e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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 West Pershing Road, Suite 201 |
|
64108 |
Kansas City, Missouri
|
|
(Zip Code) |
(Address of principal executive offices)
|
|
|
(816) 472-1700
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
(Do not check if a smaller reporting company)
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
At November 4, 2009, there were 36,515,731 common shares of beneficial interest outstanding.
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
With the exception of historical information, certain statements contained or incorporated by
reference herein constitute forward-looking statements as such term is defined in Section 27A of
the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). The forward-looking statements may refer to
our financial condition, results of operations, plans, objectives, acquisition or disposition of
properties, future expenditures for development projects, capital resources, future financial
performance and business. Forward-looking statements are not guarantees of performance. They
involve numerous risks, uncertainties and assumptions. Our future results, financial condition and
business may differ materially from those expressed in these forward-looking statements. You can
find many of these statements by looking for words such as will be, continue, hope, goal,
forecast, approximates, believes, expects, anticipates, estimates, intends, plans
would, may or other similar expressions in this Quarterly Report on Form 10-Q. In addition,
references to our budgeted amounts are forward looking statements. Factors that could materially
and adversely affect us include, but are not limited to, the factors listed below:
|
|
|
General international, national, regional and local business and economic conditions; |
|
|
|
Current levels of market volatility are unprecedented; |
|
|
|
Failure of current governmental efforts to stimulate the economy; |
|
|
|
The downturn in the credit markets; |
|
|
|
The failure of a bank to fund a request by us to borrow money; |
|
|
|
Failure of banks in which we have deposited funds; |
|
|
|
Defaults in the performance of lease terms by our tenants; |
|
|
|
Defaults by our customers and counterparties on their obligations owed to us; |
|
|
|
A mortgagors bankruptcy or default; |
|
|
|
A significant loan commitment for a development project that may not be completed; |
|
|
|
The obsolescence of older multiplex theaters owned by some of our tenants; |
|
|
|
Risks of operating in the entertainment industry; |
|
|
|
Our ability to compete effectively; |
|
|
|
The majority of our megaplex theater properties are leased by a single tenant; |
|
|
|
A single tenant leases or is the mortgagor of all our ski area investments; |
|
|
|
A single tenant leases all of our charter schools; |
|
|
|
Risks associated with use of leverage to acquire properties; |
|
|
|
Financing arrangements that require lump-sum payments; |
|
|
|
Our ability to sustain the rate of growth we have had in recent years; |
|
|
|
Our ability to raise capital; |
2
|
|
|
Covenants in our debt instruments that limit our ability to take certain actions; |
|
|
|
Risks of acquiring and developing properties and real estate companies; |
|
|
|
The lack of diversification of our investment portfolio; |
|
|
|
Our continued qualification as a REIT; |
|
|
|
The ability of our subsidiaries to satisfy their obligations; |
|
|
|
Financing arrangements that expose us to funding or purchase risks; |
|
|
|
We have a limited number of employees and the loss of personnel could harm operations; |
|
|
|
Fluctuations in the value of real estate income and investments; |
|
|
|
Risks relating to real estate ownership, leasing and development, for example local
conditions such as an oversupply of space or a reduction in demand for real estate in the
area, competition from other available space, whether tenants and users such as customers
of our tenants consider a property attractive, changes in real estate taxes and other
expenses, changes in market rental rates, the timing and costs associated with property
improvements and rentals, changes in taxation or zoning laws or other governmental
regulation, whether we are able to pass some or all of any increased operating costs
through to tenants, and how well we manage our properties; |
|
|
|
Our ability to secure adequate insurance and risk of potential uninsured losses,
including from natural disasters; |
|
|
|
Risks involved in joint ventures; |
|
|
|
Risks in leasing multi-tenant properties; |
|
|
|
A failure to comply with the Americans with Disabilities Act or other laws; |
|
|
|
Risks of environmental liability; |
|
|
|
Our real estate investments are relatively illiquid; |
|
|
|
We own assets in foreign countries; |
|
|
|
Risks associated with owning or financing properties for which the tenants or
mortgagors operations may be impacted by weather conditions; |
|
|
|
Risks associated with the ownership of vineyards; |
|
|
|
Our ability to pay dividends in cash or at current rates; |
|
|
|
Fluctuations in interest rates; |
|
|
|
Fluctuations in the market prices for our shares; |
|
|
|
Certain limits on change in control imposed under law and by our Declaration of Trust
and Bylaws; |
|
|
|
Policy changes obtained without the approval of our shareholders; |
|
|
|
Equity issuances could dilute the value of our shares; |
3
|
|
|
Risks associated with changes in the Canadian exchange rate; and |
|
|
|
Changes in laws and regulations, including tax laws and regulations |
These forward-looking statements represent our intentions, plans, expectations and beliefs and are
subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine
these items are beyond our ability to control or predict. For further discussion of these factors
see Item 1A. Risk Factors in the Annual Report on Form 10-K for the year ended December 31, 2008
filed with the SEC on February 24, 2009 and to the extent applicable, our Quarterly Reports on Form
10-Q.
