and other properties located
in 24 states and Ontario, Canada. Except as otherwise noted, all of the real
estate investments listed below are owned or ground leased directly by us. The
following table lists our properties, their locations, acquisition dates, number
of theatre screens, number of seats, gross square footage, and the tenant.
ACQUISITION BUILDING
PROPERTY LOCATION DATE SCREENS SEATS (GROSS SQ. FT) TENANT
- ----------------------------------- -------------------- ----------- ------- --------- -------------- -------------
Megaplex Theatre Properties:
Grand 24 (3) Dallas, TX 11/97 24 5,067 98,175 AMC
Mission Valley 20 (1) (3) San Diego, CA 11/97 20 4,361 84,352 AMC
Promenade 16 (3) Los Angeles, CA 11/97 16 2,860 129,822 AMC
Ontario Mills 30 (3) Los Angeles, CA 11/97 30 5,469 131,534 AMC
Lennox 24 (1) (3) Columbus, OH 11/97 24 4,412 98,261 AMC
West Olive 16 (3) St. Louis, MO 11/97 16 2,817 60,418 AMC
Studio 30 (3) Houston, TX 11/97 30 6,032 136,154 AMC
Huebner Oaks 24 (3) San Antonio, TX 11/97 24 4,400 96,004 AMC
First Colony 24 (1) (6) Houston, TX 11/97 24 5,098 107,690 AMC
Oakview 24 (1) (6) (10) Omaha, NE 11/97 24 5,098 107,402 AMC
Leawood Town Center 20 (6) Leawood, KS 2/98 20 2,995 75,224 AMC
Gulf Pointe 30 (2) (6) Houston, TX 3/98 30 6,008 130,891 AMC
South Barrington 30 (6) Chicago, IL 3/98 30 6,210 130,891 AMC
Cantera 30 (2) (5) Chicago, IL 4/98 30 6,210 130,757 AMC
Mesquite 30 (2) (6) Dallas, TX 6/98 30 6,008 130,891 AMC
Hampton Town Center 24 (6) Norfolk, VA 8/98 24 5,098 107,396 AMC
Raleigh Grand 16 (4) Raleigh, NC 8/98 16 2,596 51,450 Consolidated
Pompano 18 (4) Pompano Beach, FL 11/98 18 3,424 73,637 Muvico
Paradise 24 (6) Davie, FL 12/98 24 4,180 96,497 Muvico
Boise Stadium (1) (4) Boise, ID 12/98 21 4,734 140,300 Regal
Aliso Veijo Stadium 20 (6) Los Angeles, CA 12/98 20 4,352 98,557 Regal
Westminster 24 (7) Westminster, CO 6/99 24 4,812 107,000 AMC
Woodridge 18 (2) (10) Woodridge, IL 6/99 18 4,384 84,206 Loews
Tampa Starlight 20 (10) Tampa, FL 1/00 20 3,928 84,000 Muvico
Palm Promenade 24 (10) San Diego, CA 1/00 24 4,586 88,610 AMC
Cary Crossroads 20 (10) Cary, NC 3/02 20 3,936 77,475 Consolidated
Elmwood Palace 20 (10) New Orleans, LA 3/02 20 4,357 90,391 AMC
Hammond Palace 10 (10) New Orleans, LA 3/02 10 1,531 39,850 AMC
Houma Palace 10 (10) New Orleans, LA 3/02 10 1,871 44,450 AMC
Westbank Palace 16 (10) New Orleans, LA 3/02 16 3,176 71,607 AMC
Clearview Palace 12 (10) New Orleans, LA 3/02 12 2,495 70,000 AMC
Olathe Studio 30 (10) Olathe, KS 6/02 30 5,731 113,108 AMC
Forum 30 (10) Sterling Heights, MI 6/02 30 5,041 107,712 AMC
Cherrydale 16 (10) Greenville, SC 6/02 16 2,744 51,450 Consolidated
Livonia 20 (10) Detroit, MI 8/02 20 3,808 75,106 AMC
Hoffman Town Centre 22 (10) Alexandria, VA 10/02 22 4,150 132,903 AMC
Colonel Glenn 18 (4) Little Rock, AR 12/02 18 4,122 79,330 Rave
AmStar Cinema 16 (9) Macon, GA 3/03 16 2,950 55,000 AmStar
Star Southfield 20 (9) Southfield, MI 5/03 20 7,000 110,000 Loews
Southwind 12 (9) Lawrence, KS 6/03 12 2,481 42,497 Wallace
Veterans 24 (11) Tampa, FL 6/03 24 4,580 94,774 AMC
New Roc City 18 and IMAX (12) New Rochelle, NY 10/03 18 3,400 103,000 Regal
Harbour View Grande 16 (9) Suffolk, VA 11/03 16 3,036 61,500 Consolidated
Columbiana Grande 14 (9) Columbia, SC 11/03 14 3,000 55,400 Consolidated
The Grande 18 (9) Hialeah, FL 12/03 18 4,900 77,400 Crown
=== ======= =========
Subtotal Megpaplex Theatres, carried over to page 13 943 189,448 4,133,072
=== ======= =========
12
ACQUISITION BUILDING
PROPERTY LOCATION DATE SCREENS SEATS (GROSS SQ. FT) TENANT
- ---------------------------------- -------------------- ----------- ------- --------- -------------- ------------
Megaplex Theatre Properties:
Subtotal from page 12 n/a n/a 943 189,448 4,133,072 n/a
Mississauga 16 (8) Toronto, ON 3/04 16 3,856 95,000 AMC
Oakville 24 (8) Toronto, ON 3/04 24 4,772 89,290 AMC
Whitby 24 (8) Toronto, ON 3/04 24 4,688 89,290 AMC
Kanata 24 (8) Ottawa, ON 3/04 24 4,764 89,290 AMC
Mesa Grand 24 (9) Phoenix, AZ 3/04 24 4,530 94,774 AMC
Deer Valley 30 (4) Phoenix, AZ 3/04 30 5,877 113,768 AMC
Hamilton 24 (4) Hamilton, NJ 3/04 24 4,268 95,466 AMC
Grand Prairie 18 (9) Peoria, IL 7/04 18 4,063 82,330 Rave
Lafayette Grand 16 (9) Lafayette, LA 7/04 16 2,744 61,579 Southern
Northeast Mall 18 (9) Hurst, TX 11/04 18 3,886 98,250 Rave
The Grand D'Iberville 14 (9) Biloxi, MS 12/04 14 2,400 48,000 Southern
Avenue 16 (9) Melbourne, FL 12/04 16 3,600 75,850 Rave
Mayfaire Cinema 16 (9) Wilmington, NC 2/05 16 3,050 57,338 Consolidated
East Ridge 18 (9) Chattanooga, TN 3/05 18 4,133 82,330 Rave
Burbank 16 (13) Burbank, CA 3/05 16 4,232 86,551 AMC
ShowPlace 12 (9) Indianapolis, IN 6/05 12 2,200 45,700 Kerasotes
The Grand Theatre 14 (9) Conroe, TX 6/05 14 2,400 45,000 Southern
The Grand Theatre 14 (9) Hattiesburg, MS 9/05 14 2,200 46,000 Southern
Auburn Stadium 10 Auburn, CA 12/05 10 1,573 32,185 Regal
Arroyo Grande 10(2) Arroyo Grande, CA 12/05 10 1,714 34,500 Regal
Modesto Stadium 10 Modesto, CA 12/05 10 1,885 38,873 Regal
Manchester Stadium 16(1) Fresno, CA 12/05 16 3,860 80,600 Regal
===== ======= =========
Subtotal Megaplex Theatres 1,327 266,143 5,715,036
===== ======= =========
ACQUISITION BUILDING
PROPERTY LOCATION DATE SCREENS SEATS (GROSS SQ. FT) TENANT
- ---------------------------------------- ----------------- ----------- ------- ------- -------------- ---------------------------
Retail, Restaurant and Other Properties:
Pompano Kmart Pompano Beach, FL 11/98 -- -- 80,540 Kmart
Hooters Restaurant Pompano Beach, FL 11/98 -- -- 5,600 Hooters Restaurant
Westminster Promenade(9) Westminster, CO 6/99 -- -- 140,000 Multi-Tenant
On-The-Border Dallas, TX 1/99 -- -- 6,580 Brinkers
Bennigan's Houston, TX 5/00 -- -- 6,575 S & A
Bennigan's Dallas, TX 5/00 -- -- 6,575 S & A
Texas Land & Cattle Houston, TX 5/00 -- -- 6,600 Tx.C.C., Inc.
Texas Roadhouse Dallas, TX 1/99 -- -- 6,000 TX Roadhouse
Roadhouse Grill Atlanta, GA 8/00 -- -- 6,850 Roadhouse Grill
Cherrydale Shops Greenville, SC 6/02 -- -- 10,000 Multi-Tenant
Johnny Carino's Dallas, TX 3/03 -- -- 6,200 Kona Rest. Group, Inc.
Star Southfield, Center(9) Southfield, MI 5/03 -- -- 45,200 Multi-Tenant
New Roc City(12) New Rochelle, NY 10/03 -- -- 344,000 Multi-Tenant
Harbour View Station(9) Suffolk, SC 11/03 -- -- 21,855 Multi-Tenant
Whitby Entertainment Centrum(8) Toronto, ON 3/04 -- -- 109,361 Multi-Tenant
Oakville Entertainment Centrum(8) Toronto, ON 3/04 -- -- 127,071 Multi-Tenant
Mississauga Entertainment Centrum(8) Toronto, ON 3/04 -- -- 92,657 Multi-Tenant
Kanata Entertainment Centrum(8) Ottawa, ON 3/04 -- -- 258,772 Multi-Tenant
Vland Chicago, IL 7/04 -- -- 7,500 Vland Warrenville
Stir Crazy Chicago, IL 9/04 -- -- 6,500 Stir Crazy Cafe
Burbank Village (13) Burbank, CA 3/05 -- -- 35,256 Multi-Tenant
Asahi Sushi Bar Houston, TX 8/05 -- -- 9,000 EBI International, Inc.
Sizzler Arroyo Grande,CA 12/05 -- -- 5,850 Arroyo Grande Sizzler, Inc.
Mad River Mountain Bellefontaine, OH 11/05 -- -- 48,427 Mad River Mountain, Inc.
===== ======= =========
Subtotal Retail, Res taurant and Other Properties -- -- 1,392,969
===== ======= =========
Total 1,327 266,143 7,108,005
===== ======= =========
13
- ----------------
(1) Third party ground leased property. Although we are the tenant under the
ground leases and have assumed responsibility for performing the
obligations thereunder, pursuant to the leases, the theatre tenants are
responsible for performing our obligations under the ground leases.
(2) In addition to the theatre property itself, we have acquired land parcels
adjacent to the theatre property, which we have or intend to ground lease
or sell to restaurant or other entertainment themed operators.
(3) Property is included as security for a $105 million mortgage note payable.
(4) Property is included as security for $79 million in mortgage notes
payable.
(5) Property is included in the Atlantic-EPR I joint venture.
(6) Property is included as security for $125 million in mortgage notes
payable.
(7) Property is included as security for a $17 million mortgage note payable.
(8) Property is included as security for a $97 million mortgage note payable.
(9) Property is included in the borrowing base for a $200 million unsecured
revolving variable rate credit facility.
(10) Property is included as security for $155.5 million in mortgage notes
payable.
(11) Property is included in the Atlantic-EPR II joint venture.
(12) Property is included as security for a $66 million mortgage note payable
and $4 million credit facility.
(13) Property is included as security for a $36 million mortgage note payable.
OFFICE LOCATION.
Our executive office is located in Kansas City, Missouri and is
leased from a third party landlord. The office occupies approximately 10,960
square feet with annual rentals of $203,000 and includes annual fixed rent
escalations of $.50 per square foot. The lease expires in December, 2009.
TENANTS AND LEASES
Our existing leases on rental property (on a consolidated basis - excluding
joint venture property) provide for aggregate annual rentals of approximately
$158 million (not including periodic rent escalations or percentage rent). The
megaplex theatre leases have an average remaining base term lease life of 13.6
years and may be extended for predetermined extension terms at the option of the
tenant. The theatre leases are typically triple-net leases that require the
tenant to pay substantially all expenses associated with the operation of the
properties, including taxes, other governmental charges, insurance, utilities,
service, maintenance and any ground lease payments.
PROPERTY ACQUISITIONS IN 2005
The following table lists the significant rental properties we acquired or
developed during 2005:
PROPERTY LOCATION TENANT
- --------------------- ----------------- -----------
Mayfaire Cinema 16 Wilmington, NC Consolidated
East Ridge 18 Chattanooga, TN Rave
Burbank 16 Burbank, CA AMC
ShowPlace 12 Indianapolis, IN Kerasotes
The Grand Theatre 14 Conroe, TX Southern
The Grand Theatre 14 Hattiesburg, MS Southern
Auburn Stadium 10 Auburn, CA Regal
Arroyo Grande 10 Arroyo Grande, CA Regal
Modesto Stadium 10 Modesto, CA Regal
Manchester Stadium 16 Manchester, CA Regal
Mad River Mountain Bellefontaine, OH Mad River Mountain, Inc.
14
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth, for the quarterly periods indicated, the high
and low sales prices per share for our common shares on the New York Stock
Exchange ("NYSE") under the trading symbol "EPR" and the distributions declared.
SHARE PRICE DECLARED
HIGH LOW DISTRIBUTION
----------- ------- ------------
2005:
Fourth quarter $ 44.31 $ 38.68 $ 0.6250
Third quarter 47.50 42.71 0.6250
Second quarter 46.82 41.15 0.6250
First quarter 44.80 40.44 0.6250
2004:
Fourth quarter $ 45.00 $ 38.00 $ 0.5625
Third quarter 38.85 33.75 0.5625
Second quarter 41.55 31.57 0.5625
First quarter 40.91 33.71 0.5625
The closing price for our common shares on the NYSE on February 24, 2006 was
$41.36 per share.
We declared quarterly distributions to common shareholders aggregating $2.50 per
common share in 2005 and $2.25 per common share in 2004.
While we intend to continue paying regular quarterly dividends, future dividend
declarations will be at the discretion of the Board of Trustees and will depend
on our actual cash flow, our financial condition, capital requirements, the
annual distribution requirements under the REIT provisions of the Code, debt
covenants and other factors the Board of Trustees deems relevant. The actual
cash flow available to pay dividends may be affected by a number of factors,
including the revenues received from rental properties, our operating expenses,
debt service on our borrowings, the ability of lessees to meet their obligations
to us and any unanticipated capital expenditures (See "Risk Factors - We cannot
assure you we will continue paying dividends at historical rates," in Item
1-"Business" and "Liquidity and Capital Resources" in Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations"). Our
Series A preferred shares have a fixed dividend rate of 9.50% and our Series B
preferred shares have a fixed dividend rate of 7.75%.
On February 8, 2006, we closed on a public offering of 1,000,000 common shares
at $41.25 per share. The underwriter of this offering subsequently exercised an
option to purchase an additional 150,000 common shares at $41.25 per share which
closed on February 15, 2006. Total net proceeds after expenses were
approximately $46.2 million (described in Note 17 to the consolidated financial
statements in this Form 10-K).
On February 24, 2006, there were approximately 621 holders of record of our
outstanding common shares.
As a company with shares listed on the NYSE, we are required to comply with the
corporate governance rules of the NYSE. Our CEO is required to certify to the
NYSE that we are in compliance with the governance rules not later than 30 days
after the date of each annual shareholder meeting. Our CEO complied with this
requirement in 2005. We also filed with the SEC as exhibits to our annual report
on Form 10-K for the year ended December 31, 2004 the certifications of our CEO
and CFO required under Sections 302 and 906 of the Sarbanes-Oxley Act.
16
ITEM 6. SELECTED FINANCIAL DATA
OPERATING STATEMENT DATA
YEAR ENDED DECEMBER 31,
----------- --------- ------- ------- ------
2005 2004 2003 2002 2001
----------- --------- ------- ------- ------
Rental revenue $ 145,227 124,423 89,965 71,610 54,667
Other income 3,517 557 1,195 -- --
Mortgage financing interest 3,560 -- -- -- --
Property operating expense, net
of tenant reimbursements 3,680 2,322 698 201 --
Other operating expense 2,985 -- -- -- --
General and administrative expense 5,544 4,716 3,859 2,293 2,507
Costs associated with loan refinancing -- 1,134 -- -- --
Interest expense, net 42,427 38,054 30,570 24,475 20,334
Depreciation and amortization 27,597 23,365 16,359 12,862 10,209
Amortization of non-vested shares 1,705 1,377 926 1,048 240
----------- ------- ------- ------- ------
Income before minority interests,
income from joint ventures and
gain on sale of real estate 68,366 54,012 38,748 30,731 21,377
Gain on sale of real estate -- -- -- 202 --
Minority interests (34) (953) (1,555) (1,195) --
Equity in income from joint ventures 728 654 401 1,421 2,203
Preferred dividend requirements (11,353) (5,463) (5,463) (3,225) --
----------- ------- ------- ------- ------
Net income available to
common shareholders $ 57,707 48,250 32,131 27,934 23,580
=========== ======= ======= ======= ======
Net income per common share:
Basic $ 2.31 2.12 1.81 1.66 1.60
Diluted 2.26 2.07 1.77 1.64 1.60
Weighted average number of common shares
outstanding:
Basic 25,019 22,721 17,780 16,791 14,715
Diluted 25,504 23,664 19,051 17,762 14,783
Cash dividends declared per
common share $ 2.50 2.25 2.00 1.90 1.80
BALANCE SHEET DATA
DECEMBER 31,
----------- --------- ------- ------- -------
2005 2004 2003 2002 2001
----------- --------- ------- ------- -------
Net real estate investments $ 1,303,758 1,144,553 900,096 692,922 530,280
Mortgage note and related
accrued interest receivable 44,067 -- -- -- --
Total assets 1,414,165 1,213,448 965,918 730,387 583,351
Common dividends payable 15,770 14,097 9,829 8,162 6,659
Preferred dividends payable 2,916 1,366 1,366 1,366 --
Long-term debt 714,591 592,892 506,555 346,617 314,766
Total liabilities 742,509 620,059 521,509 361,834 325,223
Minority interests 5,235 6,049 21,630 15,375 --
Shareholders' equity 666,421 587,340 422,779 353,178 258,128
17
ITEM 7. 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 Annual Report on Form
10-K. The forward-looking statements included in this discussion and elsewhere
in this Form 10-K 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 1
"Business - Risk Factors".