For these statements, we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place
undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly
Report on Form 10-Q or the date of any document incorporated by reference herein. All subsequent
written and oral forward-looking statements attributable to us or any person acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained or referred to in
this section. We do not undertake any obligation to release publicly any revisions to our
forward-looking statements to reflect events or circumstances after the date of this Quarterly
Report on Form 10-Q.
4
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ENTERTAINMENT PROPERTIES TRUST
Consolidated Balance Sheets
(Dollars in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
(Unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Rental properties, net of accumulated depreciation of $247,425 and
$214,078 at September 30, 2009 and December 31, 2008,
respectively |
|
$ |
1,726,136 |
|
|
$ |
1,735,026 |
|
Property under development |
|
|
20,575 |
|
|
|
30,835 |
|
Mortgage notes and related accrued interest receivable, net |
|
|
518,069 |
|
|
|
508,506 |
|
Investment in a direct financing lease, net |
|
|
168,884 |
|
|
|
166,089 |
|
Investment in joint ventures |
|
|
2,435 |
|
|
|
2,493 |
|
Cash and cash equivalents |
|
|
11,196 |
|
|
|
50,082 |
|
Restricted cash |
|
|
15,902 |
|
|
|
11,004 |
|
Intangible assets, net |
|
|
6,908 |
|
|
|
12,400 |
|
Deferred financing costs, net |
|
|
13,159 |
|
|
|
10,741 |
|
Accounts receivable, net |
|
|
31,714 |
|
|
|
33,405 |
|
Notes and related accrued interest receivable, net |
|
|
12,395 |
|
|
|
40,338 |
|
Other assets |
|
|
26,164 |
|
|
|
33,006 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,553,537 |
|
|
$ |
2,633,925 |
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
28,608 |
|
|
$ |
35,665 |
|
Common dividends payable |
|
|
23,748 |
|
|
|
27,377 |
|
Preferred dividends payable |
|
|
7,552 |
|
|
|
7,552 |
|
Unearned rents and interest |
|
|
12,277 |
|
|
|
8,312 |
|
Long-term debt |
|
|
1,184,139 |
|
|
|
1,262,368 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,256,324 |
|
|
|
1,341,274 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common Shares, $.01 par value; 50,000,000 shares authorized;
and 37,419,399 and 33,734,181 shares issued at September 30,
2009 and December 31, 2008, respectively |
|
|
374 |
|
|
|
337 |
|
Preferred Shares, $.01 par value; 25,000,000 shares authorized;
3,200,000 Series B shares issued at September 30, 2009 and
December 31, 2008; liquidation preference of $80,000,000 |
|
|
32 |
|
|
|
32 |
|
5,400,000 Series C convertible shares issued at September 30,
2009
and December 31, 2008; liquidation preference of $135,000,000 |
|
|
54 |
|
|
|
54 |
|
4,600,000 Series D shares issued at September 30, 2009 and
December 31, 2008; liquidation preference of $115,000,000 |
|
|
46 |
|
|
|
46 |
|
3,450,000 Series E convertible shares issued at September 30,
2009
and December 31, 2008; liquidation preference of $86,250,000 |
|
|
35 |
|
|
|
35 |
|
Additional paid-in-capital |
|
|
1,440,063 |
|
|
|
1,339,798 |
|
Treasury shares at cost: 904,824 and 860,084 common shares at
September 30, 2009 and December 31, 2008, respectively |
|
|
(27,698 |
) |
|
|
(26,357 |
) |
Loans to shareholders |
|
|
(1,925 |
) |
|
|
(1,925 |
) |
Accumulated other comprehensive income (loss) |
|
|
16,985 |
|
|
|
(6,169 |
) |
Distributions in excess of net income |
|
|
(126,760 |
) |
|
|
(28,417 |
) |
|
|
|
|
|
|
|
Entertainment Properties Trust shareholders equity |
|
|
1,301,206 |
|
|
|
1,277,434 |
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
(3,993 |
) |
|
|
15,217 |
|
Shareholders equity |
|
|
1,297,213 |
|
|
|
1,292,651 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,553,537 |
|
|
$ |
2,633,925 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Rental revenue |
|
$ |
51,297 |
|
|
$ |
52,139 |
|
|
$ |
152,215 |
|
|
$ |
151,201 |
|
Tenant reimbursements |
|
|
4,734 |
|
|
|
5,249 |
|
|
|
13,627 |
|
|
|
16,114 |
|
Other income |
|
|
441 |
|
|
|
460 |
|
|
|
2,310 |
|
|
|
1,657 |
|
Mortgage and other financing
income |
|
|
11,650 |
|
|
|
17,125 |
|
|
|
33,392 |
|
|
|
40,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
68,122 |
|
|
|
74,973 |
|
|
|
201,544 |
|
|
|
209,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expense |
|
|
6,708 |
|
|
|
6,612 |
|
|
|
21,108 |
|
|
|
19,947 |
|
Other expense |
|
|
614 |
|
|
|
430 |
|
|
|
2,087 |
|
|
|
1,982 |
|
General and administrative
expense |
|
|
3,557 |
|
|
|
3,718 |
|
|
|
11,961 |
|
|
|
12,070 |
|
Costs associated with loan
refinancing |
|
|
|
|
|
|
|
|
|
|
117 |
|
|
|
|
|
Interest expense, net |
|
|
19,355 |
|
|
|
17,689 |
|
|
|
54,274 |
|
|
|
52,117 |
|
Provision for loan losses |
|
|
65,757 |
|
|
|
|
|
|
|
65,757 |
|
|
|
|
|
Impairment charge |
|
|
35,801 |
|
|
|
|
|
|
|
35,801 |
|
|
|
|
|
Depreciation and amortization |
|
|
11,921 |
|
|
|
11,170 |
|
|
|
36,383 |
|
|
|
32,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in
income from joint ventures and
discontinued operations |
|
|
(75,591 |
) |
|
|
35,354 |
|
|
|
(25,944 |
) |
|
|
91,281 |
|
Equity in income from joint
ventures |
|
|
229 |
|
|
|
216 |
|
|
|
673 |
|
|
|
1,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations |
|
$ |
(75,362 |
) |
|
$ |
35,570 |
|
|
$ |
(25,271 |
) |
|
$ |
93,024 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27 |
) |
Gain on sale of real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(75,362 |
) |
|
|
35,570 |
|
|
|
(25,271 |
) |
|
|
93,116 |
|
Add: Net loss attributable to
noncontrolling interests |
|
|
16,071 |
|
|
|
488 |
|
|
|
19,014 |
|
|
|
1,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable
to Entertainment Properties
Trust |
|
|
(59,291 |
) |
|
|
36,058 |
|
|
|
(6,257 |
) |
|
|
94,590 |
|
Preferred dividend requirements |
|
|
(7,552 |
) |
|
|
(7,552 |
) |
|
|
(22,655 |
) |
|
|
(20,714 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders of
Entertainment Properties Trust |
|
$ |
(66,843 |
) |
|
$ |
28,506 |
|
|
$ |
(28,912 |
) |
|
$ |
73,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data attributable to
Entertainment
Properties Trust common
shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations available to common
shareholders |
|
$ |
(1.89 |
) |
|
$ |
0.89 |
|
|
$ |
(0.83 |
) |
|
|
2.44 |
|
Income from discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders |
|
$ |
(1.89 |
) |
|
$ |
0.89 |
|
|
$ |
(0.83 |
) |
|
$ |
2.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations available to common
shareholders |
|
$ |
(1.89 |
) |
|
$ |
0.88 |
|
|
$ |
(0.83 |
) |
|
$ |
2.41 |
|
Income from discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders |
|
$ |
(1.89 |
) |
|
$ |
0.88 |
|
|
$ |
(0.83 |
) |
|
$ |
2.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used for computation (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
35,445 |
|
|
|
32,033 |
|
|
|
34,937 |
|
|
|
30,252 |
|
Diluted |
|
|
35,445 |
|
|
|
32,365 |
|
|
|
34,937 |
|
|
|
30,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share |
|
$ |
0.65 |
|
|
$ |
0.84 |
|
|
$ |
1.95 |
|
|
$ |
2.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
7
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statement of Changes in Shareholders Equity
Nine Months Ended September 30, 2009
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Properties Trust Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
other |
|
|
Distributions |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Preferred Stock |
|
|
paid-in |
|
|
Treasury |
|
|
Loans to |
|
|
comprehensive |
|
|
in excess of |
|
|
Noncontrolling |
|
|
|
|
|
|
Shares |
|
|
Par |
|
|
Shares |
|
|
Par |
|
|
capital |
|
|
shares |
|
|
shareholders |
|
|
income (loss) |
|
|
net income |
|
|
Interests |
|
|
Total |
|
Balance at December 31, 2008 |
|
|
33,734,181 |
|
|
$ |
337 |
|
|
|
16,650,000 |
|
|
$ |
167 |
|
|
$ |
1,339,798 |
|
|
$ |
(26,357 |
) |
|
$ |
(1,925 |
) |
|
$ |
(6,169 |
) |
|
$ |
(28,417 |
) |
|
$ |
15,217 |
|
|
$ |
1,292,651 |
|
Restricted share units issued to Trustees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390 |
|
Issuance of nonvested shares, including nonvested
shares issued for the payment of bonuses |
|
|
218,797 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,415 |
|
Cancellation of 4,175 employee nonvested shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139 |
|
|
|
(139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of nonvested shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,459 |
|
Share option expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
505 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,178 |
|
|
|
|
|
|
|
|
|
|
|
30,178 |
|
Change in unrealized gain/loss on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,024 |
) |
|
|
|
|
|
|
|
|
|
|
(7,024 |
) |
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,257 |
) |
|
|
(19,014 |
) |
|
|
(25,271 |
) |
Purchase of 40,565 common shares for treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,202 |
) |
Issuances of common shares, net of costs of $377 |
|
|
3,466,421 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
94,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,394 |
|
Dividends to common and preferred shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92,086 |
) |
|
|
|
|
|
|
(92,086 |
) |
Distributions paid to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(196 |
) |
|
|
(196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
|
37,419,399 |
|
|
$ |