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 December 31, 2005, we
had invested approximately $1.4 billion (before accumulated depreciation) in 67
megaplex theatre properties and various restaurant, retail and other properties
located in 24 states and Ontario, Canada. As of December 31, 2005, we had
invested approximately $19.8 million in development land and construction in
progress for real-estate development. Also, as of December 31, 2005, we had
invested approximately US $44.1 million (including accrued interest) in mortgage
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 are required to pay common area maintenance charges to reimburse us
for 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 unsecured 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 have 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 2006.
18
Our business is subject to a number of risks and uncertainties, including those
described in "Risk Factors" in Item 1 of this report.
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, accounting for real
estate acquisitions and estimating reserves for uncollectible receivables.
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 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 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 2005.
19
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.
Allowance for Doubtful Accounts
Management makes quarterly estimates of the collectibility of its accounts
receivable related to base rents, tenant escalations and reimbursements and
other revenue or income. Management specifically analyzes tenant receivables,
historical bad debts, customer credit worthiness, current economic trends and
changes in customer payment terms when evaluating the adequacy of its allowance
for doubtful accounts. In addition, when tenants are in bankruptcy, management
makes estimates of the expected recovery of pre-petition administrative and
damage claims. These estimates have a direct impact on our net income.
RECENT DEVELOPMENTS
Following are our significant developments during the year ended December 31,
2005:
On March 11, 2005, we completed the acquisition of a megaplex theatre property
in Chattanooga, Tennessee. The Chattanooga 18 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 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 $51.9 million. The theatre is
leased under a long-term lease and the retail shops have an average remaining
lease life of approximately nine years. On May 19, 2005, a wholly-owned
subsidiary of the Company obtained a $36.0 million non-recourse mortgage loan on
this property. 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.
As further described in Note 16 to the consolidated financial statements in this
Form 10-K, 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 retail center in downtown
Toronto, Ontario, Canada. It is anticipated that the development will be
completed in 2008 at a total cost of approximately $272 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 of and equity in the
Partnership at December 31, 2005. The Partnership has an agreement with a bank
to provide a first mortgage construction loan to the Partnership of $106
million. The bank construction financing will be senior to the Company's
mortgage note.
20
On June 28, 2005, we completed the acquisition of a megaplex theatre property in
Indianapolis, Indiana. The ShowPlace 12 is operated by Kerasotes Showplace
Theatres and was acquired for a total cost (including land and building) of
approximately $6.0 million. This theatre is leased under a long-term triple-net
lease.
On October 28, 2005, a wholly-owned subsidiary of the Company obtained six
non-recourse mortgage loans aggregating $79.0 million in proceeds. Each of these
loans is secured by an individual theatre property and require monthly principal
and interest payments aggregating approximately $498 thousand. The mortgage
notes are ten-year fixed rate loans that bear interest at 5.77% and are due and
payable on November 6, 2015.
On November 17, 2005, we completed the acquisition of the Mad River Ski Resort
in Bellefontaine, Ohio. The property serves the Columbus and Dayton, Ohio
markets and has over 40 acres of skiing terrain that is serviced by nine lifts.
The acquisition price for the ski resort was $11.0 million and is leased to Peak
Resorts under a long-term triple-net lease.
On December 2, 2005, we completed the acquisition of four megaplex theatre
properties leased to and operated by Regal Cinemas and located in California.
The theatres are the Modesto Stadium 10 located in Modesto, California, the
Auburn Stadium 10 located in Auburn, California, the Manchester Stadium 16
located in Fresno, California, and the Arroyo Grande Stadium 10 located in
Arroyo Grande, California. A related land parcel leased to a restaurant operator
was also purchased in Arroyo Grande. The properties were acquired for a total
acquisition price of $33.4 million and are all leased under long-term triple-net
leases.
During the year ended December 31, 2005, we completed development of three
megaplex theatre properties located in Wilmington, North Carolina, Conroe, Texas
and Hattiesburg, Mississippi. The Mayfaire Cinema 16 in Wilmington is operated
by Consolidated Theatres and was completed for a total development cost
(including land and building) of approximately $8.7 million. The Grand Theatre
14 in Conroe is operated by Southern Theatres and was completed for a total
development cost (including land and building) of approximately $10.1 million.
The Hattiesburg Grand Theatre 14 in Hattiesburg is operated by Southern Theatres
and was completed for a total development cost (including land and building) of
approximately $9.7 million. These theatres are leased under long-term triple-net
leases.
As of December 31, 2005, we had six theatre development projects under
construction for which we have 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 95 screens
and their development costs (including land) are expected to be approximately
$88.2 million. Through December 31, 2005, we have invested $26.9 million in
these projects (including land), and have commitments to fund approximately
$61.3 million of additional improvements. Development costs are advanced by us
either in periodic draws or upon successful completion of construction. 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. We have agreed to lease the theatres
to the operators at pre-determined rates.
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, and one of our theatres in Biloxi, Mississippi with 14
screens. The five New Orleans area theatres are all operated by AMC and the
theatre in Biloxi is operated by Southern Theatres. All six of these theatres
have reopened as of December 31, 2005. In addition, all six of these theatres
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. The tenants
21
remain responsible for paying base rent during any repair period. Percentage
rent of $197,000 was received in 2005 related to one of these theatres. We
expect no percentage rent will be received in 2006 related to any of these six
theatres.
One non triple-net retail property in Pompano Beach, Florida also had damage to
the roof as a result of the hurricane events. The claim with the insurance
company related to this damage is pending, but we expect to incur no loss as a
result of this damage.
As discussed above and in Note 17 to the consolidated financial statements in
this Form 10-K, subsequent to December 31, 2005, we amended and restated our
revolving credit facility, and also issued 1,150,000 common shares for proceeds,
after expenses, of approximately $46.2 million. We also refinanced certain
maturing mortgage notes payable.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Rental revenue was $145.2 million for the year ended December 31, 2005, compared
to $124.4 million for the year ended December 31, 2004. The $20.8 million
increase resulted primarily from the property acquisitions and developments
completed in 2005 and 2004 and base rent increases on existing properties.
Percentage rents of $1.9 million and $2.2 million were recognized during 2005
and 2004, respectively. Straight-line rents of $2.2 million were recognized for
both 2005 and 2004. As of December 31, 2005 and 2004, the receivable for
straight-line rents was $4.7 million and $2.4 million, respectively.
Tenant reimbursements totaled $12.5 million for the year ended December 31, 2005
compared to $8.3 million for the year ended December 31, 2004. These tenant
reimbursements arise from the operations of our retail centers. The $4.2 million
increase is due primarily to the acquisitions of the retail centers in Burbank,
California on March 31, 2005 and Ontario, Canada on March 1, 2004.
Other income was $3.5 million for the year ended December 31, 2005 compared to
$557 thousand for the year ended December 31, 2004. The increase of $2.9 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 year ended December 31, 2005 was $3.6
million and related solely to interest income from the mortgage note financing
we provided in Canada in June of 2005 (described in Note 16 to the consolidated
financial statements in this Form 10-K). No such revenue was recognized during
2004.
Our property operating expense totaled $16.2 million for the year ended December
31, 2005 compared to $10.7 million for the year ended December 31, 2004. These
property operating expenses arise from the operations of our retail centers. The
$5.5 million increase is due primarily to the acquisitions of the retail centers
in Burbank, California 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 $3.0 million for the year ended December 31,
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 during 2004.
22
Our general and administrative expenses totaled $5.5 million for the year ended
December 31, 2005 compared to $4.7 million for the year ended December 31, 2004.
The $0.8 million increase is due primarily to the following:
- An increase infranchise 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.
Costs associated with loan refinancing for the year ended December 31, 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 during the year ended December 31, 2005.
Our net interest expense increased by $4.3 million to $42.4 million for the year
ended December 31, 2005 from $38.1 million for the year ended December 31, 2004.
The increase in net interest expense primarily resulted from increases in
long-term debt used to finance real estate acquisitions and increases in the
interest rate associated with our borrowings under the revolving variable rate
credit facility that we amended and restated in 2006.
Depreciation and amortization expense, including amortization of non-vested
shares, totaled $29.3 million for the year ended December 31, 2005 compared to
$24.7 million for the year ended December 31, 2004. The $4.6 million increase
resulted primarily from the property acquisitions completed in 2005 and 2004 and
grants of restricted shares to management.
Income from joint ventures totaled $728 thousand for the year ended December 31,
2005 compared to $654 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 year ended December 31, 2005, minority interest in net income was $34
thousand compared to $953 thousand for the year ended December 31, 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. Minority interest for the year ended December 31, 2005, relates solely
to New Roc.
Preferred dividend requirements for the year ended December 31, 2005 were $11.4
million compared to $5.5 million for the same period in 2004. The $5.9 million
increase is due to the issuance of 3.2 million Series B preferred shares in
January of 2005 (described in Note 14 to the consolidated financial statements
in this Form 10-K).
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Rental revenue was $124.4 million for the year ended December 31, 2004, as
compared to $90.0 million for the year ended December 31, 2003. The $34.4
million increase resulted primarily from property acquisitions completed in 2004
and 2003, base rent increases and percentage rents on existing properties.
Percentage rents of $2.2 million and $1.9 million were recognized in 2004 and
2003, respectively. Straight-line rents of $2.2 million were recognized in 2004
compared to no straight-line rents recognized in 2003. As of December 31, 2004,
the receivable for straight-line rents was $2.4 million. There was no receivable
for straight-line rents at December 31, 2003.
Tenant reimbursements totaled $8.3 million for the year ended December 31, 2004
compared to $2.3 million for the year ended December 31, 2003. These tenant
reimbursements arise from the operations of
23
our retail centers. The $6.0 million increase is due primarily to the
acquisitions of the retail centers in Southfield, Michigan on May 27, 2003, New
Rochelle, New York on October 27, 2003, Suffolk, Virginia on November 12, 2003
and Ontario, Canada on March 1, 2004.
Our property operating expense totaled $10.7 million for the year ended December
31, 2004 compared to $3.0 million for the year ended December 31, 2003. These
property operating expenses arise from the operations of our retail centers. The
$7.7 million increase is due primarily to the acquisitions of the retail centers
in Southfield, Michigan on May 27, 2003, New Rochelle, New York on October 27,
2003, Suffolk, Virginia on November 12, 2003 and Ontario, Canada on March 1,
2004.
Our general and administrative expenses totaled $4.7 million for the year ended
December 31, 2004 compared to $3.9 million for the year ended December 31, 2003.
The increase is primarily due to the following:
- Increases in insurance expense, including premiums for both Director
and Officer insurance and property and casualty insurance due to an
overall increase in premiums in the insurance market and increases
in the size of our real estate portfolio.
- A $99 thousand expense incurred for professional fees on a project
that was ultimately not executed.
- An increase in payroll and related expenses attributable to
increases in base compensation, bonus awards, and payroll taxes
related to the vesting of stock grants and stock bonuses, and the
addition of employees.
- Increases in franchise and other miscellaneous taxes paid.
Costs associated with loan refinancing in 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 in 2003.
Our net interest expense increased by $7.5 million to $38.1 million for the year
ended December 31, 2004 from $30.6 million for the year ended December 31, 2003.
The increase in net interest expense primarily resulted from increases in
long-term debt used to finance real estate acquisitions.
Depreciation and amortization expense, including amortization of non-vested
shares, totaled $24.7 million for the year ended December 31, 2004 compared to
$17.3 million for the year ended December 31, 2003. The $7.4 million increase
resulted from the property acquisitions completed in 2003 and 2004 and grants of
restricted shares to management. Amortization of non-vested shares was $1.4
million and $0.9 million in 2004 and 2003, respectively.
Income from joint ventures totaled $654 thousand for the year ended December 31,
2004 compared to $401 thousand for the same period in 2003. The increase is due
to the addition of the Atlantic-EPR II joint venture on March 1, 2004.
For the year ended December 31, 2004, minority interest in net income was $953
thousand compared to $1.6 million in the prior year. The decrease is due
primarily to the conversion of the preferred interest in our subsidiary, EPT
Gulf States, LLC, as of September 20, 2004 to 857,145 common shares of the
Company.
24
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $6.5 million at December 31, 2005. In addition,
we had restricted cash of $13.1 million at December 31, 2005 required in
connection with debt service, payment of real estate taxes and capital
improvements.
Mortgage Debt and Credit Facilities
As of December 31, 2005, we had total debt outstanding of $714.6 million. All of
our debt at that time was mortgage debt secured by a substantial portion of our
rental properties. As of December 31, 2005, $650.6 million of debt outstanding
was fixed rate debt with a weighted average interest rate of approximately 6.3%.
All of our debt is described in note 6 to the consolidated financial statements
in this Form 10-K.
At December 31, 2005, we had $64.0 million in debt outstanding under a secured
revolving variable rate credit facility, with interest at a floating rate and
secured by fourteen theatre properties, two theatre and retail mix properties
and one retail mix property. As discussed above and in Note 17 to the
consolidated financial statements in this Form 10-K, in January 2006, we amended
our credit facility to increase its size to $200 million, extend its initial
term to 2009, improve the pricing and convert from a secured to an unsecured
facility. We also refinanced certain maturing mortgage notes payable.
Our principal investing activity is the purchase and development of rental
property, which has generally been financed with mortgage debt and the proceeds
from equity offerings. Our unsecured revolving variable rate credit facility
will also be used to finance the acquisition or development of properties.
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 $94.5 million
for the year ended December 31, 2005, $80.7 million for the year ended December
31, 2004 and $54.7 million for the year ended December 31, 2003. We anticipate
that our cash on hand, cash from operations, and funds available under our
unsecured 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.
Long-term liquidity requirements at December 31, 2005 consisted primarily of
maturities of long-term debt. Contractual obligations as of December 31, 2005
are as follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS 2006 2007 2008 2009 2010 THEREAFTER TOTAL
------------------------------------------------------------------
Long Term Debt Obligations $ 122,828 78,322 104,217 13,956 14,820 380,448 714,591
Operating Lease Obligations 203 209 214 220 - - 846
------------------------------------------------------------------
Total $ 123,031 78,531 104,431 14,176 14,820 380,448 715,437
==================================================================
25
As further described in Note 17 to the consolidated financial statements in this
Form 10-K, subsequent to December 31, 2005, we amended and restated our
revolving rate credit facility, completed a public offering of 1,150,000 shares
at $41.25 per share, and refinanced certain maturing mortgage notes payable.
We believe that we will be able to obtain financing in order to repay our debt
obligations by refinancing the properties as the debt comes due. However, there
can be no assurance that additional financing or capital will be available, or
that terms will be acceptable or advantageous to us.
Our primary use of cash after paying operating expenses, debt service and
distributions to shareholders is in the acquisition of properties. We expect to
finance these acquisitions with borrowings under our unsecured revolving
variable rate credit facility, as well as long-term secured borrowings and
equity financing alternatives. The availability and terms of any such financing
will depend upon market and other conditions. If we borrow the maximum amount
available under our unsecured revolving variable rate credit facility, there can
be no assurance that we will be able to obtain additional acquisition financing,
which would not affect our liquidity, but would affect our ability to grow (See
"We must obtain new financing in order to grow" and "Risks that may affect the
market price of our shares" under "Risk Factors").
In addition to the contractual obligations listed in the table above, we had six
theatre projects under construction at December 31, 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 95 screens and their total development costs
(including land) will be approximately $88.2 million. Through December 31, 2005,
we have invested $26.9 million in these projects (including land), and have
commitments to fund an additional $61.3 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.
Off Balance Sheet Arrangements
At December 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. We recognized income of $437, $410 and $401 (in
thousands) from our investment in the Atlantic-EPR I joint venture during 2005,
2004 and 2003, respectively. We also recognized income of $291 and $244 (in
thousands) from our investment in the Atlantic-EPR II joint venture during 2005
and 2004, respectively. Condensed financial information for Atlantic-EPR I and
Atlantic-EPR II joint ventures is included in Note 4 to the consolidated
financial statements included as part of this Form 10-K.
The joint venture agreement for Atlantic-EPR I allows our partner, Atlantic of
Hamburg, Germany (Atlantic), to exchange up to a maximum of 10% of its ownership
interest per year in Atlantic-EPR I for our common shares or, at our discretion,
the cash value of those shares as defined in the joint venture agreement. This
same provision exists in the Atlantic-EPR II joint venture agreement, except
that Atlantic's right to such exchange does not commence until 2007.
26
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 years ended December
31, 2005 and December 31, 2004 (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004
-------- -------
Net income available to common shareholders $57,707 48,250
Add: Real estate depreciation and amortization 27,043 22,379
Add: Allocated share of joint venture depreciation 242 223
------- ------
Basic Funds From Operations 84,992 70,852
Add: minority interest in net income - 750
------- ------
Diluted Funds From Operations $84,992 71,602
======= ======
FFO per common share:
Basic $ 3.40 3.12
Diluted 3.33 3.03
Shares used for computation (in thousands):
Basic 25,019 22,721
Diluted 25,504 23,664
Other financial information:
Straight-lined rental revenue $ 2,242 2,248
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
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
27
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.
FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement
Obligations, was issued in March 2005 and clarifies that the term conditional
asset retirement obligation as used in FASB Statement No. 143, Accounting for
Asset Retirement Obligations, refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. FIN 47 requires an entity to recognize a liability for the fair value of
a conditional asset retirement obligation if the fair value of the liability can
be reasonably estimated. We adopted FIN 47 in 2005. The implementation of FIN 47
did not have any effect on our 2005 financial statements.
EITF 04-5, "Determining Whether a General Partner, or the General Partners as a
Group, Controls a Limited Partnership or Similar Entity when the Limited
Partners Have Certain Rights," became effective in June 2005 for general
partners of all new limited partnerships formed and for existing limited
partnerships for which the partnership agreements are modified. For general
partners in all other limited partnerships, this guidance is effective no later
than the beginning of the first reporting period in fiscal years beginning after
December 31, 2005. We adopted EITF 04-5 in 2005. The implementation of EITF 04-5
did not have any effect on our 2005 financial statements.
INFLATION
Investments by EPR are financed with a combination of equity and debt. 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 annual report on Form 10-K
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 this
report. Investors are cautioned not to place undue reliance on any
forward-looking statements.
28
ITEM 7A. 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 $200 million unsecured
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.
The following table presents the principal amounts, weighted average interest
rates, and other terms required by year of expected maturity to evaluate the
expected cash flows and sensitivity to interest rate changes as of December 31:
Expected Maturities (in millions)
ESTIMATED
2006 2007 2008 2009 2010 THEREAFTER TOTAL FAIR VALUE
------- ---- ----- ---- ---- ---------- ----- ----------
December 31, 2005:
Fixed rate debt $ 122.8 14.3 104.2 14.0 14.8 380.5 650.6 658.5
Average interest rate 7.2% 6.1% 6.7% 6.0% 6.0% 5.9% 6.3% -
Variable rate debt $ - 64.0 - - - - 64.0 64.0
Average interest rate (as of - 6.6% - - - - 6.6% -
December 31, 2005)
ESTIMATED
2005 2006 2007 2008 2009 THEREAFTER TOTAL FAIR VALUE
------- ----- ----- ----- ---- ---------- ----- ----------
December 31, 2004:
Fixed rate debt $ 33.4 120.9 12.3 102.0 11.6 285.7 565.9 570.2
Average interest rate 8.3% 7.3% 6.2% 6.7% 6.1% 6.0% 6.5% -
Variable rate debt $ - - 27.0 - - - 27.0 27.0
Average interest rate (as of - - 4.7% - - - 4.7% -
December 31, 2004)
We have not engaged extensively in the use of derivatives to manage our
interest rate and market risk due to our limited use of variable rate debt. For
a discussion of derivative financial instruments and interest rate hedging
activity, see note 10 to the consolidated financial statements.
We financed the acquisition of our Canadian properties with non-recourse fixed
rate mortgage loans from a Canadian lender in the original aggregate principal
amount of approximately US $97 million. The loans were made and are payable by
us in Canadian dollars, and the rents received from tenants of the properties
are payable in Canadian dollars. We also provided a secured mortgage
construction loan of U.S. $37.5 million. The loan is payable to us in Canadian
dollars. Although we have attempted to mitigate the impact of foreign currency
exchange risk on our Canadian properties by matching Canadian dollar debt
financing with Canadian dollar rents, a significant change in the exchange rate
between the Canadian and U.S. dollars could have a material impact on our
earnings.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Entertainment Properties Trust
CONTENTS
Report of Independent Registered Public Accounting Firm...... 31
Audited Financial Statements
Consolidated Balance Sheets ................................. 32
Consolidated Statements of Income ........................... 33
Consolidated Statements of Changes in Shareholders' Equity... 34
Consolidated Statements of Comprehensive Income ............. 35
Consolidated Statements of Cash Flows ....................... 36
Notes to Consolidated Financial Statements .................. 37
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts ............. 58
Schedule III - Real Estate and Accumulated Depreciation ..... 59
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees
Entertainment Properties Trust:
We have audited the accompanying consolidated balance sheets of Entertainment
Properties Trust (the Company) as of December 31, 2005 and 2004, and the related
consolidated statements of income, changes in shareholders' equity,
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2005. In connection with our audits of the
consolidated financial statements, we have also audited the accompanying
financial statement schedules listed in the Index at Item 15(2). These
consolidated financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Entertainment
Properties Trust as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated February 24, 2006 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
KPMG LLP
Kansas City, Missouri
February 24, 2006
31
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31,
2005 2004
----------- ----------
ASSETS
Rental properties, net of accumulated depreciation of $112.7
million and $87.1 million at December 31, 2005 and 2004, respectively $ 1,283,988 $ 1,120,792
Property under development 19,770 23,144
Mortgage note and related accrued interest receivable 44,067 -
Investment in joint ventures 2,297 2,541
Cash and cash equivalents 6,546 11,255
Restricted cash 13,124 12,794
Intangible assets, net 10,461 10,900
Deferred financing costs, net 10,896 12,730
Other assets 23,016 19,292
----------- -----------
Total assets $ 1,414,165 $ 1,213,448
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 7,928 $ 10,070
Common dividends payable 15,770 14,097
Preferred dividends payable 2,916 1,366
Unearned rents 1,304 1,634
Long-term debt 714,591 592,892
----------- -----------
Total liabilities 742,509 620,059
Commitments and contingencies - -
Minority interests 5,235 6,049
Shareholders' equity:
Common Shares, $.01 par value; 50,000,000 shares authorized; and 25,881,647
and 25,578,472 shares issued at December 31, 2005 and 2004, respectively 259 256
Preferred Shares, $.01 par value; 10,000,000 shares authorized:
2,300,000 Series A shares issued at December 31, 2005 and 2004;
liquidation preference of $57,500,000 23 23
3,200,000 Series B shares issued at December 31, 2005;
liquidation preference of $80,000,000 32 -
Additional paid-in-capital 703,963 618,715
Treasury shares at cost: 649,142 and 517,421 common shares
at December 31, 2005 and 2004, respectively (14,350) (8,398)
Loans to shareholders (3,525) (3,525)
Non-vested shares (3,259) (2,338)
Accumulated other comprehensive income 13,402 7,480
Distributions in excess of net income (30,124) (24,873)
----------- -----------
Shareholders' equity 666,421 587,340
----------- -----------
Total liabilities and shareholders' equity $ 1,414,165 $ 1,213,448
=========== ===========
See accompanying notes to consolidated financial statements.
32
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------
2005 2004 2003
---------- --------- --------
Rental revenue $ 145,227 $ 124,423 $ 89,965
Tenant reimbursements 12,511 8,335 2,301
Other income 3,517 557 1,195
Mortgage financing interest 3,560 - -
--------- --------- --------
Total revenue 164,815 133,315 93,461
Property operating expense 16,191 10,657 2,999
Other operating expense 2,985 - -
General and administrative expense, excluding
amortization of non-vested shares below 5,544 4,716 3,859
Costs associated with loan refinancing - 1,134 -
Interest expense, net 42,427 38,054 30,570
Depreciation and amortization 27,597 23,365 16,359
Amortization of non-vested shares 1,705 1,377 926
--------- --------- --------
Income before income from joint ventures and minority interests 68,366 54,012 38,748
Equity in income from joint ventures 728 654 401
Minority interests (34) (953) (1,555)
--------- --------- --------
Net income $ 69,060 $ 53,713 $37,594
Preferred dividend requirements (11,353) (5,463) (5,463)
--------- --------- --------
Net income available to common shareholders $ 57,707 $ 48,250 $ 32,131
========= ========= ========
Net income per common share:
Basic $ 2.31 $ 2.12 $ 1.81
Diluted ========= ========= ========
$ 2.26 $ 2.07 $ 1.77
========= ========= ========
Shares used for computation (in thousands):
Basic 25,019 22,721 17,780
Diluted 25,504 23,664 19,051
Dividends per common share $ 2.50 $ 2.25 $ 2.00
========= ========= ========
See accompanying notes to consolidated financial statements.
33
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
PREFERRED ACCUMULATED
COMMON STOCK STOCK ADDITIONAL OTHER
------------- ------------ PAID-IN TREASURY LOANS TO NON-VESTED COMPREHENSIVE
SHARES PAR SHARES PAR CAPITAL SHARES SHAREHOLDERS SHARES INCOME
------ ----- ------ ---- ---------- -------- ------------ ---------- -------------
Balance at December 31, 2002 17,656 177 2,300 23 379,447 (6,533) (3,525) (1,247) --
Shares issued to Trustees 2 -- -- -- 62 -- -- -- --
Issuance of restricted share
grants 54 1 -- -- 1,303 -- -- (1,304) --
Amortization of restricted
share grants -- -- -- -- -- -- -- 926 --
Stock option expense -- -- -- -- 25 -- -- -- --
Net income -- -- -- -- -- -- -- -- --
Issuances of common shares
in Dividend Reinvestment Plan 21 -- -- -- 586 -- -- -- --
Issuance of common shares,
net of costs of $1.4 million 2,397 23 -- -- 72,772 -- -- -- --
Dividends to common
shareholders ($2.00 per share) -- -- -- -- -- -- -- -- --
Dividends to Series A
preferred shareholders ($2.375
per share) -- -- -- -- -- -- -- -- --
------ ----- ------ ---- ---------- -------- ------------ ---------- -------------
Balance at December 31, 2003 20,130 201 2,300 23 454,195 (6,533) (3,525) (1,625) --
Shares issued to Trustees 2 -- -- -- 66 -- -- -- --
Issuance of restricted share
grants 56 1 -- -- 2,089 -- -- (2,090) --
Cancellation of common shares (1) -- -- -- (50) -- -- -- --
Amortization of restricted
share grants -- -- -- -- -- -- -- 1,377 --
Stock option expense -- -- -- -- 116 -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- -- -- 7,480
Net income -- -- -- -- -- -- -- -- --
Issuances of common shares in
Dividend Reinvestment Plan 23 -- -- -- 837 -- -- -- --
Issuances of common shares, net
of costs of $3.5 million 5,190 52 -- -- 158,629 -- -- -- --
Stock option exercises, net 178 2 -- -- 2,833 (1,865) -- -- --
Dividends to common
shareholders ($2.25 per share) -- -- -- -- -- -- -- -- --
Dividends to Series A preferred
shareholders ($2.375 per share) -- -- -- -- -- -- -- -- --
------ ----- ------ ---- ---------- -------- ------------ ---------- -------------
Balance at December 31, 2004 25,578 $ 256 2,300 $ 23 618,715 (8,398) (3,525) (2,338) 7,480
Shares issued to Trustees 4 -- -- -- 161 -- -- -- --
Issuance of restricted share
grants 63 1 -- -- 2,625 -- -- (2,626) --
Amortization of restricted share
grants -- -- -- -- -- -- -- 1,705 --
Stock option expense -- -- -- -- 145 -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- -- -- 5,922
Net income -- -- -- -- -- -- -- -- --
Purchase of 17,350 common
shares for treasury -- -- -- -- -- (759) -- -- --
Issuances of common shares in
Dividend Reinvestment Plan 22 -- -- -- 880 -- -- -- --
Issuance of preferred shares,
net of costs of $2.7 million -- -- 3,200 32 77,229 -- -- -- --
Stock option exercises, net 215 2 -- -- 4,208 (5,193) -- -- --
Dividends to common shareholders
($2.50 per share) -- -- -- -- -- -- -- -- --
Dividends to Series A preferred
shareholders ($2.375 per share) -- -- -- -- -- -- -- -- --
Dividends to Series B preferred
shareholders ($1.841 per share) -- -- -- -- -- -- -- -- --
------ ----- ------ ---- ---------- -------- ------------ ---------- -------------
Balance at December 31, 2005 25,882 $ 259 5,500 $ 55 $ 703,963 $(14,350) $ (3,525) $ (3,259) $ 13,402
====== ===== ====== ==== ========== ======== ============ ========== =============
DISTRIBUTIONS
IN EXCESS OF
NET INCOME TOTAL
------------- ---------
Balance at December 31, 2002 (15,164) 353,178
Shares issued to Trustees -- 62
Issuance of restricted share
grants -- --
Amortization of restricted
share grants -- 926
Stock option expense -- 25
Net income 37,594 37,594
Issuances of common shares
in Dividend Reinvestment Plan -- 586
Issuance of common shares,
net of costs of $1.4 million -- 72,795
Dividends to common
shareholders ($2.00 per share) (36,924) (36,924)
Dividends to Series A
preferred shareholders ($2.375
per share) (5,463) (5,463)
------------- ---------
Balance at December 31, 2003 (19,957) 422,779
Shares issued to Trustees -- 66
Issuance of restricted share
grants -- --
Cancellation of common shares -- (50)
Amortization of restricted
share grants -- 1,377
Stock option expense -- 116
Foreign currency translation
adjustment -- 7,480
Net income 53,713 53,713
Issuances of common shares in
Dividend Reinvestment Plan -- 837
Issuances of common shares, net
of costs of $3.5 million -- 158,681
Stock option exercises, net -- 970
Dividends to common
shareholders ($2.25 per share) (53,166) (53,166)
Dividends to Series A preferred
shareholders ($2.375 per share) (5,463) (5,463)
------------- ---------
Balance at December 31, 2004 (24,873) 587,340
Shares issued to Trustees -- 161
Issuance of restricted share
grants -- --
Amortization of restricted share
grants -- 1,705
Stock option expense -- 145
Foreign currency translation
adjustment -- 5,922
Net income 69,060 69,060
Purchase of 17,350 common
shares for treasury -- (759)
Issuances of common shares in
Dividend Reinvestment Plan -- 880
Issuance of preferred shares,
net of costs of $2.7 million -- 77,261
Stock option exercises, net -- (983)
Dividends to common shareholders
($2.50 per share) (62,958) (62,958)
Dividends to Series A preferred
shareholders ($2.375 per share) (5,463) (5,463)
Dividends to Series B preferred
shareholders ($1.841 per share) (5,890) (5,890)
------------- ---------
Balance at December 31, 2005 $ (30,124) $ 666,421
============= =========
See accompanying notes to consolidated financial statements.
34
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------
2005 2004 2003
------- ------- -------
Net income $69,060 $53,713 $37,594
Other comprehensive income:
Foreign currency translation adjustment 5,922 7,480 -
------- ------- -------
Comprehensive income $74,982 $61,193 $37,594
======= ======= =======
See accompanying notes to consolidated financial statements.
35
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
2005 2004 2003
--------- --------- ---------
Operating activities:
Net income $ 69,060 $ 53,713 $ 37,594
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in net income 34 953 1,555
Equity in income from joint ventures (728) (654) (401)
Depreciation and amortization 27,597 23,365 16,359
Amortization of deferred financing costs 3,345 3,299 2,771
Costs associated with loan refinancing (non-cash portion) - 729 -
Non-cash compensation expense to management and trustees 2,011 1,590 1,013
Increase in mortgage note accrued interest receivable (3,508) - -
Increase in other assets (3,253) (6,533) (1,744)
Increase in accounts payable and accrued liabilities 310 3,509 836
Increase (decrease) in unearned rents (337) 739 (3,275)
--------- --------- ---------
Net cash provided by operating activities 94,531 80,710 54,708
--------- --------- ---------
Investing activities:
Acquisition of rental properties and other assets (157,694) (221,038) (129,381)
Net proceeds from sale of real estate and other assets 514 5,100 -
Additions to properties under development (26,064) (41,197) (21,987)
Distributions from joint ventures 855 811 486
Proceeds from sale of equity interest in joint venture - 8,240 8,437
Proceeds from secured note receivable - 5,000 -
Investment in secured notes receivable (37,525) (5,000) (5,000)
--------- --------- ---------
Net cash used in investing activities (219,914) (248,084) (147,445)
--------- --------- ---------
Financing activities:
Proceeds from long-term debt facilities 315,000 181,450 190,200
Principal payments on long-term debt (196,709) (90,923) (100,263)
Deferred financing fees paid (2,083) (5,133) (7,550)
Net proceeds from issuance of common shares 880 117,533 73,381
Net proceeds from issuance of preferred shares 77,261 - -
Impact of stock option exercises, net (983) 970 -
Purchase of common shares for treasury (759) - -
Distributions paid to minority interests (848) (1,534) (1,875)
Dividends paid to shareholders (71,088) (54,363) (40,720)
--------- --------- ---------
Net cash provided by financing activities 120,671 148,000 113,173
Effect of exchange rate changes on cash 3 102 -
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (4,709) (19,272) 20,436
Cash and cash equivalents at beginning of year 11,255 30,527 10,091
--------- --------- ---------
Cash and cash equivalents at end of year $ 6,546 $ 11,255 $ 30,527
========= ========= =========
Supplemental schedule of non-cash activity:
Contribution of rental property to joint venture $ - $ 24,186 $ -
Conversion of minority interest for common shares $ - $ 15,000 $ -
Debt assumed by joint venture $ - $ 14,583 $ -
Transfer of property under development to rental property $ 29,752 $ 59,443 $ 5,509
Issuance of restricted share grants $ 2,626 $ 2,040 $ 1,304
Assumption of debt of New Roc $ - $ - $ 70,000
Issuance of shares in acquisition of rental properties $ - $ 27,087 $ -
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 40,414 $ 37,008 $ 29,010
Cash paid (received) during the year for income taxes $ (321) $ 765 $ -
See accompanying notes to consolidated financial statements.
36
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
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 megaplex theatres, entertainment retail centers (centers
generally anchored by an entertainment component such as a megaplex theatre and
containing other entertainment-related properties) and other specialty
properties. The Company's properties are located in the United States and
Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Entertainment
Properties Trust and its subsidiaries, all of which are wholly-owned except for
New Roc Associates, LP (New Roc). New Roc was acquired in October 2003 and is
71.4% owned. Minority interest expense related to New Roc was $34 thousand, $203
thousand and $55 thousand for the years ended December 31, 2005, 2004 and 2003,
respectively. Total minority interest in New Roc was $5.2 million and $6.0
million at December 31, 2005 and 2004, respectively. All significant
inter-company transactions have been eliminated in consolidation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America. Actual results could differ from those estimates.
RENTAL PROPERTIES
Rental properties are carried at cost less accumulated depreciation. Costs
incurred for the acquisition of the properties are capitalized. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, which generally are estimated to be 40 years for buildings and 3 to 20
years for furniture, fixtures and equipment. Tenant improvements, including
allowances, are depreciated over the shorter of the base term of the lease or
the estimated useful life. Expenditures for ordinary maintenance and repairs are
charged to operations in the period incurred. Significant renovations and
improvements which improve or extend the useful life of the asset are
capitalized and depreciated over their estimated useful life.
The Company applies Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", for the
recognition and measurement of impairment of long-lived assets to be held and
used. Management reviews a property for impairment whenever events or changes in
circumstances indicate that the carrying value of a property may not be
recoverable. The review of recoverability is based on an estimate of
undiscounted future cash flows expected to result from its use and eventual
disposition. If impairment exists due to the inability to recover the carrying
value of the property, an impairment loss is recorded to the extent that the
carrying value of the property exceeds its estimated fair value.
37
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
ACCOUNTING FOR ACQUISITIONS
For rental property acquisitions completed after June 30, 2001 (the effective
date of SFAS No. 141, "Business Combinations"), the Company considers the fair
values of both tangible and intangible assets acquired or liabilities assumed
when allocating the purchase price (plus any capitalized costs incurred during
the acquisition). Tangible assets may include land, building, tenant
improvements, furniture, fixtures and equipment. Intangible assets or
liabilities may include values assigned to in-place leases (including the
separate values that may be assigned to above-market and below-market in-place
leases), the value of tenant relationships, and any assumed financing that is
determined to be above or below market terms.