374 |
|
|
|
16,650,000 |
|
|
$ |
167 |
|
|
$ |
1,440,063 |
|
|
$ |
(27,698 |
) |
|
$ |
(1,925 |
) |
|
$ |
16,985 |
|
|
$ |
(126,760 |
) |
|
$ |
(3,993 |
) |
|
$ |
1,297,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
8
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
(75,362 |
) |
|
$ |
35,570 |
|
|
$ |
(25,271 |
) |
|
$ |
93,116 |
|
|
Other comprehensive
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation
adjustment |
|
|
19,701 |
|
|
|
(10,640 |
) |
|
|
30,178 |
|
|
|
(17,624 |
) |
Change in
unrealized gain
(loss) on
derivatives |
|
|
(12,667 |
) |
|
|
7,282 |
|
|
|
(7,024 |
) |
|
|
9,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) |
|
|
(68,328 |
) |
|
|
32,212 |
|
|
|
(2,117 |
) |
|
|
84,894 |
|
Comprehensive
loss
attributable to
the
noncontrolling
interests |
|
|
16,071 |
|
|
|
488 |
|
|
|
19,014 |
|
|
|
1,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
attributable to
Entertainment
Properties Trust |
|
$ |
(52,257 |
) |
|
$ |
32,700 |
|
|
$ |
16,897 |
|
|
$ |
86,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
9
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(25,271 |
) |
|
$ |
93,116 |
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
65,757 |
|
|
|
|
|
Non-cash impairment charge |
|
|
35,801 |
|
|
|
|
|
Loss from discontinued operations |
|
|
|
|
|
|
(92 |
) |
Costs associated with loan refinancing |
|
|
117 |
|
|
|
|
|
Equity in income from joint ventures |
|
|
(673 |
) |
|
|
(1,743 |
) |
Distributions from joint ventures |
|
|
743 |
|
|
|
2,017 |
|
Depreciation and amortization |
|
|
36,383 |
|
|
|
32,184 |
|
Amortization of deferred financing costs |
|
|
2,552 |
|
|
|
2,402 |
|
Share-based compensation expense to management and trustees |
|
|
3,238 |
|
|
|
2,975 |
|
Decrease in restricted cash |
|
|
1,315 |
|
|
|
2,304 |
|
Increase in mortgage notes accrued interest receivable |
|
|
(516 |
) |
|
|
(15,570 |
) |
Decrease (increase) in accounts receivable, net |
|
|
2,977 |
|
|
|
(2,477 |
) |
Decrease in notes receivable and accrued interest receivable |
|
|
535 |
|
|
|
456 |
|
Increase in direct financing lease receivable |
|
|
(2,795 |
) |
|
|
(1,363 |
) |
Increase in other assets |
|
|
(4,561 |
) |
|
|
(3,452 |
) |
Decrease in accounts payable and accrued liabilities |
|
|
(969 |
) |
|
|
(551 |
) |
Decrease (increase) in unearned rents and interest |
|
|
(1,767 |
) |
|
|
198 |
|
|
|
|
|
|
|
|
Net operating cash provided by continuing operations |
|
|
112,866 |
|
|
|
110,404 |
|
Net operating cash used by discontinued operations |
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
112,866 |
|
|
|
110,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Acquisition of rental properties and other assets |
|
|
(3,205 |
) |
|
|
(139,957 |
) |
Investment in unconsolidated joint venture |
|
|
(13 |
) |
|
|
(116 |
) |
Investment in mortgage notes receivable |
|
|
(33,555 |
) |
|
|
(173,871 |
) |
Proceeds from mortgage note receivable paydown |
|
|
3,512 |
|
|
|
|
|
Investment in promissory notes receivable |
|
|
(4,108 |
) |
|
|
(10,149 |
) |
Proceeds from promissory note receivable paydown |
|
|
1,000 |
|
|
|
|
|
Investment in direct financing lease, net |
|
|
|
|
|
|
(121,785 |
) |
Additions to properties under development |
|
|
(17,672 |
) |
|
|
(28,748 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities from continued operations |
|
|
(54,041 |
) |
|
|
(474,626 |
) |
Net proceeds from sale of real estate from discontinued
operations |
|
|
|
|
|
|
986 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(54,041 |
) |
|
|
(473,640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from long-term debt facilities |
|
|
68,006 |
|
|
|
476,491 |
|
Principal payments on long-term debt |
|
|
(158,579 |
) |
|
|
(332,324 |
) |
Deferred financing fees paid |
|
|
(4,950 |
) |
|
|
(2,917 |
) |
Net proceeds from issuance of common shares |
|
|
94,312 |
|
|
|
224,226 |
|
Net proceeds from issuance of preferred shares |
|
|
|
|
|
|
83,438 |
|
Impact of stock option exercises, net |
|
|
|
|
|
|
(147 |
) |
Proceeds from payment on shareholder loan |
|
|
|
|
|
|
1,600 |
|
Purchase of common shares for treasury |
|
|
(1,202 |
) |
|
|
(777 |
) |
Distributions paid to noncontrolling interests |
|
|
(196 |
) |
|
|
(71 |
) |
Dividends paid to shareholders |
|
|
(95,633 |
) |
|
|
(89,850 |
) |
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(98,242 |
) |
|
|
359,669 |
|
Effect of exchange rate changes on cash |
|
|
531 |
|
|
|
(451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(38,886 |
) |
|
|
(4,045 |
) |
Cash and cash equivalents at beginning of the period |
|
|
50,082 |
|
|
|
15,170 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period |
|
$ |
11,196 |
|
|
$ |
11,125 |
|
|
|
|
|
|
|
|
Supplemental information continued on next page.
10
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Continued from previous page.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
Supplemental schedule of non-cash activity: |
|
|
|
|
|
|
|
|
Transfer of property under development to
rental property |
|
$ |
29,382 |
|
|
$ |
16,522 |
|
Issuance of nonvested shares and restricted
share units at fair value,
including nonvested shares issued for
payment of bonuses |
|
$ |
4,368 |
|
|
$ |
6,028 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
52,595 |
|
|
$ |
51,125 |
|
Cash received during the period for income taxes |
|
$ |
(500 |
) |
|
$ |
(701 |
) |
See accompanying notes to consolidated financial statements.
11
ENTERTAINMENT PROPERTIES TRUST
Notes to Consolidated Financial Statements (Unaudited)
1. Organization
Description of Business
Entertainment Properties Trust (the Company) is a Maryland real estate investment trust (REIT)
organized on August 29, 1997. The Company develops, owns, leases and finances megaplex theatres,
entertainment retail centers (centers generally anchored by an entertainment component such as a
megaplex theatre and containing other entertainment-related properties), and destination
recreational and specialty properties. The Companys properties are located in the United States
and Canada.
2. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in
accordance with U.S. generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been
included. In preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date
of the balance sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates. In addition, operating results for the nine month period ended
September 30, 2009 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2009.
The Company consolidates certain entities if it is deemed to be the primary beneficiary in a
variable interest entity (VIE), as defined in Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic on Consolidation. The equity method of accounting is
applied to entities in which the Company is not the primary beneficiary as defined in the
Consolidation Topic of the FASB ASC, or does not have effective control, but can exercise influence
over the entity with respect to its operations and major decisions.
The Company reports its noncontrolling interests as required by the Consolidation Topic of the FASB
ASC. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not
attributable, directly or indirectly, to a parent. The ownership interests in the subsidiary that
are held by owners other than the parent are noncontrolling interests. Such noncontrolling
interests are reported on the consolidated balance sheets within equity, separately from the
Companys equity. On the consolidated statements of income, revenues, expenses and net income or
loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including
both the amounts attributable to the Company and noncontrolling interests. Consolidated statements
of changes in shareholders equity are included for both quarterly and annual financial statements,
including beginning balances, activity for the period and ending balances for shareholders equity,
noncontrolling interests and total equity. The Company does not have any redeemable noncontrolling
interests.
12
The consolidated balance sheet as of December 31, 2008 has been derived from the audited
consolidated balance sheet at that date but does not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008 filed
with the Securities and Exchange Commission (SEC) on February 24, 2009.
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 on leases that are dependent upon increases in the
Consumer Price Index (CPI) is recognized when known. Straight-line rent receivable is included in
accounts receivable and was $25.5 million and $23.1 million at September 30, 2009 and December 31,
2008, respectively. In addition, most of the Companys 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 $1.2 million and $1.5 million were
recognized for the nine months ended September 30, 2009 and 2008, respectively. Lease termination
fees are recognized when the related leases are canceled and the Company has no obligation to
provide services to such former tenants. No termination fees were recognized during the nine
months ended September 30, 2009 and 2008.
Direct financing lease income is recognized on the effective interest method to produce a level
yield on funds not yet recovered. Estimated unguaranteed residual values at the date of lease
inception represent managements initial estimates of fair value of the leased assets at the
expiration of the lease, not to exceed original cost. Significant assumptions used in estimating
residual values include estimated net cash flows over the remaining lease term and expected future
real estate values. The estimated unguaranteed residual value is reviewed on an annual basis to
determine if there are other than temporary impairments. The Company evaluates on an annual basis
during the second quarter the collectibility of its direct financing lease receivable and
unguaranteed residual value to determine whether they are impaired. A direct financing lease
receivable is considered to be impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according to the existing
contractual terms. When a direct financing lease receivable is considered to be impaired, the
amount of loss is calculated by comparing the recorded investment to the value determined by
discounting the expected future cash flows at the direct financing lease receivables effective
interest rate or to the fair value of the underlying collateral, less costs to sell, if such
receivable is collateralized.
Rental Properties
Rental properties are carried at cost less accumulated depreciation. Costs incurred for the
acquisition and development 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 25 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.
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
13
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.