Most of the Company's rental property acquisitions do not involve in-place
leases. In such cases, the cost of the acquisition is allocated to the tangible
assets based on recent independent appraisals and management judgment. Because
the Company typically executes these leases simultaneously with the purchase of
the real estate, no value is ascribed to in-place leases in these transactions.
For rental property acquisitions involving in-place leases, the fair value of
the tangible assets is determined by valuing the property as if it were vacant
based on management's determination of the relative fair values of the assets.
Management determines the "as if vacant" fair value of a property using recent
independent appraisals or methods similar to those used by independent
appraisers. The aggregate value of intangible assets or liabilities is measured
based on the difference between the stated price plus capitalized costs and the
property as if vacant.
In determining the fair value of acquired in-place leases, the Company considers
many factors. On a lease-by-lease basis, management considers the present value
of the difference between the contractual amounts to be paid pursuant to the
leases and management's estimate of fair market lease rates. For above market
leases, management considers such differences over the remaining non-cancelable
lease terms and for below market leases, management considers such differences
over the remaining initial lease terms plus any fixed rate renewal periods. The
capitalized above-market lease values are amortized as a reduction of rental
income over the remaining non-cancelable terms of the respective leases. The
capitalized below market lease values are amortized to income over the remaining
initial lease terms plus any fixed rate renewal periods. Management considers
several factors in determining the discount rate used in the present value
calculations, including the credit risks associated with the respective tenants.
If debt is assumed in the acquisition, the determination of whether it is above
or below market is based upon a comparison of similar financing terms for
similar rental properties.
The fair value of acquired in-place leases also includes management's estimate,
on a lease-by-lease basis, of the present value of the following amounts: (i)
the value associated with avoiding the cost of originating the acquired in-place
leases (i.e. the market cost to execute the leases, including leasing
commissions, legal and other related costs); (ii) the value associated with lost
revenue related to tenant reimbursable operating costs estimated to be incurred
during the assumed re-leasing period, (i.e. real estate taxes, insurance and
other operating expenses); (iii) the value associated with lost rental revenue
from existing leases during the assumed re-leasing period; and (iv) the value
associated with avoided tenant improvement costs or other inducements to secure
a tenant lease. These values are amortized over the remaining initial lease term
of the respective leases.
38
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
The Company also determines the value, if any, associated with customer
relationships considering factors such as the nature and extent of the Company's
existing business relationship with the tenants, growth prospects for developing
new business with the tenants and expectation of lease renewals. The value of
customer relationship intangibles is amortized over the remaining initial lease
terms plus any renewal periods.
Management of the Company reviews the carrying value of intangible assets for
impairment on an annual basis. Intangible assets consist of the following at
December 31 (in thousands):
2005 2004
------- -------
In-place leases, net of accumulated
amortization of $1.9 million
and $778 thousand, respectively $ 9,768 $10,207
Goodwill 693 693
------- -------
Total intangible assets, net $10,461 $10,900
======= =======
In-place leases, net at December 31, 2005 of approximately $9.8 million, relate
to four entertainment retail centers in Ontario, Canada that were purchased on
March 1, 2004 and one entertainment retail center in Burbank, California that
was purchased on March 31, 2005. Goodwill at December 31, 2005 and 2004 relates
solely to the acquisition of New Roc that was acquired on October 27, 2003.
Amortization expense related to in-place leases is computed using the
straight-line method and was $1.0 million and $778 thousand for the year ended
December 31, 2005 and 2004, respectively. The weighted average life for these
in-place leases at December 31, 2005 is 9 years. There was no amortization
expense related to in-place leases for the year ended December 31, 2003.
Future amortization of in-place leases at December 31, 2005 is as follows (in
thousands):
AMOUNT
------
Year:
2006 $1,078
2007 1,078
2008 1,078
2009 1,070
2010 1,070
Thereafter 4,394
------
Total $9,768
======
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the terms of the related long-term
debt obligations or mortgage rate receivable as applicable.
39
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
CAPITALIZED DEVELOPMENT COSTS
The Company capitalizes certain costs that relate to property under development
including interest and development personnel costs.
OPERATING SEGMENT
The Company aggregates the financial information of all its properties into one
reportable segment because the properties all have similar economic
characteristics and provide similar services to similar types and classes of
customers.
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 those of the
Company's leases that are dependent upon increases in the Consumer Price Index
(CPI) is recognized when known. Straight-line rent receivable is included in
other assets and was $4.7 million and $2.4 million at December 31, 2005 and
2004, respectively. In addition, most of the Company's tenants are subject to
additional rents if gross revenues of the properties exceed certain thresholds
defined in the lease agreements (percentage rents). Percentage rents are
recognized at the time when specific triggering events occur as provided by the
lease agreements. Percentage rents of $1.9 million, $2.2 million and $1.9
million were recognized in 2005, 2004 and 2003, respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable, included in other assets, is reduced by an allowance for
amounts that may become uncollectible in the future. The Company's receivable
balance is comprised primarily of rents and operating cost recoveries due from
tenants as well as accrued rental rate increases to be received over the life of
the existing leases. The Company regularly evaluates the adequacy of its
allowance for doubtful accounts. The evaluation primarily consists of reviewing
past due account balances and considering such factors as the credit quality of
the Company's tenants, historical trends of the tenant and/or other debtor,
current economic conditions and changes in customer payment terms. Additionally,
with respect to tenants in bankruptcy, the Company estimates the expected
recovery through bankruptcy claims and increases the allowance for amounts
deemed uncollectible. If the Company's assumptions regarding the collectiblity
of accounts receivable prove incorrect, the Company could experience write-offs
of the accounts receivable or accrued straight-line rents receivable in excess
of its allowance for doubtful accounts. The allowance for doubtful accounts was
$244 thousand and $93 thousand at December 31, 2005 and 2004, respectively.
INCOME TAXES
The Company operates in a manner intended to enable it to qualify as a REIT
under the Internal Revenue Code (the Code). A REIT which distributes at least
90% of its taxable income to its shareholders each year and which meets certain
other conditions is not taxed on that portion of its taxable income which is
distributed to its shareholders. The Company intends to continue to qualify as a
REIT and distribute substantially all of its taxable income to its shareholders.
In 2004, the Company acquired certain real estate operations that are subject to
income tax in Canada. Also in 2004, the Company formed certain taxable REIT
subsidiaries, as permitted under the Code, through which it conducts certain
business activities. The taxable REIT subsidiaries are subject to federal and
state income taxes on their net taxable income. Temporary differences between
income for financial reporting purposes and taxable income for the Canadian
operations and the taxable REIT subsidiaries
40
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
relate primarily to depreciation, amortization of deferred financing costs and
straight line rents. As of December 31, 2005, the Canadian operations and the
taxable REIT subsidiaries had deferred tax assets totaling approximately $3.0
million and deferred tax liabilities totaling approximately $1.6 million. As
there is no assurance that the Canadian operations and the taxable REIT
subsidiaries will generate taxable income in the future beyond the reversal of
temporary taxable differences, the deferred tax asset has been offset by a
valuation allowance such that there is no net deferred tax asset or liability at
December 31, 2005 and 2004. Furthermore, the Company qualified as a REIT and
distributed the necessary amount of taxable income. Accordingly, no provision
for income taxes was recorded for the years ended December 31, 2005, 2004 or
2003.
Earnings and profits, which determine the taxability of distributions to
shareholders, may differ from that reported for income tax reporting purposes
due primarily to differences in the basis of the assets and the estimated useful
lives used to compute depreciation.
CONCENTRATION OF RISK
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (54%)
of the megaplex theatre rental properties held by the Company (including joint
venture properties) at December 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 rental revenues (approximately $82.1
million or 57%, $74.8 million or 60%, and $66.1 million or 73% for the years
ended December 31, 2005, 2004 and 2003, respectively) result from the 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.
CASH EQUIVALENTS
Cash equivalents include bank demand deposits and shares of highly liquid
institutional money market mutual funds for which cost approximates market
value.
RESTRICTED CASH
Restricted cash represents deposits required in connection with debt service,
payment of real estate taxes and capital improvements.
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 provided alternative methods of
accounting for stock-based compensation and amends SFAS No. 123 "Accounting for
Stock-Based Compensation." Prior to 2003, the Company accounted for stock
options issued under its share incentive plan under the recognition and
measurement provisions of APB Opinion No. 25 "Accounting for Stock Issued to
Employees," and related interpretations. Effective January 1, 2003, the Company
adopted the fair value recognition provisions of SFAS No. 123 prospectively for
all awards granted, modified, or settled after January 1, 2003. Awards under the
Company's plan vest either immediately or up to a period of 5 years. Stock
option expense for options issued after January 1, 2003 is recognized on a
straight-line basis over the vesting period.
41
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
The expense related to stock options included in the determination of net income
for 2005, 2004 and 2003 is less than that which would have been recognized if
the fair value based method had been applied to all awards since the original
effective date of SFAS No. 123. The following table illustrates the effect on
net income and earnings per share if the fair value based method had been
applied to all outstanding and unvested awards for each year (in thousands):
2005 2004 2003
-------- -------- --------
Net income available to common shareholders,
as reported $ 57,707 $ 48,250 $ 32,131
Add: Stock-based compensation expense
included in reported net income 145 116 25
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards (221) (241) (153)
-------- -------- --------
Pro forma net income $ 57,631 $ 48,125 $ 32,003
======== ======== ========
Basic earnings per share:
As reported $ 2.31 $ 2.12 $ 1.81
Pro forma 2.30 2.12 1.80
Diluted earnings per share:
As reported $ 2.26 $ 2.07 $ 1.77
Pro forma 2.26 2.07 1.76
The fair value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 4.0% in 2005, 2004 and 2003, dividend yield of 6.0% in 2005 and
2004 and 8.0% in 2003, volatility factors of the expected market price of the
Company's common shares of 20.7% in 2005, 14.1% in 2004 and 14.6% in 2003; and
an expected life of the options of eight years.
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 to expense over the vesting period.
42
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
FOREIGN CURRENCY TRANSLATION
The Company accounts for the operations of its Canadian properties in Canadian
dollars. The assets and liabilities related to the Company's Canadian properties
are translated into U.S. dollars at current exchange rates; revenues and
expenses are translated at average exchange rates. Resulting translation
adjustments are recorded as a separate component of comprehensive income.
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
December 31, 2005 and 2004 (in thousands):
2005 2004
-------------- ---------
Buildings and improvements $ 1,068,569 940,598
Furniture, fixtures & equipment 5,240 2,000
Land 322,865 265,276
-------------- ---------
1,396,674 1,207,874
Accumulated depreciation (112,686) (87,082)
-------------- ---------
Total $ 1,283,988 1,120,792
============== =========
Depreciation expense on rental properties was $25.9 million, $22.3 million and
$16.2 million for the years ended December 31, 2005, 2004 and 2003,
respectively.
4. UNCONSOLIDATED REAL ESTATE JOINT VENTURES
At December 31, 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 $437, $410 and $401 (in thousands) from its
investment in the Atlantic-EPR I joint venture during 2005, 2004 and 2003,
respectively. The Company also received distributions from Atlantic-EPR I of
$511, $512 and $486 (in thousands) during 2005, 2004 and 2003, respectively.
Condensed financial information for Atlantic-EPR I is as follows as of and for
the years ended December 31, 2005, 2004 and 2003 (in thousands):
2005 2004 2003
------------- -------- ------
Rental properties, net $ 29,889 30,533 31,177
Cash 141 141 141
Long-term debt 16,470 16,768 17,039
Partners' equity 13,452 13,790 14,173
Rental revenue 4,156 4,077 4,006
Net income 2,063 1,949 1,911
43
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
The Atlantic-EPR II joint venture was formed on March 1, 2004. The Company
recognized income of $291 and $244 (in thousands) from its investment in this
joint venture during 2005 and 2004, respectively. The Company also received
distributions from Atlantic-EPR II of $344 and $299 (in thousands) during 2005
and 2004, respectively. Condensed financial information for Atlantic-EPR II is
as follows as of and for the years ended December 31, 2005 and 2004 (in
thousands):
2005 2004
---------- -------
Rental properties, net $ 23,341 23,802
Cash 114 103
Long-term debt 14,149 14,405
Note payable to Entertainment Properties Trust 117 117
Partners' equity 8,984 9,192
Rental revenue 2,778 2,377
Net income 1,280 1,046
The joint venture agreement for Atlantic-EPR I allows for the Company's partner,
Atlantic of Hamburg, Germany (Atlantic), to exchange up to a maximum of 10% of
its ownership interest per year in Atlantic-EPR I for common shares of the
Company or, at the discretion of the Company, the cash value of those shares as
defined in the joint venture agreement. This same provision exists in the
Atlantic-EPR II joint venture agreement, except that Atlantic's right to such
exchange does not commence until 2007.
5. OPERATING LEASES
The Company's rental properties are leased under operating leases with
expiration dates ranging from 3 to 25 years. Future minimum rentals on
non-cancelable tenant leases at December 31, 2005 are as follows (in thousands):
AMOUNT
-------------
Year:
2006 $ 157,948
2007 157,461
2008 157,613
2009 158,030
2010 156,771
Thereafter 1,130,822
-------------
Total $ 1,918,645
=============
The Company leases its executive office from a third party landlord through
December, 2009. Rental expense for this lease totaled approximately $200
thousand, $195 thousand and $137 thousand in 2005, 2004 and 2003, respectively,
and is included as a component of general and administrative expense in the
accompanying consolidated statements of income. Future minimum lease payments
under this lease at December 31, 2005 are (in thousands):
44
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
AMOUNT
---------
Year:
2006 $ 203
2007 209
2008 214
2009 220
2010 --
---------
Total $ 846
=========
6. LONG-TERM DEBT
Long term debt at December 31, 2005 and 2004 consists of the following (in
thousands):
2005 2004
----------- --------
(1)Secured revolving variable rate credit facility, 64,000 27,000
due March 29, 2007
(2)Mortgage note payable, 8.18%, repaid February 1, 2005 -- 18,850
(3)Mortgage notes payable, 6.50%-15.03%, due
February 10, 2006 109,355 113,074
(4)Mortgage note payable, 6.77%, due July 11, 2028 94,859 96,550
(5)Mortgage note payable, 7.37%, due July 15, 2018 14,998 15,660
(6)Mortgage notes payable, 4.26%-9.012%, due
February 10, 2013 142,399 147,257
(7) Mortgage note payable, 6.84%, due March 1, 2014 105,711 105,038
(8) Mortgage note payable, 5.58%, due April 1, 2014 64,608 65,463
(9) Mortgage note payable, 5.56%, due June 5, 2015 35,780 --
(10) Mortgage notes payable, 5.77%, due November 6, 2015 78,881 --
Other 4,000 4,000
----------- --------
Total $ 714,591 592,892
=========== ========
(1)The Company's secured revolving variable rate credit facility was due March
29, 2007 and was secured by fourteen theatre properties, two theatre and retail
mix properties and one retail mix property, which had a net book value of
approximately $208.8 million at December 31, 2005. There was $64.0 million and
$27 million outstanding on the $150 million secured revolving variable rate
credit facility at December 31, 2005 and 2004, respectively. The note required
monthly payments of interest with the outstanding principal due at maturity. At
December 31, 2005, the principal amounts were bearing interest at LIBOR plus 225
basis points (6.59% at December 31, 2005). As described in Note 17, the
Company's credit facility was amended and restated subsequent to December 31,
2005.
(2)The Company's mortgage note payable due February 1, 2005 was secured by three
theatre properties, which had a net book value of approximately $37.9 million at
December 31, 2004. The note required monthly principal and interest payments
with the outstanding principal due at maturity. The note was paid in full at
maturity on February 1, 2005 (see Note 14).
45
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
(3)The Company's mortgage notes payable were due February 10, 2006 and were
secured by nine theatre properties, which had a net book value of approximately
$175.4 million at December 31, 2005, and by $6.5 million in cash escrow
deposits. The escrow deposits are recorded as restricted cash in the
accompanying consolidated balance sheets at December 31, 2005 and 2004. The
escrow deposits were required by the terms of the mortgage notes and were
available to pay debt service on the mortgage notes if certain triggering events
occurred, or they were to be applied to the principal amount at maturity. The
notes required monthly principal and interest payments of approximately $1.0
million with a final principal payment at maturity of approximately $109.0
million. As described in Note 17, these notes were paid in full at maturity
using the cash escrow deposits, borrowings under the Company's unsecured
revolving variable rate credit facility and proceeds of approximately $44
million from refinancing two of the theatre properties originally included as
security.
(4)The Company's mortgage note payable due July 11, 2028 is secured by eight
theatre properties, which had a net book value of approximately $135.7 million
at December 31, 2005. The note requires monthly principal and interest payments
of approximately $689 thousand. This mortgage agreement contains a
"hyper-amortization" feature, in which the principal payment schedule is rapidly
accelerated, and our principal payments are substantially increased, if we fail
to pay the balance of approximately $89.9 million on the anticipated prepayment
date of July 11, 2008.
(5)The Company's mortgage note payable due June 15, 2018 is secured by one
theatre property, which had a net book value of approximately $21.4 million at
December 31, 2005. The notes require monthly principal and interest payments of
approximately $151 thousand with a final principal payment at maturity of
approximately $0.8 million.
(6)The Company's mortgage notes payable due February 10, 2013 are secured by
fourteen theatre properties, which had a net book value of approximately $229.4
million at December 31, 2005. The notes require monthly principal and interest
payments of approximately $1.1 million with a final principal payment at
maturity of approximately $99.2 million.
(7)The Company's mortgage note payable due March 1, 2014 is secured by four
theatre and retail mix properties in Ontario, Canada, which had a net book value
of approximately $174.6 million at December 31, 2005. The note requires monthly
principal and interest payments of approximately $840 thousand with a final
principal payment at maturity of approximately $73.6 million. The mortgage note
payable is denominated in Canadian dollars. At December 31, 2005 and 2004, the
outstanding balance in Canadian dollars was $126.3 million and $122.9 million,
respectively.
(8)The Company's mortgage note payable due April 1, 2014 is secured by one
theatre and retail mix property, which had a net book value of approximately
$95.7 million at December 31, 2005. The note requires monthly principal and
interest payments of approximately $378 thousand with a final principal payment
at maturity of approximately $55.3 million.