Allowance for Doubtful Accounts
The Company makes quarterly estimates of the collectibility of its accounts receivable related to
base rents, tenant escalations (straight-line rents), reimbursements and other revenue or income.
The Company specifically analyzes trends in accounts receivable, 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 customers are in
bankruptcy, the Company makes estimates of the expected recovery of pre-petition administrative and
damage claims. These estimates have a direct impact on the Companys net income.
Mortgage Notes and Other Notes Receivable
Mortgage notes and other notes receivable, including related accrued interest receivable, consist
of loans originated by the Company and the related accrued and unpaid interest income as of the
balance sheet date. Mortgage notes and other notes receivable are initially recorded at the amount
advanced to the borrower and the Company defers certain loan origination and commitment fees, net
of certain origination costs, and amortizes them over the term of the related loan. Interest
income on performing loans is accrued as earned. The Company evaluates the collectibility of both
interest and principal of each of its loans to determine whether it is impaired. A loan is
considered to be impaired when, based on current information and events, the Company determines
that it is probable that it will be unable to collect all amounts due according to the existing
contractual terms. When a loan is considered to be impaired, the amount of loss is calculated by
comparing the recorded investment to the value determined by discounting the expected future cash
flows at the loans effective interest rate or to the fair value of the underlying collateral, less
costs to sell, if the loan is collateralized. For impaired loans, interest income is recognized on
a cash basis, unless the Company determines based on the loan to estimated fair value ratio the
loan should be on the cost recovery method, and any cash payments received would then be reflected
as a reduction of principal. Interest income recognition is recommenced when the impaired loan
becomes contractually current and performance is demonstrated to be resumed.
Concentrations of Risk
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (51%) of the megaplex
theatre rental properties held by the Company (including joint venture properties) at September 30,
2009 as a result of a series of sale leaseback transactions pertaining to a number of AMC megaplex
theatres. A substantial portion of the Companys rental revenues (approximately $72.7 million or
48% and $73.1 million or 48% for the nine months ended September 30, 2009 and 2008, respectively)
result from the rental payments by AMC under the leases, or its parent, AMC Entertainment, Inc.
(AMCE), as the guarantor of AMCs obligations under the leases. AMCE had total assets of $3.7
billion and $3.8 billion, total liabilities of $2.7 billion and $2.7 billion and total
stockholders equity of $1.0 billion and $1.1 billion at April 2, 2009 and April 3, 2008,
respectively. AMCE had a net loss of $81.2 million for the fifty-two weeks ended April 2, 2009 and
net earnings of $43.4 million for the fifty-three weeks ended April 3, 2008. In addition, AMCE had
net earnings of $8.6 million for the thirteen weeks ended July 2, 2009. AMCE has publicly held
debt and the foregoing financial information was reported in its consolidated financial information
which is publicly available.
14
For the nine months ended September 30, 2009 and 2008, respectively, approximately $26.4
million, or 13%, and $29.1 million, or 14%, of total revenue was derived from the Companys four
entertainment retail centers in Ontario, Canada. For the nine months ended September 30, 2008,
$42.2 million, or 20%, of our total revenue was derived from the Companys four entertainment
retail centers in Ontario, Canada combined with the mortgage financing interest related to the
Companys mortgage note receivable held in Canada and initially funded on June 1, 2005. For the
nine months ended September 30, 2009, no mortgage financing interest income was recognized related
to the Companys mortgage note receivable held in Canada as further described in Note 5. The
Companys wholly owned subsidiaries that hold the Canadian entertainment retail centers, third
party debt and mortgage note receivable (net of loan loss reserve) represent approximately $222.3
million or 17% and $219.5 million or 17% of the Companys net assets as of September 30, 2009 and
December 31, 2008, respectively.
Share-Based Compensation
Share-based compensation to employees of the Company is determined pursuant to the Annual Incentive
Program and the Long-Term Incentive Plan. Share-based compensation to non-employee trustees of the
Company is determined pursuant to the director compensation program. Prior to May 9, 2007, all
common shares and options to purchase common shares (share options) were issued under the 1997
Share Incentive Plan. The 2007 Equity Incentive Plan was approved by shareholders at the May 9,
2007 annual meeting and this plan replaced the 1997 Share Incentive Plan. Accordingly, all common
shares and options to purchase common shares granted on or after May 9, 2007 are issued under the
2007 Equity Incentive Plan.
The Company accounts for share based compensation under the FASB ASC Topic on Stock Compensation.
Share based compensation expense consists of share option expense, amortization of nonvested share
grants, and shares and share units issued to non-employee Trustees for payment of their annual
retainers. Share based compensation is included in general and administrative expense in the
accompanying consolidated statements of income, and totaled $3.2 million and $3.0 million for the
nine months ended September 30, 2009 and 2008, respectively.
Share Options
Share options are granted to employees pursuant to the Long-Term Incentive Plan and to non-employee
Trustees for their service to the Company. The fair value of share options granted is estimated at
the date of grant using the Black-Scholes option pricing model. Share options granted to employees
vest over a period of four to five years and share option expense for these options is recognized
on a straight-line basis over the vesting period, except for those unvested options held by a
retired executive which were fully expensed as of June 30, 2006. Share options granted to
non-employee Trustees vest immediately but may not be exercised for a period of one year from the
grant date. Share option expense for non-employee Trustees is recognized on a straight-line basis
over the year of service by the non-employee Trustees.
The expense related to share options included in the determination of net income for the nine
months ended September 30, 2009 and 2008 was $505 thousand and $334 thousand, respectively. The
following assumptions were used in applying the Black-Scholes option pricing model at the grant
dates: risk-free interest rate of 2.6% to 2.8% and 3.2% to 3.5% for the nine months ended September
30, 2009 and 2008, respectively, dividend yield of 6.5% to 6.6% and 6.7% for the nine months ended
September 30, 2009 and 2008, respectively, volatility factors in the expected market price of the
Companys common shares of 31.4% to 37.5% and 23.2% for the nine months ended September 30, 2009
and 2008, respectively, no expected forfeitures and an expected life of eight years. The Company
uses historical data to estimate the expected life of the option and the risk-free interest rate
15
is based on the U.S. Treasury yield curve in effect at the time of grant. Additionally, expected
volatility is computed based on the average historical volatility of the Companys publicly traded
shares.
Nonvested Shares Issued to Employees
The Company grants nonvested shares to employees pursuant to both the Annual Incentive Program and
the Long-Term Incentive Plan. The Company amortizes the expense related to the nonvested shares
awarded to employees under the Long-Term Incentive Plan and the premium awarded under the nonvested
share alternative of the Annual Incentive Program on a straight-line basis over the future vesting
period (three to five years). Total expense recognized related to all nonvested shares was $2.5
million and $2.4 million for the nine months ended September 30, 2009 and 2008.
Shares Issued to Non-Employee Trustees
Prior to 2009, the Company issued shares to non-employee Trustees for payment of their annual
retainers. These shares vested immediately but could not be sold for a period of one year from the
grant date. This expense was amortized by the Company on a straight-line basis over the year of
service by the non-employee Trustees. Total expense recognized related to shares issued to
non-employee Trustees was $111 thousand and $257 thousand for the nine months ended September 30,
2009 and 2008, respectively.
Restricted Share Units Issued to Non-Employee Trustees
In 2009, the Company issued restricted share units to non-employee Trustees for payment of their
annual retainers. The fair value of the share units granted was based on the share price at the
date of grant. The share units vest upon the earlier of the day preceding the next annual meeting
of shareholders or a change of control. The settlement date for the shares is selected by the
non-employee trustee, and ranges from three years from the grant date to upon termination of
service. This expense was amortized by the Company on a straight-line basis over the year of
service by the non-employee Trustees. Total expense recognized related to shares issued to
non-employee Trustees was $163 thousand for the nine months ended September 30, 2009.
Derivative Instruments
The Company has acquired certain derivative instruments to reduce exposure to fluctuations in
foreign currency exchange rates and variable interest rates. The Company has established policies
and procedures for risk assessment and the approval, reporting and monitoring of derivative
financial instrument activities. These derivatives consist of foreign currency forward contracts,
cross currency swaps and interest rate swaps.
As required by the Derivatives and Hedging Topic of the FASB ASC, the Company records all
derivatives on the balance sheet at fair value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative, whether the Company has elected to
designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging
relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives
designated and qualifying as a hedge of the exposure to changes in the fair value of an asset,
liability, or firm commitment attributable to a particular risk, such as interest rate risk, are
considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to
variability in expected future cash flows, or other types of forecasted transactions, are
considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency
exposure of a net investment in a foreign operation. Hedge accounting generally provides for the
matching of the timing of gain or loss recognition on the hedging instrument with the recognition
of the changes in the fair value of the
16
hedged asset or liability that are attributable to the hedged risk in a fair value hedge
or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may
enter into derivative contracts that are intended to economically hedge certain of its risk, even
though hedge accounting does not apply or the Company elects not to apply hedge accounting under
the Derivatives and Hedging Topic of the FASB ASC.
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform to the current
period presentation.
Subsequent Events
The Company evaluated subsequent events through the time of filing these financial statements with
the SEC on November 5, 2009.
3. Rental Properties
The following table summarizes the carrying amounts of rental properties as of September 30, 2009
and December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
(Unaudited) |
|
|
|
|
|
Buildings and improvements |
|
$ |
1,497,819 |
|
|
$ |
1,452,500 |
|
Furniture, fixtures & equipment |
|
|
63,790 |
|
|
|
62,090 |
|
Land |
|
|
444,317 |
|
|
|
434,514 |
|
|
|
|
|
|
|
|
|
|
|
2,005,926 |
|
|
|
1,949,104 |
|
Accumulated depreciation |
|
|
(247,425 |
) |
|
|
(214,078 |
) |
Impairment of property carrying value |
|
|
(32,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,726,136 |
|
|
$ |
1,735,026 |
|
|
|
|
|
|
|
|
Depreciation expense on rental properties was $32.4 million and $29.8 million for the nine months
ended September 30, 2009 and 2008, respectively.