46
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
(9)The Company's mortgage note payable due June 5, 2015 is secured by one
theatre and retail mix property, which had a net book value of approximately
$50.9 million at December 31, 2005. The note requires monthly principal and
interest payments of approximately $206 thousand with a final principal payment
at maturity of approximately $30.1 million.
(10)The Company's mortgage notes payable due November 6, 2015 are secured by six
theatre properties, which had a net book value of approximately $90.0 million at
December 31, 2005. The notes require monthly principal and interest payments of
approximately $498 thousand with a final principal payment at maturity of
approximately $60.7 million.
Certain of the Company's long-term debt agreements contain customary restrictive
covenants related to financial and operating performance. At December 31, 2005,
the Company was in compliance with all restrictive covenants.
Principal payments due on long term debt obligations subsequent to December 31,
2005 are as follows (in thousands):
AMOUNT
------------
Year:
2006 $ 122,828
2007 78,322
2008 104,217
2009 13,956
2010 14,820
Thereafter 380,448
------------
Total $ 714,591
============
As indicated above and in Note 17, subsequent to December 31, 2005, the Company
amended and restated its credit facility, and refinanced $109 million in
mortgage notes payable that had matured. As a result, $14.0 million of principal
payments are now due in 2006 compared to the $122.8 million shown above.
The Company capitalizes a portion of interest costs as a component of property
under development. The following is a summary of interest costs incurred during
2005, 2004 and 2003 (in thousands):
2005 2004 2003
--------- ------- ------
Interest cost charged to income $ 42,427 38,054 30,570
Interest cost capitalized 160 688 832
--------- ------- ------
Total interest costs incurred $ 42,587 38,742 31,402
========= ======= ======
47
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
7. SHARE INCENTIVE PLAN
The Company maintains a Share Incentive Plan (the Plan) under which common
shares and options to purchase up to 3,000,000 of the Company's common shares,
subject to adjustment in the event of certain capital events, may be granted. At
December 31, 2005, there were 1,606,243 shares available for grant under the
Plan.
SHARE OPTIONS
Share options granted under the Plan have exercise prices equal to the fair
market value of a common share at the date of grant. The options may be granted
for any reasonable term, not to exceed 10 years, and typically become
exercisable at a rate of 20% per year over a five-year period. For trustees,
share options become exercisable at a rate of one-third per year over a
three-year period. A summary of the Company's share option activity and related
information is as follows:
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
----------- ---------------------- --------------
Outstanding at
December 31, 2002 733,787 14.00 - 20.00 17.25
Exercised 66,863 14.00 - 22.89 18.50
Granted 341,019 23.26 - 27.43 24.98
-----------
Outstanding at
December 31, 2003 1,007,943 14.00 - 27.43 19.67
Exercised 178,353 14.13 - 26.87 16.22
Granted 151,087 32.50 - 39.80 36.41
-----------
Outstanding at
December 31, 2004 980,677 $ 14.00 - $ 39.80 $ 22.99
Exercised 215,137 14.13 - 34.26 19.57
Granted 124,636 41.65 - 43.75 42.27
-----------
Outstanding at
December 31, 2005 890,176 $ 14.00 - $ 43.75 $ 26.52
===========
The weighted average fair value of options granted was $3.47, $1.18 and $.41
during 2005, 2004 and 2003, respectively.
The following table summarizes outstanding and exercisable options at December
31, 2005:
Exercise Options Options Weighted avg.
price range outstanding exercisable life remaining
- ------------------- ----------- ----------- ---------------
$ 14.00 - 19.99 230,811 195,483 4.7
20.00 - 29.99 387,065 135,864 6.8
30.00 - 39.99 147,664 64,796 9.3
40.00 - 43.75 124,636 - 9.8
------- ------- ---
890,176 396,143 6.9
======= ======= ===
48
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
RESTRICTED SHARES
During 2005, 2004 and 2003, the Company issued 63,048, 55,651 and 54,480,
respectively, of restricted common shares as bonus and long-term incentive
compensation to executives and other employees of the Company. During 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 2005. Based upon the market price of the Company's common shares on the
grant dates, approximately $2.6 million, $2.1 million and $1.3 million were
recognized as non-vested shares issued in 2005, 2004 and 2003 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 during 2005, 2004 and 2003 amounted to $1.71
million, $1.38 million and $926 thousand, respectively. At December 31, 2005,
there were 140,133 non-vested restricted shares issued and outstanding.
8. RELATED PARTY TRANSACTIONS
In 2000, the Company loaned an aggregate of $3.5 million to Company executives.
The loans were made in order for the executives to purchase common shares of the
Company at the market value of the shares on the date of the loan, as well as to
repay borrowings on certain amounts previously loaned. The loans are recourse to
the executives' assets and bear interest at 6.24%, are due on January 1, 2011
and interest is payable at maturity. Interest income from these loans totaled
$327 thousand, $307 thousand and $289 thousand for the years ended December 31,
2005, 2004 and 2003, respectively. These loans were issued with terms that
include a Loan Forgiveness Program, under which the compensation committee of
the Board of Trustees may forgive a portion of the above referenced indebtedness
after application of proceeds from the sale of shares, following a change in
control of the Company. The compensation committee may also forgive the debt
incurred upon termination of employment by reason of death, disability, normal
retirement or without cause. At December 31, 2005 and 2004, accrued interest
receivable on these loans, included in other assets in the accompanying
consolidated balance sheets, was $2.00 million and $1.67 million, respectively.
The Company loaned $5 million to a minority joint venture partner in 2003 in
connection with an acquisition. This note is included in other assets, bears
interest at 10% per year, matures on March 9, 2009, and is secured by the
minority partner's interest in the partnership. In February 2004, the Company
loaned an additional $5 million to the same minority partner with interest also
at 10% per year. This note was paid in full, including all accrued interest, on
October 14, 2004. Interest income from these loans totaled $500 thousand, $954
thousand and $163 thousand for the years ended December 31, 2005, 2004 and 2003,
respectively.
49
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
9. EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted earnings
per common share for the years ended December 31, 2005, 2004 and 2003 (amounts
in thousands except per share information):
2005 2004 2003
----------- ------ ------
Net income available to common
shareholders $ 57,707 48,250 32,131
Weighted-average shares outstanding 25,019 22,721 17,780
Basic net income per common share $ 2.31 2.12 1.81
Numerator for diluted earnings per
common share:
Net income available to common
shareholders $ 57,707 48,250 32,131
Minority interests -- 750 1,500
----------- ------ ------
Numerator for diluted earnings per
common share $ 57,707 49,000 33,631
=========== ====== ======
Weighted-average shares outstanding 25,019 22,721 17,780
Effect of dilutive securities:
Employee options to acquire common
shares 345 383 322
Minority interest convertible into
common shares -- 429 857
Non-vested common share grants 140 131 92
----------- ------ ------
Dilutive potential common shares 485 943 1,271
----------- ------ ------
Denominator for diluted earnings per
share 25,504 23,664 19,051
=========== ====== ======
Diluted net income per common share $ 2.26 2.07 1.77
10. DERIVATIVE FINANCIAL INSTRUMENTS
In 1998, the Company entered into a forward contract in connection with a
mortgage note payable due July 2028 to essentially fix the base rate of interest
on a notional amount of $105 million. Because of a hyper-amortization feature on
this note, as further described in Note 6, it is anticipated that this note will
be paid in full prior to maturity in July, 2008, the optional prepayment date.
The forward contract settled on June 29, 1998, the closing date of the long-term
debt issuance, and the Company incurred a loss of $1.4 million, which is being
amortized as an increase to interest expense over the anticipated ten year term
of the long-term debt resulting in an effective interest rate of 6.84%. The
remaining unamortized amount of $434 thousand and $605 thousand is included in
other assets in the accompanying 2005 and 2004 consolidated balance sheets,
respectively.
50
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
11. COMPLETED PROPERTY ACQUISITIONS
The Company acquired a 71.4% ownership interest in New Roc Associates, LP (New
Roc) on October 27, 2003 in exchange for cash of $25 million. New Roc owns an
entertainment retail center encompassing 446 thousand square feet located in New
Rochelle, New York. The results of New Roc's operations have been included in
the consolidated financial statements since the date of acquisition. At any time
after March 8, 2007, the Company's partner in New Roc, LRC Industries L.T.D.
(LRC), has the right to exchange its interest in New Roc for common shares of
the Company or the cash value of those shares, at the Company's option, as long
as the net operating income (NOI) of New Roc during the preceding 12 months
exceeds $8.9 million, and certain other conditions are met. The number of common
shares of the Company issuable to LRC would equal 75% of LRC's capital in New
Roc (up to 100% if New Roc's NOI is between $8.9 million and $10.0 million),
divided by the greater of the Company's book value per share or the average
closing price of the Company's common shares. New Roc's NOI was approximately
$8.9 million for the year ended December 31, 2005 and LRC's capital in New Roc
was approximately $5.2 million.
On March 1, 2004, the Company also acquired, through a wholly-owned subsidiary,
four separate entertainment retail centers anchored by AMC megaplex theatres
located in Ontario, Canada for total consideration of U.S. $152 million.
Approximately U.S. $27 million of the purchase price consisted of 747,243
restricted common shares of the Company valued at U.S. $36.25 per share
determined based on a the approximate average market price of the Company's
common shares over the 2-day period before and after the terms of the
acquisition were agreed upon. The cash portion of the purchase price was paid in
Canadian dollars and financed in part through Canadian-dollar non-recourse
fixed-rate mortgage loans of approximately U.S. $97 million. The properties are
the Mississauga Entertainment Centrum located in suburban Toronto, the Oakville
Entertainment Centrum located in suburban Toronto, the Whitby Entertainment
Centrum located in suburban Toronto, and the Kanata Centrum Walk located in
suburban Ottawa.
In accordance with Statement of Financial Accounting Standard (SFAS) No. 141
(described in Note 2), the Company allocated approximately $10 million of the
purchase price to in-place leases and is amortizing this value over the
remaining non-cancelable lease terms ranging from 5 to 19 years. The remaining
amount of the purchase price of approximately $142 million was allocated $37
million to land and $105 million to buildings.
The following unaudited pro forma results of operations reflect the Company's
acquisitions of the Canadian properties as if they had occurred as of the
beginning of 2004:
PRO FORMA YEAR
ENDED DECEMBER 31,
2004
------------------
Total revenue $ 136,981
Net income available to common shareholders $ 48,826
Basic net income per common share $ 2.14
Diluted net income per common share $ 2.08
51
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
For the year ended December 31, 2005 and 2004, respectively, approximately $28.2
million, or 17.1%, and $19.3 million, or 14.5%, of total revenue was derived
from the Company's four entertainment retail centers in Ontario, Canada. For the
year ended December 31, 2005, approximately $31.8 million, or 19.3% of our total
revenue was derived from the Company's four entertainment retail centers in
Ontario, Canada combined with the mortgage financing interest related to the
Company's mortgage note receivable held in Canada and funded on June 1, 2005
(see Note 16).
During 2005 and 2004, the Company acquired various other rental and development
properties. Those acquisitions were recorded at the Company's cost of
acquisition. Rental properties acquired generally consisted of properties
subject to triple-net leases.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Management compares the carrying value and the estimated fair value of our
financial instruments. The following methods and assumptions were used by the
Company to estimate the fair value of each class of financial instruments at
December 31, 2005 and 2004:
MORTGAGE NOTE RECEIVABLE AND RELATED ACCRUED INTEREST RECEIVABLE:
At December 31, 2005, the Company had a mortgage note receivable with a
carrying value, including related accrued interest, of $44.1 million. The
note bears interest at 15% and its carrying value approximates fair value.
CASH AND CASH EQUIVALENTS, RESTRICTED CASH:
Due to the highly liquid nature of our short term investments, the
carrying values of our cash and cash equivalents and restricted cash
approximate the fair market values.
ACCOUNTS RECEIVABLE:
The carrying value of our accounts receivable, included in other assets,
approximates the fair market value due to the short term maturities of
these amounts.
DEBT INSTRUMENTS:
The fair value of the Company's debt as of December 31, 2005 and 2004 is
estimated by discounting the future cash flows of each instrument using
current market rates. At December 31, 2005, the Company had a carrying
value of $64.0 million in variable rate debt outstanding, which management
believes represents fair value. At December 31, 2005, the Company had a
carrying value of $650.6 million in fixed rate long-term debt outstanding
with an average weighted interest rate of approximately 6.3%. Discounting
the future cash flows for fixed rate debt using an estimated market rate
of 5.75%, management estimates the fixed rate debt's fair value to be
approximately $658.5 million at December 31, 2005.
At December 31, 2004, the Company had a carrying value of $565.9 million
in fixed rate long-term debt outstanding with an average weighted interest
rate of approximately 6.5%. Discounting the future cash flows for fixed
rate debt using an estimated market rate of 6%, management estimates the
fixed rate debt's fair value to be approximately $570.2 million at
December 31, 2004.
52
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
The carrying value of accounts payable and accrued liabilities
approximates fair value due to the short term maturities of these amounts.
COMMON AND PREFERRED DIVIDENDS PAYABLE:
The carrying values of common and preferred dividends payable approximate
fair value due to the short term maturities of these amounts.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for the years ended December 31, 2005 and
2004 are as follows (in thousands, except per share data):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- -------- ------------ -----------
2005:
Total revenue $ 37,943 40,774 41,825 44,274
Net income 15,813 17,322 17,814 18,112
Net income available to
common shareholders 13,207 14,406 14,898 15,196
Basic net income per
common share 0.53 0.58 0.59 0.61
Diluted net income per
common share 0.52 0.57 0.58 0.60
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- -------- ------------ -----------
2004:
Total revenue $ 29,614 34,032 35,154 34,514
Net income 11,330 11,716 15,354 15,314
Net income available to
common shareholders 9,964 10,350 13,988 13,948
Basic net income per
common share 0.50 0.47 0.58 0.56
Diluted net income per
common share 0.49 0.46 0.57 0.55
53
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
14. DIVIDENDS
COMMON SHARES
The Board of Trustees declared cash dividends totaling $2.50 per common share
for the year ended December 31, 2005 and $2.25 per common share for the year
ended December 31, 2004.
Of the total dividends calculated for tax purposes, the amounts characterized as
ordinary income, return of capital and capital gain for 2005 and 2004 are as
follows:
Cash dividends paid per common share for the year ended December 31, 2005:
CASH TAXABLE
CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM
RECORD DATE DATE PER SHARE INCOME CAPITAL CAPITAL GAIN
- ----------------- ------------ ------------ -------- --------- ------------
12-31-04 01-14-05 $ 0.56250 0.46355 0.09895 --
03-31-05 04-15-05 0.62500 0.51505 0.10995 --
06-30-05 07-15-05 0.62500 0.51505 0.10995 --
09-30-05 10-14-05 0.62500 0.51505 0.10995 --
----------- ------- ------- ------------
Total for 2005 $ 2.43750 2.00870 0.42880 --
=========== ======= ======= ============
$ 100.0% 82.4% 17.6% --
Cash dividends paid per common share for the year ended December 31, 2004:
CASH TAXABLE
CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM
RECORD DATE DATE PER SHARE INCOME CAPITAL CAPITAL GAIN
- ----------------- ------------ ------------ -------- --------- ------------
12-31-03 01-15-04 $ 0.50000 0.38960 0.11040 --
03-31-04 04-15-04 0.56250 0.43820 0.12430 --
06-30-04 07-15-04 0.56250 0.43820 0.12430 --
09-30-04 10-15-04 0.56250 0.43820 0.12430 --
----------- ------- ------- ------------
Total for 2004 $ 2.18750 1.70420 0.48330 --
=========== ======= ======= ============
$ 100.0% 77.9% 22.1% --
SERIES A PREFERRED SHARES
On May 29, 2002, the Company issued 2.3 million 9.50% Series A cumulative
redeemable preferred shares ("Series A preferred shares") in a registered public
offering. The Company may not redeem the Series A preferred shares, which have a
$25 liquidation preference per share, before May 29, 2007, except in limited
circumstances to preserve the Company's REIT status. On or after May 29, 2007,
the Company may, at its option, redeem the Series A 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 A
preferred shares generally have no stated maturity, are not subject to any
sinking fund or mandatory redemption, and are not convertible into any of the
Company's other securities. The Board of Trustees declared cash dividends
totaling $2.375 per Series A preferred share for the years ended December 31,
2005 and December 31, 2004, respectively.
54
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
Of the total dividends calculated for tax purposes, the amounts characterized as
ordinary income, return of capital and capital gain for 2005 and 2004 are as
follows:
Cash dividends paid per Series A preferred share for the year ended December 31,
2005:
CASH TAXABLE
CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM
RECORD DATE DATE PER SHARE INCOME CAPITAL CAPITAL GAIN
- ----------------- ------------ ------------ -------- --------- ------------
12-31-04 01-14-05 $ 0.59375 0.59375 -- --
03-31-05 04-15-05 0.59375 0.59375 -- --
06-30-05 07-15-05 0.59375 0.59375 -- --
09-30-05 10-14-05 0.59375 0.59375 -- --
----------- ------- -------- ------------
Total for 2005 $ 2.37500 2.37500 -- --
=========== ======= ======== ============
$ 100.0% 100.0% -- --
Cash dividends paid per Series A preferred share for the year ended December 31,
2004:
CASH TAXABLE
CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM
RECORD DATE DATE PER SHARE INCOME CAPITAL CAPITAL GAIN
- ----------------- ------------ ------------ -------- --------- ------------
12-31-03 01-15-04 $ 0.59375 0.59375 -- --
03-31-04 04-15-04 0.59375 0.59375 -- --
06-30-04 07-15-04 0.59375 0.59375 -- --
09-30-04 10-15-04 0.59375 0.59375 -- --
----------- ------- -------- ------------
Total for 2004 $ 2.37500 2.37500 -- --
=========== ======= ======== ============
$ 100.0% 100.0% -- --
SERIES B PREFERRED SHARES
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 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, described in Note 6. The Board of Trustees declared cash dividends
totaling $1.35625 per Series B preferred share for the year ended December 31,
2005.
55
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
Of the total dividends calculated for tax purposes, the amounts characterized as
ordinary income, return of capital and capital gain for 2005 are as follows:
Cash dividends paid per Series B preferred share for the year ended December 31,
2005:
CASH TAXABLE
CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM
RECORD DATE DATE PER SHARE INCOME CAPITAL CAPITAL GAIN
- ----------------- ------------ ------------ -------- --------- ------------
03-31-05 04-15-05 0.387500 0.387500 -- --
06-30-05 07-15-05 0.484375 0.484375 -- --
09-30-05 10-14-05 0.484375 0.484375 -- --
----------- -------- --------- ------------
Total for 2005 $ 1.356250 1.356250 -- --
=========== ======== ========= ============
$ 100.0% 100.0% -- --
15. CONVERSION OF PREFERRED INTEREST IN EPT GULF STATES, LLC
On September 20, 2004, 100% of the preferred interest in EPT Gulf States, LLC
(Gulf States), a subsidiary formed in 2002 for the purpose of acquiring five
theatre properties, was converted to 857,145 restricted common shares of the
Company. As a result, $15 million of minority interest in Gulf States was
converted to common shares and additional paid-in-capital. Minority interest
expense related to the preferred interest in Gulf States was $.8 million and
$1.5 million for the years ended December 31, 2004 and 2003, respectively.
16. 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 retail 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 in 2008 at a total cost of
approximately $272 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
Partnership debt at December 31, 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 note has a stated maturity of June 2, 2010. No principal or
interest payments are due prior to November 30, 2007 at which time a 25%
principal payment is due along with all accrued interest to date (defined as the
"Option Due Date Amount"). The Partnership also has an option on November 30,
2007 (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 would be November 30, 2008.
The Partnership could also prepay the note (in full only, including all accrued
interest) at any other time with prepayment penalties as defined in the
agreement.
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
56
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
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 December 31,
2005 was US $44.1 million, including related accrued interest receivable of US
$3.7 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.
17. SUBSEQUENT DEVELOPMENTS
On January 31, 2006, the Company amended and restated its secured revolving
variable rate credit facility to increase the size of the facility to $200
million from $150 million and reduce the interest rate charged on the facility
from rates ranging from LIBOR plus 175 to 250 basis points to LIBOR plus 130 to
175 basis points. The facility was also converted from a secured to an unsecured
facility. The unsecured revolving variable rate credit facility has a three year
term expiring in 2009 with a one year extension available at the Company's
option. As a result of this amendment and restatement, the Company will expense
certain unamortized financing costs, totaling approximately $673 thousand, in
the first quarter of 2006.
On February 8, 2006, the Company closed on a public offering of 1,000,000 common
shares at $41.25 per share. The underwriter of this offering subsequently
exercised an option to purchase an additional 150,000 common shares at $41.25
per share which closed on February 15, 2006. Total net proceeds to the Company
after expenses were approximately $46.2 million.
On February 10, 2006, the Company paid off approximately $109 million in
mortgage notes payable that had matured using funds from related debt service
escrow deposits, borrowings under the Company's amended and restated unsecured
revolving variable rate credit facility and approximately $44 million in
proceeds from the refinancing of two of the theatres originally included as
security for those mortgage notes payable. The new mortgage loans bear interest
at 5.84%, mature on March 6, 2016 and require monthly principal and interest
payments totaling $279 thousand with a final principal payment at maturity
totaling $33.9 million.
18. COMMITMENTS AND CONTINGENCIES
As of December 31, 2005, the Company had six 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 95 screens
and their development costs (including land) are expected to be approximately
$88.2 million. Through December 31, 2005, the Company has invested $26.9 million
in these projects (including land), and has commitments to fund approximately
$61.3 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.
ENTERTAINMENT PROPERTIES TRUST
Schedule II - Valuation and Qualifying Accounts
December 31, 2005
BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT
DESCRIPTION DECEMBER 31, 2004 DURING 2005 DURING 2005 DECEMBER 31, 2005
- ----------------- ----------------- ----------- ----------- ------------------
Reserve for
Doubtful Accounts 93,000 482,000 (331,000) 244,000
See accompanying report of independent registered public accounting firm.
ENTERTAINMENT PROPERTIES TRUST
Schedule II - Valuation and Qualifying Accounts
December 31, 2004
BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT
DESCRIPTION DECEMBER 31, 2003 DURING 2004 DURING 2004 DECEMBER 31, 2004
- ----------------- ----------------- ----------- ----------- ------------------
Reserve for
Doubtful Accounts 60,000 33,000 -- 93,000
See accompanying report of independent registered public accounting firm
58
ENTERTAINMENT PROPERTIES TRUST
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2005
INITIAL COST
--------------------
BUILDINGS, ADDITIONS (SALES)
EQUIPMENT & SUBSEQUENT TO
DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION
- ---------------------- --------------------- ---------------- ------ ------------ -----------------
Grand 24 Dallas, TX $ 10,842 3,060 15,281 --
Mission Valley 20 San Diego, CA 9,475 -- 16,028 --
Promenade 16 Los Angeles, CA 16,626 6,021 22,104 --
Ontario Mills 30 Los Angeles, CA 14,761 5,521 19,450 --
Lennox 24 Columbus, OH 7,499 -- 12,685 --
West Olive 16 St. Louis, MO 10,396 4,985 12,602 --
Studio 30 Houston, TX 15,406 6,023 20,037 --
Huebner Oaks 24 San Antonio, TX 9,854 3,006 13,662 --
First Colony 24 Houston, TX 10,009 -- 19,100 67
Oakview 24 Omaha, NE 12,305 5,215 16,700 59
Leawood 20 Kansas City, MO 8,272 3,714 12,086 43
Gulf Pointe 30 Houston, TX 13,512 4,304 21,496 76
South Barrington 30 Chicago, IL 17,962 6,577 27,723 98
Mesquite 30 Dallas, TX 12,153 2,912 20,288 72
Hampton Town Center 24 Norfolk, VA 14,929 3,822 24,678 88
Pompano 18 Pompano Beach, FL 10,984 6,376 9,899 2,425
Raleigh Grand 16 Raleigh, NC 7,089 2,919 5,559 --
Paradise 24 Miami, FL 12,278 2,000 13,000 8,512
Pompano Kmart Pompano Beach, FL -- 600 2,430 --
Pompano Restaurant Pompano Beach, FL -- 200 803 430
Aliso Viejo 20 Los Angeles, CA 11,488 8,000 14,000 --
Bosie Stadium 20 Boise, ID 15,876 -- 16,003 --
Woodridge 18 Chicago, IL 8,140 9,926 8,968 --
Cary Crossroads 20 Cary, NC 8,714 3,352 11,653 155
Tampa Palms 20 Tampa, FL 10,319 6,000 12,809 --
Palm Promenade San Diego, CA 13,701 7,500 17,750 --
On The Border Dallas, TX -- 879 -- --
Bennigans Dallas, TX -- 565 -- 1,000
Bennigans Houston, TX -- 652 -- 750
Texas Land & Cattle Dallas, TX -- 1,519 -- --
Texas Roadhouse Grill Atlanta, GA -- 886 -- --
Roadhouse Grill Atlanta, GA -- 868 -- --
Westminster 24 Denver, CO 14,998 5,850 17,314 --
Westminster Center Denver, CO 6,336 6,204 12,600 2,739
Westbank Palace 10 Westbank, LA 9,172 4,378 12,330 --
Houma Palace 10 Houma, LA 5,159 2,404 6,780 --
Hammond Palace 10 Hammond, LA 5,016 2,404 6,780 --
Elmwood Palace 10 Elmwood, LA 13,185 5,264 14,820 --
Clearview Palace 12 Clearview, LA 6,879 -- 11,740 --
Sterling Forum 30 Sterling Heights, MI 16,051 5,975 17,956 3,400
Olathe Studio 30 Olathe, KS 11,465 4,000 15,935 --
Cherrydale 16 Greenville, SC 4,730 1,660 7,570 --
Livonia Livonia, MI 13,127 4,500 17,525 --
Hoffman 22 Alexandria, VA 13,185 -- 22,035 --
Little Rock Rave Little Rock, AR 10,884 3,858 7,990 --
AmStar Cinema 16 Macon, GA 2,125 1,982 5,056 --
Star Southfield Center Southfield, MI 8,157 8,000 20,518 767
---------------- ------- ----------- -------------
Subtotals carried over to page 60 $ 423,059 163,881 583,743 20,681
================ ======= =========== =============
GROSS AMOUNT AT DECEMBER 31, 2005
---------------------------------
BUILDINGS,
EQUIPMENT & ACCUMULATED DATE DEPRECIATION
DESCRIPTION MARKET LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE
- ---------------------- ------------------ ------ ------------ ------ ------------ -------- ------------
Grand 24 Dallas, TX 3,060 15,281 18,341 2,865 11/97 40 years
Mission Valley 20 San Diego, CA -- 16,028 16,028 3,005 11/97 40 years
Promenade 16 Los Angeles, CA 6,021 22,104 28,125 4,145 11/97 40 years
Ontario Mills 30 Los Angeles, CA 5,521 19,450 24,971 3,647 11/97 40 years
Lennox 24 Columbus, OH -- 12,685 12,685 2,379 11/97 40 years
West Olive 16 St. Louis, MO 4,985 12,602 17,587 2,363 11/97 40 years
Studio 30 Houston, TX 6,023 20,037 26,060 3,757 11/97 40 years
Huebner Oaks 24 San Antonio, TX 3,006 13,662 16,668 2,562 11/97 40 years
First Colony 24 Houston, TX -- 19,167 19,167 3,867 11/97 40 years
Oakview 24 Omaha, NE 5,215 16,759 21,974 3,382 11/97 40 years
Leawood 20 Kansas City, MO 3,714 12,129 15,843 2,447 11/97 40 years
Gulf Pointe 30 Houston, TX 4,304 21,572 25,876 4,263 2/98 40 years
South Barrington 30 Chicago, IL 6,577 27,821 34,398 5,440 3/98 40 years
Mesquite 30 Dallas, TX 2,912 20,360 23,272 3,897 4/98 40 years
Hampton Town Center 24 Norfolk, VA 3,822 24,766 28,588 4,628 6/98 40 years
Pompano 18 Pompano Beach, FL 6,376 12,324 18,700 2,268 8/98 40 years
Raleigh Grand 16 Raleigh, NC 2,919 5,559 8,478 1,062 8/98 40 years
Paradise 24 Miami, FL 2,000 21,512 23,512 3,667 11/98 40 years
Pompano Kmart Pompano Beach, FL 600 2,430 3,030 425 11/98 40 years
Pompano Restaurant Pompano Beach, FL 200 1,233 1,433 244 11/98 40 years
Aliso Viejo 20 Los Angeles, CA 8,000 14,000 22,000 2,450 12/98 40 years
Bosie Stadium 20 Boise, ID -- 16,003 16,003 2,800 12/98 40 years
Woodridge 18 Chicago, IL 9,926 8,968 18,894 1,452 6/99 40 years
Cary Crossroads 20 Cary, NC 3,352 11,808 15,160 1,748 6/99 40 years
Tampa Palms 20 Tampa, FL 6,000 12,809 18,809 1,948 6/99 40 years
Palm Promenade San Diego, CA 7,500 17,750 25,250 2,626 6/99 40 years
On The Border Dallas, TX 879 -- 879 -- 11/97 n/a
Bennigans Dallas, TX 565 1,000 1,565 281 11/97 20 years
Bennigans Houston, TX 652 750 1,402 211 11/97 20 years
Texas Land & Cattle Dallas, TX 1,519 -- 1,519 -- 11/97 n/a
Texas Roadhouse Grill Atlanta, GA 886 -- 886 -- 3/99 n/a
Roadhouse Grill Atlanta, GA 868 -- 868 -- 3/99 n/a
Westminster 24 Denver, CO 5,850 17,314 23,164 1,768 12/01 40 years
Westminster Center Denver, CO 6,204 15,339 21,543 1,491 12/01 40 years
Westbank Palace 10 Westbank, LA 4,378 12,330 16,708 1,169 3/2 40 years
Houma Palace 10 Houma, LA 2,404 6,780 9,184 642 3/2 40 years
Hammond Palace 10 Hammond, LA 2,404 6,780 9,184 642 3/2 40 years
Elmwood Palace 10 Elmwood, LA 5,264 14,820 20,084 1,405 3/2 40 years
Clearview Palace 12 Clearview, LA -- 11,740 11,740 1,113 3/2 40 years
Sterling Forum 30 Sterling Heights, MI 5,975 21,356 27,331 2,160 6/2 40 years
Olathe Studio 30 Olathe, KS 4,000 15,935 19,935 1,394 6/2 40 years
Cherrydale 16 Greenville, SC 1,660 7,570 9,230 560 6/2 40 years
Livonia Livonia, MI 4,500 17,525 22,025 1,497 8/2 40 years
Hoffman 22 Alexandria, VA -- 22,035 22,035 1,790 10/2 40 years
Little Rock Rave Little Rock, AR 3,858 7,990 11,848 608 12/2 40 years
AmStar Cinema 16 Macon, GA 1,982 5,056 7,038 343 3/3 40 years
Star Southfield Center Southfield, MI 8,000 21,285 29,285 1,920 5/3 40 years
------- --------- ------ ---------
Subtotals carried over to page 60 163,881 604,424 768,305 92,331
======= ========= ======= =========
59
ENTERTAINMENT PROPERTIES TRUST
Continued Schedule III - Real Estate and Accumulated Depreciation
December 31, 2005
INITIAL COST
------------------------
BUILDINGS, ADDITIONS (SALES)
EQUIPMENT & SUBSEQUENT TO
DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION
- ------------------------ ----------------- --------------- ------- ------------ -----------------
Subtotal from page 59 n/a $ 423,059 163,881 583,743 20,681
Southwind 12 Lawrence, KS 1,518 1,500 3,526 --
New Roc City New Rochelle, NY 68,608 6,100 97,601 90
Harbour View Station Suffolk, VA 3,253 3,256 9,205 --
Columbiana Grande 14 Columbiana, SC 2,727 1,000 10,534 (2,446)
The Grande 18 Hialeah, FL 2,411 7,985 -- --
Johnny Carino's Mesquite, TX -- 789 990 --
Kanata Centrum Toronto, Ontario 36,549 10,834 39,513 12,127
Oakville Centrum Toronto, Ontario 21,526 10,834 25,530 368
Mississauga Centrum Toronto, Ontario 21,935 9,974 18,994 8,237
Whitby Centrum Toronto, Ontario 25,701 11,006 23,709 9,218
Deer Valley 30 Phoenix, AZ 16,075 4,276 15,934 --
Mesa Grand 24 Phoenix, AZ 6,101 4,446 16,565 --
Hamilton 24 Hamilton, NJ 17,973 4,869 18,142 --
Grand Prairie 18 Peoria, IL 4,264 2,948 11,177 --
Lafayette Grand 16 Lafayette, LA 3,115 1,935 8,383 --
Northeast Mall 18 Hurst, TX 5,357 5,000 11,729 1,015
The Grand D'Iberville 14 Biloxi, MS 3,032 2,001 8,043 --
Melbourne 16 Melbourne, FL 3,915 3,817 8,830 320
Stir Crazy Chicago, IL -- 1,983 900 --
Vland Multi-tenant Retail Chicago, IL -- 1,936 -- 114
RMP Chatanooga 18 Chatanooga, TN 4,307 2,798 11,466 --
Mayfaire Cinema 16 Plex Wilmington, NC 2,626 1,650 7,047 --
Conroe Grande Theatre Conroe, TX -- 1,841 8,230 --
Splitz Westminster, CO -- -- 2,213 270
Etouffee Southfield, MI -- -- 1,200 --
Garner Land Garner, NC -- 1,305 -- --
Winston-Salem Land Winston-Salem, NC -- 3,616 -- --
Huntsville Land Huntsville, AL -- 3,508 -- --
Manchester Stadium 16 Fresno, CA -- -- 11,613 --
Modesto Stadium 10 Modesto, CA -- 2,542 3,910 --
Sizzler Arroyo Grande, CA -- 444 534 --
Arroyo Grande Stadium 10 Arroyo Grande, CA -- 2,641 3,810 --
Auburn Stadium 10 Auburn, CA -- 2,179 6,185 --
Kalamazoo Land Kalamazoo, MI -- 5,125 -- --
Pensacola Land Pensacola, FL -- 5,316 -- --
Mad River Mountain Bellefontaine, OH -- 5,108 5,994 --
Washington Square Indianapolis, IN 1,826 1,481 4,565 --
Savannah Land Savannah, GA -- 2,783 -- --
Burbank Village Burbank, CA 35,780 16,584 35,016 --
Asahi Houston, TX -- 1,482 1,365 --
Hattiesburg Theatre Hattiesburg, MS 2,933 1,978 7,733 --
Property Under Development Various -- 19,770 -- --
--------------- ------- ------------ --------------
Total $ 714,591 342,521 1,023,929 49,994
=============== ======= ============ ==============
GROSS AMOUNT AT DECEMBER 31, 2005
---------------------------------
BUILDINGS,
EQUIPMENT & ACCUMULATED DATE DEPRECIATION
DESCRIPTION MARKET LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE
- ---------------------- ----------------- -------- ------------ -------- ------------ -------- -------------
Subtotal from page 59 n/a 163,881 604,424 768,305 92,331 n/a n/a
Southwind 12 Lawrence, KS 1,500 3,526 5,026 228 6/3 40 years
New Roc City New Rochelle, NY 6,100 97,691 103,791 8,107 10/3 40 years
Harbour View Station Suffolk, VA 3,256 9,205 12,461 489 11/3 40 years
Columbiana Grande 14 Columbiana, SC 1,000 8,088 9,088 459 11/3 40 years
The Grande 18 Hialeah, FL 7,985 -- 7,985 -- 12/3 40 years
Johnny Carino's Mesquite, TX 789 990 1,779 70 3/3 40 years
Kanata Centrum Toronto, Ontario 10,834 51,640 62,474 2,116 3/4 40 years
Oakville Centrum Toronto, Ontario 10,834 25,898 36,732 1,182 3/4 40 years
Mississauga Centrum Toronto, Ontario 9,974 27,231 37,205 980 3/4 40 years
Whitby Centrum Toronto, Ontario 11,006 32,927 43,933 1,490 3/4 40 years
Deer Valley 30 Phoenix, AZ 4,276 15,934 20,210 697 3/4 40 years
Mesa Grand 24 Phoenix, AZ 4,446 16,565 21,011 725 3/4 40 years
Hamilton 24 Hamilton, NJ 4,869 18,142 23,011 794 3/4 40 years
Grand Prairie 18 Peoria, IL 2,948 11,177 14,125 396 7/4 40 years
Lafayette Grand 16 Lafayette, LA 1,935 8,383 10,318 396 7/4 40 years
Northeast Mall 18 Hurst, TX 5,000 12,744 17,744 339 11/4 40 years
The Grand D'Iberville 14 Biloxi, MS 2,001 8,043 10,044 209 12/4 40 years
Melbourne 16 Melbourne, FL 3,817 9,150 12,967 235 12/4 40 years
Stir Crazy Chicago, IL 1,983 900 2,883 75 10/4 15 years
Vland Multi-tenant Retail Chicago, IL 2,050 -- 2,050 -- 7/4 n/a
RMP Chatanooga 18 Chatanooga, TN 2,798 11,466 14,264 239 12/3 n/a
Mayfaire Cinema 16 Plex Wilmington, NC 1,650 7,047 8,697 147 6/4 n/a
Conroe Grande Theatre Conroe, TX 1,841 8,230 10,071 102 7/4 n/a
Splitz Westminster, CO -- 2,483 2,483 61 12/4 40 years
Etouffee Southfield, MI -- 1,200 1,200 7 38,934 various
Garner Land Garner, NC 1,305 -- 1,305 -- 38,781 n/a
Winston-Salem Land Winston-Salem, NC 3,616 -- 3,616 -- 38,873 n/a
Huntsville Land Huntsville, AL 3,508 -- 3,508 -- 38,873 n/a
Manchester Stadium 16 Fresno, CA -- 11,613 11,613 -- 39,056 40 years
Modesto Stadium 10 Modesto, CA 2,542 3,910 6,452 -- 39,056 40 years
Sizzler Arroyo Grande, CA 444 534 978 -- 39,056 40 years
Arroyo Grande Stadium 10 Arroyo Grande, CA 2,641 3,810 6,451 -- 39,056 40 years
Auburn Stadium 10 Auburn, CA 2,179 6,185 8,364 -- 39,056 40 years
Kalamazoo Land Kalamazoo, MI 5,125 -- 5,125 -- 39,026 n/a
Pensacola Land Pensacola, FL 5,316 -- 5,316 -- 38,842 n/a
Mad River Mountain Bellefontaine, OH 5,108 5,994 11,102 20 39,026 40 years
Washington Square Indianapolis, IN 1,481 4,565 6,046 57 38,873 40 years
Savannah Land Savannah, GA 2,783 -- 2,783 -- 38,842 n/a
Burbank Village Burbank, CA 16,584 35,016 51,600 657 38,781 40 years
Asahi Houston, TX 1,482 1,365 2,847 30 38,934 15 years
Hattiesburg Theatre Hattiesburg, MS 1,978 7,733 9,711 48 38,995 40 years
Property Under Development Various 19,770 -- 19,770 -- various n/a
-------- ----------- -------- -----------
Total 342,635 1,073,809 1,416,444 112,686
======== =========== ========= ===========
60
ENTERTAINMENT PROPERTIES TRUST
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2004
INITIAL COST GROSS AMOUNT AT DECEMBER 31, 2004
-------------------- ---------------------------------
BUILDINGS, ADDITIONS (SALES) BUILDINGS,
EQUIPMENT & SUBSEQUENT TO EQUIPMENT &
DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ---------------------- -------------------- ----------- ------- ------------ ----------------- ------ ------------ ---------
Grand 24 Dallas, TX $ 11,035 3,060 15,281 -- 3,060 15,281 18,341
Mission Valley 20 San Diego, CA 9,644 -- 16,028 -- -- 16,028 16,028
Promenade 16 Los Angeles, CA 16,923 6,021 22,104 -- 6,021 22,104 28,125
Ontario Mills 30 Los Angeles, CA 15,024 5,521 19,450 -- 5,521 19,450 24,971
Lennox 24 Columbus, OH 7,632 -- 12,685 -- -- 12,685 12,685
West Olive 16 St. Louis, MO 10,581 4,985 12,602 -- 4,985 12,602 17,587
Studio 30 Houston, TX 15,680 6,023 20,037 -- 6,023 20,037 26,060
Huebner Oaks 24 San Antonio, TX 10,029 3,006 13,662 -- 3,006 13,662 16,668
First Colony 24 Houston, TX 10,349 -- 19,100 67 -- 19,167 19,167
Oakview 24 Omaha, NE 12,725 5,215 16,700 59 5,215 16,759 21,974
Leawood 20 Kansas City, MO 8,554 3,714 12,086 43 3,714 12,129 15,843
Gulf Pointe 30 Houston, TX 13,972 4,304 21,496 76 4,304 21,572 25,876
South Barrington 30 Chicago, IL 18,573 6,577 27,723 98 6,577 27,821 34,398
Mesquite 30 Dallas, TX 12,566 2,912 20,288 72 2,912 20,360 23,272
Hampton Town Center 24 Norfolk, VA 15,437 3,822 24,678 88 3,822 24,766 28,588
Pompano 18 Pompano Beach, FL 7,475 6,376 9,899 2,426 6,376 12,325 18,701
Raleigh Grand 16 Raleigh, NC 3,901 2,919 5,559 -- 2,919 5,559 8,478
Paradise 24 Miami, FL 12,695 2,000 13,000 8,512 2,000 21,512 23,512
Pompano Kmart Pompano Beach, FL -- 600 2,430 -- 600 2,430 3,030
Pompano Restaurant Pompano Beach, FL -- 200 803 430 200 1,233 1,433
Aliso Viejo 20 Los Angeles, CA 11,879 8,000 14,000 -- 8,000 14,000 22,000
Bosie Stadium 20 Boise, ID 7,475 -- 16,003 -- -- 16,003 16,003
Woodridge 18 Chicago, IL 8,418 9,926 8,968 -- 9,926 8,968 18,894
Cary Crossroads 20 Cary, NC 9,011 3,352 11,653 155 3,352 11,808 15,160
Tampa Palms 20 Tampa, FL 10,671 6,000 12,809 -- 6,000 12,809 18,809
Palm Promenade San Diego, CA 14,168 7,500 17,750 -- 7,500 17,750 25,250
On The Border Dallas, TX -- 879 -- -- 879 -- 879
Bennigans Dallas, TX -- 565 -- 1,000 565 1,000 1,565
Bennigans Houston, TX -- 652 -- 750 652 750 1,402
Texas Land & Cattle Dallas, TX -- 1,519 -- -- 1,519 -- 1,519
Texas Roadhouse Grill Atlanta, GA -- 886 -- -- 886 -- 886
Roadhouse Grill Atlanta, GA -- 868 -- -- 868 -- 868
Westminster 24 Denver, CO 15,659 5,850 17,314 -- 5,850 17,314 23,164
Westminster Center Denver, CO 3,141 6,204 12,600 2,184 6,204 14,784 20,988
Subway Denver, CO -- -- 27 -- -- 27 27
Westbank Palace 10 Westbank, LA 9,485 4,378 12,330 -- 4,378 12,330 16,708
Houma Palace 10 Houma, LA 5,335 2,404 6,780 -- 2,404 6,780 9,184
Hammond Palace 10 Hammond, LA 5,187 2,404 6,780 -- 2,404 6,780 9,184
Elmwood Palace 10 Elmwood, LA 13,635 5,264 14,820 -- 5,264 14,820 20,084
Clearview Palace 12 Clearview, LA 7,115 -- 11,740 -- -- 11,740 11,740
Sterling Forum 30 Sterling Heights, MI 16,599 5,975 17,956 3,400 5,975 21,356 27,331
Olathe Studio 30 Olathe, KS 11,856 4,000 15,935 -- 4,000 15,935 19,935
Cherrydale 16 Greenville, SC 4,891 1,660 7,570 -- 1,660 7,570 9,230
Livonia Livonia, MI 13,576 4,500 17,525 -- 4,500 17,525 22,025
Hoffman 22 Alexandria, VA 13,635 -- 22,035 -- -- 22,035 22,035
Little Rock Rave Little Rock, AR 1,773 3,858 7,990 -- 3,858 7,990 11,848
----------- ------- ------- ------ ------- ------- -------
Subtotals carried over to page 62 $ 396,304 153,899 558,196 19,360 153,899 577,556 731,455
=========== ======= ======= ====== ======= ======= =======
ACCUMULATED DATE DEPRECIATION
DESCRIPTION MARKET DEPRECIATION ACQUIRED LIFE
- --------------------- -------------------- ------------ -------- ------------
Grand 24 Dallas, TX 2,483 11/97 40 years
Mission Valley 20 San Diego, CA 2,605 11/97 40 years
Promenade 16 Los Angeles, CA 3,592 11/97 40 years
Ontario Mills 30 Los Angeles, CA 3,161 11/97 40 years
Lennox 24 Columbus, OH 2,061 11/97 40 years
West Olive 16 St. Louis, MO 2,048 11/97 40 years
Studio 30 Houston, TX 3,256 11/97 40 years
Huebner Oaks 24 San Antonio, TX 2,220 11/97 40 years
First Colony 24 Houston, TX 3,388 11/97 40 years
Oakview 24 Omaha, NE 2,963 11/97 40 years
Leawood 20 Kansas City, MO 2,144 11/97 40 years
Gulf Pointe 30 Houston, TX 3,724 2/98 40 years
South Barrington 30 Chicago, IL 4,745 3/98 40 years
Mesquite 30 Dallas, TX 3,388 4/98 40 years
Hampton Town Center 24 Norfolk, VA 4,011 6/98 40 years
Pompano 18 Pompano Beach, FL 1,960 8/98 40 years
Raleigh Grand 16 Raleigh, NC 923 8/98 40 years
Paradise 24 Miami, FL 3,129 11/98 40 years
Pompano Kmart Pompano Beach, FL 364 11/98 40 years
Pompano Restaurant Pompano Beach, FL 181 11/98 40 years
Aliso Viejo 20 Los Angeles, CA 2,100 12/98 40 years
Bosie Stadium 20 Boise, ID 2,400 12/98 40 years
Woodridge 18 Chicago, IL 1,228 6/99 40 years
Cary Crossroads 20 Cary, NC 1,457 6/99 40 years
Tampa Palms 20 Tampa, FL 1,628 6/99 40 years
Palm Promenade San Diego, CA 2,182 6/99 40 years
On The Border Dallas, TX -- 11/97 n/a
Bennigans Dallas, TX 230 11/97 20 years
Bennigans Houston, TX 172 11/97 20 years
Texas Land & Cattle Dallas, TX -- 11/97 n/a
Texas Roadhouse Grill Atlanta, GA -- 3/99 n/a
Roadhouse Grill Atlanta, GA -- 3/99 n/a
Westminster 24 Denver, CO 1,335 12/01 40 years
Westminster Center Denver, CO 1,033 12/01 40 years
Subway Denver, CO 15 4/2 5 years
Westbank Palace 10 Westbank, LA 860 3/2 40 years
Houma Palace 10 Houma, LA 473 3/2 40 years
Hammond Palace 10 Hammond, LA 473 3/2 40 years
Elmwood Palace 10 Elmwood, LA 1,034 3/2 40 years
Clearview Palace 12 Clearview, LA 819 3/2 40 years
Sterling Forum 30 Sterling Heights, MI 1,510 6/2 40 years
Olathe Studio 30 Olathe, KS 996 6/2 40 years
Cherrydale 16 Greenville, SC 473 6/2 40 years
Livonia Livonia, MI 1,059 8/2 40 years
Hoffman 22 Alexandria, VA 1,239 10/2 40 years
Little Rock Rave Little Rock, AR 408 12/2 40 years
------
Subtotals carried over to page 62 75,470
======
61
ENTERTAINMENT PROPERTIES TRUST
Continued Schedule III - Real Estate and Accumulated Depreciation
December 31, 2004
INITIAL COST
-------------------
BUILDINGS, ADDITIONS (SALES)
EQUIPMENT & SUBSEQUENT TO
DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION
- -------------------------- ---------------- ----------- ------- ------------ -----------------
Subtotal from page 61 n/a $ 396,304 153,899 558,196 19,360
AmStar Cinema 16 Macon, GA 1,053 1,982 5,056 --
Star Southfield Center Southfield, MI 4,044 8,000 20,518 24
Southwind 12 Lawrence, KS 752 1,500 3,526 --
New Roc City New Rochelle, NY 69,463 6,100 97,601 90
Harbour View Station Suffolk, VA 1,613 3,256 9,206 --
Columbiana Grande 14 Columbiana, SC 1,352 1,000 10,534 (2,000)
The Grande 18 Hialeah, FL -- 7,985 -- --
Johnny Carino's Mesquite, TX -- 789 990 --
Rocky Mountain Choc. Westminster, CO -- -- 16 --
Kanata Centrum Toronto, Ontario 37,450 10,483 38,233 7,175
Oakville Centrum Toronto, Ontario 23,981 10,483 24,701 356
Mississauga Centrum Toronto, Ontario 18,913 9,651 18,377 --
Whitby Centrum Toronto, Ontario 24,695 10,648 22,940 5,267
Deer Valley 30 Phoenix, AZ 3,145 4,276 15,934 --
Mesa Grand 24 Phoenix, AZ 3,025 4,446 16,565 --
Hamilton 24 Hamilton, NJ 3,444 4,869 18,142 --
Grand Prairie 18 Peoria, IL 2,114 2,948 11,177 --
Lafayette Grand 16 Lafayette, LA 1,544 1,935 8,383 --
Northeast Mall 18 Hurst, TX -- 5,000 11,729 --
The Grand D'Iberville 14 Biloxi, MS -- 2,001 8,043 --
Melbourne 16 Melbourne, FL -- 3,817 8,830 --
Putting Edge Westminster, CO -- -- 482 --
Stir Crazy Chicago, IL -- 1,983 900 --
Vland Multi-tenant Retail Chicago, IL -- 1,936 -- --
Maximum Gamers Westminster, CO -- -- 34 --
Chatanooga Land Chatanooga, TN -- 2,798 -- --
Wilmington Land Wilmington, NC -- 1,650 -- --
Conroe Land Conroe, TX -- 1,841 -- --
Splitz Westminster, CO -- -- 2,213 --
Property Under Development Various -- 23,144 -- --
----------- ------- ------- ------
Total $ 592,892 288,420 912,326 30,272
=========== ======= ======= ======
GROSS AMOUNT AT DECEMBER 31, 2004
----------------------------------
BUILDINGS,
EQUIPMENT & ACCUMULATED DATE DEPRECIATION
DESCRIPTION MARKET LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE
- -------------------------- ---------------- ------- ------------- ---------- ------------ -------- -------------
Subtotal from page 61 n/a 153,899 577,556 731,455 75,470 n/a n/a
AmStar Cinema 16 Macon, GA 1,982 5,056 7,038 219 3/3 40 years
Star Southfield Center Southfield, MI 8,000 20,542 28,542 1,092 5/3 40 years
Southwind 12 Lawrence, KS 1,500 3,526 5,026 140 6/3 40 years
New Roc City New Rochelle, NY 6,100 97,691 103,791 5,659 10/3 40 years
Harbour View Station Suffolk, VA 3,256 9,206 12,462 259 11/3 40 years
Columbiana Grande 14 Columbiana, SC 1,000 8,534 9,534 697 11/3 40 years
The Grande 18 Hialeah, FL 7,985 -- 7,985 -- 12/3 40 years
Johnny Carino's Mesquite, TX 789 990 1,779 45 3/3 40 years
Rocky Mountain Choc. Westminster, CO -- 16 16 2 11/3 10 years
Kanata Centrum Toronto, Ontario 10,483 45,408 55,891 829 3/4 40 years
Oakville Centrum Toronto, Ontario 10,483 25,057 35,540 517 3/4 40 years
Mississauga Centrum Toronto, Ontario 9,651 18,377 28,028 383 3/4 40 years
Whitby Centrum Toronto, Ontario 10,648 28,207 38,855 540 3/4 40 years
Deer Valley 30 Phoenix, AZ 4,276 15,934 20,210 295 3/4 40 years
Mesa Grand 24 Phoenix, AZ 4,446 16,565 21,011 313 3/4 40 years
Hamilton 24 Hamilton, NJ 4,869 18,142 23,011 342 3/4 40 years
Grand Prairie 18 Peoria, IL 2,948 11,177 14,125 116 7/4 40 years
Lafayette Grand 16 Lafayette, LA 1,935 8,383 10,318 87 7/4 40 years
Northeast Mall 18 Hurst, TX 5,000 11,729 16,729 37 11/4 40 years
The Grand D'Iberville 14 Biloxi, MS 2,001 8,043 10,044 8 12/4 40 years
Melbourne 16 Melbourne, FL 3,817 8,830 12,647 9 12/4 40 years
Putting Edge Westminster, CO -- 482 482 8 7/4 10 years
Stir Crazy Chicago, IL 1,983 900 2,883 15 10/4 15 years
Vland Multi-tenant Retail Chicago, IL 1,936 -- 1,936 -- 7/4 n/a
Maximum Gamers Westminster, CO -- 34 34 -- 11/4 5 years
Chatanooga Land Chatanooga, TN 2,798 -- 2,798 -- 12/3 n/a
Wilmington Land Wilmington, NC 1,650 -- 1,650 -- 6/4 n/a
Conroe Land Conroe, TX 1,841 -- 1,841 -- 7/4 n/a
Splitz Westminster, CO -- 2,213 2,213 -- 12/4 40 years
Property Under Development Various 23,144 -- 23,144 -- various n/a
------- ------- --------- ------
Total 288,420 942,598 1,231,018 87,082
======= ======= ========= ======
62
ENTERTAINMENT PROPERTIES TRUST
Schedule III - Real Estate and Accumulated Depreciation (continued)
Reconciliation
December 31, 2005
Real Estate:
Reconciliation:
Balance at beginning of the year $ 1,231,018
Acquisition and development of rental properties during the year 186,346
Disposition of rental properties during the year (920)
-----------
Balance at close of year $ 1,416,444
===========
See accompanying report of independent registered public accounting firm.
ENTERTAINMENT PROPERTIES TRUST
Schedule III - Real Estate and Accumulated Depreciation (continued)
Reconciliation
December 31, 2004
Real Estate:
Reconciliation:
Balance at beginning of the year $ 965,056
Acquisition and development of rental properties during the year 295,793
Disposition of rental properties during the year (29,831)
-----------
Balance at close of year $ 1,231,018
===========
See accompanying report of independent registered public accounting firm.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We have established disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to the officers who certify our financial reports and to other
members of senior management and the Board of Trustees. A review and evaluation
was performed by our management, including the Company's Chief Executive Officer
(the "CEO") and Chief Financial Officer (the "CFO"), of the effectiveness of the
design and operation of our disclosure controls and procedures as of December
31, 2005. 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 significant deficiencies or material
weaknesses identified in the course of such review and evaluation and,
therefore, no corrective measures were taken by us.
CHANGE IN INTERNAL CONTROL
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.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our CEO and CFO, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the
framework in Internal Control - Integrated Framework, our management concluded
that our internal control over financial reporting was effective as of December
31, 2005. Our management's assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2005 has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their
report which is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees
Entertainment Properties Trust:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
Entertainment Properties Trust (the Company) maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
64
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and trustees of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Entertainment Properties Trust
maintained effective internal control over financial reporting as of December
31, 2005 is fairly stated, in all material respects, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Entertainment Properties Trust as of December 31, 2005 and 2004, and the related
consolidated statements of income, changes in shareholders' equity,
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2005, and the related financial statement schedules,
and our report dated February 24, 2006 expressed an unqualified opinion on those
consolidated financial statements and related financial statement schedules.
KPMG LLP
Kansas City, Missouri
February 24, 2006
65
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's definitive Proxy Statement for its Annual Meeting of Shareholders
to be held on May 10, 2006 (the "Proxy Statement"), contains under the captions
"Election of Trustees", "Officers", and "Section 16(a) Beneficial Ownership
Reporting Compliance" the information required by Item 10 of this Form 10-K,
which information is incorporated herein by this reference.
We have adopted a Code of Business Conduct and Ethics that applies to our Chief
Executive Officer, Chief Financial Officer, and all other officers, employees
and trustees. The Code may be viewed on our website at www.eprkc.com and is
available in print to any shareholder who requests it.
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement contains under the captions "Election of Trustees --
Compensation of Trustees", "Executive Compensation", "Compensation Committee",
and "Company Performance" the information required by Item 11 of this Form 10-K,
which information is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The Proxy Statement contains under the captions "Share Ownership" and "Equity
Compensation Plan Information" the information required by Item 12 of this Form
10-K, which information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement contains under the caption "Transactions Between the Company
and Trustees, Officers or their Affiliates" the information required by Item 13
of this Form 10-K, which information is incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Proxy Statement contains under the caption "Ratification of Appointment of
Independent Auditors" the information required by Item 14 of this Form 10-K,
which information is incorporated herein by this reference.
66
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Income for the years ended December 31, 2005,
2004 and 2003
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2005, 2004 and 2003
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended December 31,
2005, 2004, and 2003.
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Schedule III - Real Estate and Accumulated Depreciation
(3) Exhibits
21 Subsidiaries of the Company
23 Consent of KPMG LLP
31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
32 Certifications furnished pursuant to Section 906 of the
Sarbanes-Oxley Act.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 24, 2006 By /s/ David M. Brain
--------------------------------------
David M. Brain, President -
Chief Executive Officer
Dated: February 24, 2006 By /s/ Fred L. Kennon
--------------------------------------
Fred L. Kennon, Vice President -
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
SIGNATURE AND TITLE DATE
- --------------------------------------- -----------------
/s/ Robert J. Druten February 24, 2006
- ----------------------------------------------------
Robert J. Druten, Chairman of the Board
/s/ David M. Brain February 24, 2006
- ----------------------------------------------------
David M. Brain, Chief Executive Officer and Trustee
/s/ Morgan G. Earnest, II February 24, 2006
- ----------------------------------------------------
Morgan G. Earnest, II, Trustee
/s/ James A. Olson February 24, 2006
- ----------------------------------------------------
James A. Olson, Trustee
/s/ Barrett Brady February 24, 2006
- ----------------------------------------------------
Barrett Brady, Trustee
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List of Exhibits
The Company has incorporated by reference certain exhibits as specified
below pursuant to Rule 12b-32 under the Exchange Act.
3.1 Amended and Restated Declaration of Trust of the Company, which is
attached as Exhibit 3.2 to the Company's Form 8-K (Commission File No.
1-13561) filed on June 7, 1999, is hereby incorporated by reference as
Exhibit 3.1
3.2 Amendment to Declaration of Trust of the Company, which is attached as
Exhibit 3.1 to the Company's Form 8-K (Commission File No. 1-13561) filed
on January 11, 2005, is hereby incorporated by reference as Exhibit 3.2
3.3 Bylaws of the Company, which are attached as Exhibit 3.3 to the Company's
Form 8-K (Commission File No. 1-13561) filed on June 7, 1999, are hereby
incorporated by reference as Exhibit 3.3
4.1 See Exhibits 3.1 and 3.2
4.2 See Exhibit 3.3
4.3 Form of share certificate for common shares of beneficial interest of the
Company, which is attached as Exhibit 4.5 to the Company's Registration
Statement on Form S-11, as amended, (Registration No. 333-35281), is
hereby incorporated by reference as Exhibit 4.3
4.4 Form of Articles Supplementary for 9.50% Series A Cumulative Redeemable
Preferred Shares, which is attached as Exhibit 4.4 to the Company's Form
8-A12B (Commission File No. 1-13561) filed on May 24, 2002, is hereby
incorporated by reference as Exhibit 4.4
4.5 Form of 9.50% Series A Preferred Share Certificate, which is attached as
Exhibit 4.5 to the Company's Form 8-A12B (Commission File No. 1-13561)
filed on May 24, 2002, is hereby incorporated by reference as Exhibit 4.5
4.6 Form of Articles Supplementary for 7.75% Series B Cumulative Redeemable
Preferred Shares, which is attached as Exhibit 4.6 to the Company's Form
8-A12BA (Commission File No. 1-13561) filed on January 14, 2005, and to
the Company's Form 8-K filed on January 14, 2005, is hereby incorporated
by reference as Exhibit 4.6
4.7 Form of 7.75% Series B Cumulative Redeemable Preferred Share Certificate,
which is attached as Exhibit 4.7 to the Company's Form 8-A12B (Commission
File No. 1-13561) filed on January 12, 2005, is hereby incorporated by
reference as Exhibit 4.7
69
4.8 Form of Registration Rights Agreement among Entertainment Properties
Trust, Whitby Centrum Limited Partnership, Oakville Centrum Limited
Partnership, Kanata Centrum Limited Partnership, Courtney Square Limited
Partnership and 2041197 Ontario Ltd., dated February 24, 2004, which is
attached as Exhibit 10.10 to the Company's Form 8-K/A (Commission File No.
1-13561) filed on March 16, 2004, is hereby incorporated by reference as
Exhibit 4.8
4.9 Form of Registration Rights Agreement dated March 15, 2002 between EPR and
the selling shareholders named therein, which is attached as Exhibit 4.7
to the Company's registration statement on Form S-3 (Commission File No.
333-119160) filed on September 21, 2004, is hereby incorporated by
reference as Exhibit 4.9
4.10 Form of Agreement Regarding Ownership Limit Waiver between the Company and
Cohen & Steers Capital Management, Inc., which is attached as Exhibit 4.7
to the Company's Form 8-K (Commission File No. 1-13561) filed on January
19, 2005, is hereby incorporated by reference as Exhibit 4.10
10.1 Form of Mississauga Entertainment Centrum Agreement dated November 14,
2003 among Courtney Square Ltd., EPR North Trust and Entertainment
Properties Trust, which is attached as Exhibit 10.1 to the Company's Form
8-K (Commission File No. 1-13561) filed March 15, 2004, is hereby
incorporated by reference as Exhibit 10.1
10.2 Form of Oakville Entertainment Centrum Agreement dated November 14, 2003
among Penex Winston Ltd., EPR North Trust and Entertainment Properties
Trust, which is attached as Exhibit 10.2 to the Company's Form 8-K
(Commission File No. 1-13561) filed March 15, 2004, is hereby incorporated
by reference as Exhibit 10.2
10.3 Form of Whitby Entertainment Centrum Agreement dated November 14, 2003
among Penex Whitby Ltd., EPR North Trust and Entertainment Properties
Trust, which is attached as Exhibit 10.3 to the Company's Form 8-K
(Commission File No. 1-13561) filed March 15, 2004, is hereby incorporated
by reference as Exhibit 10.3
10.4 Form of Kanata Entertainment Centrum Agreement dated November 14, 2003
among Penex Kanata Ltd., Penex Main Ltd., EPR North Trust and
Entertainment Properties Trust, which is attached as Exhibit 10.4 to the
Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004, is
hereby incorporated by reference as Exhibit 10.4
10.5 Form of Amending Agreements among Courtney Square Ltd., EPR North Trust
and Entertainment Properties Trust, which are attached as Exhibit 10.5 to
the Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004,
are hereby incorporated by reference as Exhibit 10.5
70
10.6 Form of Amending Agreements among Penex Winston Ltd., EPR North Trust and
Entertainment Properties Trust, which are attached as Exhibit 10.6 to the
Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004, are
hereby incorporated by reference as Exhibit 10.6
10.7 Form of Amending Agreements among Penex Whitby Ltd., EPR North Trust and
Entertainment Properties Trust, which are attached as Exhibit 10.7 to the
Company's Form 8-K (Commission File No. 1-13561) filed March 15, 2004, are
hereby incorporated by reference as Exhibit 10.7
10.8 Form of Amending Agreements among Penex Kanata Ltd., Penex Main Ltd., EPR
North Trust and Entertainment Properties Trust, which are attached as
Exhibit 10.8 to the Company's Form 8-K (Commission File No. 1-13561) filed
March 15, 2004, are hereby incorporated by reference as Exhibit 10.8
10.9 Form of Note Purchase Agreement dated February 24, 2004 among
Entertainment Properties Trust and Courtney Square Limited Partnership,
Whitby Centrum Limited Partnership, Oakville Centrum Limited Partnership
and Kanata Centrum Limited Partnership, which is attached as Exhibit 10.9
to the Company's Form 8-K (Commission File No. 1-13561) filed March 15,
2004, is hereby incorporated by reference as Exhibit 10.9
10.10 Form of Registration Rights Agreement among Entertainment Properties
Trust, Whitby Centrum Limited Partnership, Oakville Centrum Limited
Partnership, Kanata Centrum Limited Partnership, Courtney Square Limited
Partnership and 2041197 Ontario Ltd., dated February 24, 2004 (see Exhibit
4.8)
10.11 Form of Agreement of Sale and Purchase between the Company and American
Multi-Cinema, Inc., which is attached as Exhibit 10.1 to Amendment No. 3,
filed on November 13, 1997, to the Company's Registration Statement on
Form S-11 (Registration No. 333-35281), is hereby incorporated by
reference as Exhibit 10.11
10.12 Form of Option Agreement between the Company and American Multi-Cinema,
Inc., which is attached as Exhibit 10.2 to Amendment No. 3, filed on
November 13, 1997, to the Company's Registration Statement on Form S-11
(Registration No. 333-35281), is hereby incorporated by reference as
Exhibit 10.12
10.13 Form of Option Agreement between the Company and Clip Funding, Limited
Partnership, which is attached as Exhibit 10.3 to Amendment No. 3, filed
on November 13, 1997, to the Company's Registration Statement on Form S-11
(Registration No. 333-35281), is hereby incorporated by reference as
Exhibit 10.13
71
10.14 Form of AMCE Right to Purchase Agreement between the Company and AMC
Entertainment Inc., which is attached as Exhibit 10.4 to Amendment No. 3,
filed on November 13, 1997, to the Company's Registration Statement on
Form S-11 (Registration No. 333-35281), is hereby incorporated by
reference as Exhibit 10.14
10.15 Form of Lease entered into between the Company and American Multi-Cinema,
Inc., which is attached as Exhibit 10.5 to Amendment No. 3, filed on
November 13, 1997, to the Company's Registration Statement on Form S-11
(Registration No. 333-35281), is hereby incorporated by reference as
Exhibit 10.15
10.16 Form of Guaranty of Lease entered into between the Company and AMC
Entertainment, Inc. which is attached as Exhibit 10.6 to Amendment No. 3,
filed on November 13, 1997, to the Company's Registration Statement on
Form S-11 (Registration No. 333-35281), is hereby incorporated by
reference as Exhibit 10.16
10.17 Amended and Restated Master Credit Agreement, dated March 29, 2004, among
the Company, 30 West Pershing, LLC and Fleet National Bank, which is
attached as Exhibit 10.1 to the Company's Form 8-K (Commission File No.
1-13561) filed on April 5, 2004, is hereby incorporated by reference as
Exhibit 10.17
10.18 Form of Indemnification Agreement entered into between the Company and
each of its trustees and officers, which is attached as Exhibit 10.8 to
Amendment No. 1, filed October 28, 1997, to the Company's Registration
Statement on Form S-11 (Registration No. 333-35281), is hereby
incorporated by reference as Exhibit 10.18
10.19 1997 Share Incentive Plan, which is attached as Exhibit 10.9 to Amendment
No. 2, filed November 5, 1997, to the Company's Registration Statement on
Form S-11 (Registration No. 333-35281), is hereby incorporated by
reference as Exhibit 10.19
10.20 Deferred Compensation Plan for Non-Employee Trustees, which is attached as
Exhibit 10.10 to Amendment No. 2, filed November 5, 1997, to the Company's
Registration Statement on Form S-11 (Registration No. 333-35281), is
hereby incorporated by reference as Exhibit 10.20
10.21 Annual Incentive Program, which is attached as Exhibit 10.11 to Amendment
No. 2, filed November 5, 1997, to the Company's Registration Statement on
Form S-11 (Registration No. 333-35281), is hereby incorporated by
reference as Exhibit 10.21
10.22 Employment Agreement with David M. Brain, which is attached as Exhibit
10.12 to Amendment No. 1, filed May 20, 2002, to the Company's
Registration 10.12 to Amendment No. 1, filed May 20, 2002, to the
Company's Registration Statement on Form S-3 (Registration No.
333-87242), is hereby incorporated by reference as Exhibit 10.22
72
10.23 Employment Agreement with Fred L. Kennon, which is attached as Exhibit
10.24 to the Company's Form 10-K/A for the year ended December 31, 2003
(Commission File No. 1-13561), is hereby incorporated by reference as
Exhibit 10.23
10.24 Employment Agreement with Gregory K. Silvers, which is attached as Exhibit
10.25 to the Company's Form 10-K/A for the year ended December 31, 2003
(Commission File No. 1-13561), is hereby incorporated by reference as
Exhibit 10.24
10.25 Form of Loan Agreement, dated as of June 29, 1998, between EPT DownREIT
II, Inc., as Borrower, and Archon Financial, L.P., as Lender, which is
attached as Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 (Commission File No. 1-13561), is
hereby incorporated by reference as Exhibit 10.25
10.26 Form of Mortgage and Security Agreement, Deed of Trust and Security
Agreement and Loan Agreement for secured loans aggregating $20.2 million
to 3 Theatres, Inc., a wholly-owned subsidiary of EPT DownREIT, Inc.,
which is attached as Exhibit 10.16 to the Company's Form 10-Q for the
quarter ended March 31, 2000 (Commission File No. 1-13561), is hereby
incorporated by reference as Exhibit 10.26
10.27 Form of Loan Agreement, dated February 14, 2001, between Megaplex Nine,
Inc. and Bear Stearns Funding, Inc., which is attached as Exhibit 10.19 to
the Company's Form 10-K for the year ended December 31, 2000 (Commission
File No. 1-13561), is hereby incorporated by reference as Exhibit 10.27
10.28 Form of Limited Partnership Interest Purchase Agreement, dated October 27,
2003, among EPT New Roc GP, Inc., EPT New Roc, LLC, LRC Industries, Inc.,
DKH - New Roc Associates, L.P., LC New Roc Inc. and New Roc Associates,
L.P., which is attached as Exhibit 10.1 to the Company's Form 8-K dated
October 27, 2003 and filed November 12, 2003 (Commission File No.
1-13561), is hereby incorporated by reference as Exhibit 10.28
10.29 Form of Second Amended and Restated Agreement of Limited Partnership of
New Roc Associates, L.P., which is attached as Exhibit 10.2 to the
Company's Form 8-K filed November 12, 2003 (Commission File No. 1-13561),
is hereby incorporated by reference as Exhibit 10.29
10.30 Form of Loan Agreement, dated February 27, 2003, among Flik, Inc., as
Borrower, EPT DownREIT, Inc., as Indemnitor, and Secore Financial
Corporation, as Lender, which is attached as Exhibit
10.21 to the Company's Form 8-K filed March 4, 2003 (Commission File No.
1-13561), is hereby incorporated by reference as Exhibit 10.30
73
10.31 First Amended and Restated 1997 Share Incentive Plan included as Appendix
D to the Company's definitive proxy statement filed April 8, 2004
(Commission File No. 1-13561), is hereby incorporated by reference as
Exhibit 10.31
21 The list of the Company's Subsidiaries is attached hereto as Exhibit 21
23 Consent of KPMG LLP is attached hereto as Exhibit 23
31.1 Certification of David M. Brain, Chief Executive Officer of the Company,
is attached hereto as Exhibit 31.1
31.2 Certification of Fred L. Kennon, Chief Financial Officer of the Company,
is attached hereto as Exhibit 31.2
32 Certifications furnished pursuant to 18 U.S.C. Section 1350 of David M.
Brain, Chief Executive Officer of the Company, and Fred L. Kennon, Chief
Financial Officer of the Company, are attached hereto as Exhibit 32
10.32 Employment Agreement with Mark A. Peterson, which is attached as Exhibit
10.32 to the Company's Form 8-K (Commission File No. 001-13561) filed
September 22, 2005, is hereby incorporated by reference as Exhibit 10.32.
1.2 Underwriting Agreement with RBC Capital Markets Corporation dated February
3, 2006, which is attached as Exhibit 1.2 to the Company's Form 8-K
(Commission File No. 001-13561) filed February 3, 2006, is hereby
incorporated by reference as Exhibit 1.2.
5.1 Sonnenschein, Nath & Rosenthal Opinion regarding the legality of the
public offering of 1,150,000 common shares dated February 3, 2006, which
is attached as Exhibit 5.1 to the Company's Form 8-K (Commission File No.
001-13561) filed February 3, 2006 is hereby incorporated by reference as
Exhibit 5.1.
8.1 Sonnenschein, Nath & Rosenthal Opinion regarding the tax matters
associated with the public offering of 1,150,000 common shares dated
February 3, 2006, which is attached as Exhibit 8.1 to the Company's Form
8-K (Commission File No. 001-13561) filed February 3, 2006 is hereby
incorporated by reference as Exhibit 8.1.
74