4. Impairment Charge
The Companys entertainment retail center in White Plains, New York, held in a consolidated joint
venture, was acquired with mortgage financing that had a loan to fair value ratio of more than 70%
at the time of the Companys acquisition of its interests in May 2007. The loan is personally
guaranteed by the principals of our minority partner, one of which is the same individual that is
either personally, or through his related interests, in default on several other obligations to the
Company (see Note 5 below). The debt on this center is due in October 2010, and absent any
improvement in the performance of the asset, the lender will likely require additional credit
support and fees to extend the loan. Any such extension would also require the cooperation of the
partners in the joint venture. Without a resolution of our disputes with the principals of our
minority partner, there can be no assurance that the Company and the minority partner will
cooperate. Given that the debt is currently non-recourse to the Company, the Company may elect
not to further support the joint venture, which may include a decision to surrender the property at
the loans maturity. Accordingly, the Company performed an impairment assessment of this asset at
September 30, 2009. It was determined that the carrying value of the asset exceeded the estimated
fair value by $35.8 million, and an impairment
17
charge was recorded at September 30, 2009 for this amount, which was comprised of $32.4
million related to real estate investment and $3.4 million related to in-place leases. Management
determined the fair value of the asset taking into account various factors, including an
independent appraisal prepared as of September 30, 2009 which indicated a value of $118.0 million.
In accordance with the FASB ASC Topic on Consolidation and the Companys policy for allocation of
income and loss for this joint venture, a loss of $15.1 million related to the impairment charge
was allocated to the noncontrolling interest related to this venture. The noncontrolling interest
related to White Plains was a deficit balance of $8.0 million at September 30, 2009 which is
recorded as a component of shareholders equity.
5. Investments in Mortgage Notes and Notes Receivable
Concord Resorts
On August 20, 2008, a wholly-owned subsidiary of the Company provided a secured first mortgage loan
of $225.0 million to Concord Resorts, LLC (Concord Resorts), an entity controlled by Louis
Cappelli, related to a planned casino and resort development in Sullivan County, New York. The
Companys investment is secured by a first mortgage on the resort complex real estate totaling
1,584 acres. In addition, the Company has a second mortgage on the remaining 139 acres of the
casino related real estate and the loan is personally guaranteed by Louis Cappelli. The Company
has certain rights to convert its mortgage interest into fee ownership as the project is further
developed. The net carrying value of this mortgage note receivable at September 30, 2009 was
$133.2 million which was funded under the original $225.0 million secured first mortgage
commitment.
Due to the economic downturn, certain other lenders on the development have either reduced their
commitments or withdrawn from the project. The planned initial phase of the casino and resort
development has been downsized from an estimated $1 billion to an estimated $600 million and Mr.
Cappelli is attempting to secure the necessary financing. The New York legislature has passed
legislation authorizing the benefits of a special reduced tax rate on gaming receipts in Sullivan
County, New York if at least $600 million is invested and 1,000 new jobs are created. As a result
of these issues, the development project has been slowed, and there can be no assurance that Mr.
Cappelli will obtain the financing necessary to complete the project. Due to these challenges,
Concord Resorts has ceased making interest payments to the Company as contractually obligated under
the loan agreement. The Company has evaluated its mortgage note receivable for impairment and has
determined it is impaired due to the inability of the borrower to meet its contractual obligations
per the agreement. The Companys accounting policy is to recognize interest income on impaired
loans on a cash basis. Accrual interest income recognition for book purposes was ceased on January
1, 2009 and therefore no interest income has been recorded during the nine months ended September
30, 2009. Interest income recognized on this mortgage note receivable for the nine months ended
September 30, 2008 was $1.6 million. Management of the Company determined that no loan loss
reserve was necessary for this note taking into account an independent appraisal as of April 30,
2009 of the primary collateral, 1,584 acres of land, which indicated a value in excess of the loan
balance.
The Companys original loan commitment to fund an additional $91.8 million to Concord Resorts is no
longer applicable due to the developers decision to downsize the initial phase of the project to
an investment level of $600 million. The funding of any additional investment in the project by the
Company will be subject to satisfaction of certain conditions, including but not limited to a
reduction from the aforementioned $91.8 million.
18
Toronto Dundas Square Project
During the nine months ended September 30, 2009, a wholly-owned subsidiary of the Company
invested an additional $5.1 million Canadian (CAD) ($4.6 million U.S.) bringing the total
investment to CAD $130.6 million ($122.0 million U.S.) in the mortgage note receivable from
Metropolis Limited Partnership (the Partnership) related to the construction of the Toronto Dundas
Square Project, a 13 level entertainment retail center in downtown Toronto that was completed in
May 2008 for a total cost of approximately CAD $330 million. Additionally, as of September 30,
2009, the Company had posted irrevocable stand-by letters of credit related to this project
totaling $4.0 million U.S. which are expected to be cancelled or drawn upon during 2009. The loan
is denominated in Canadian dollars and is secured by a second mortgage on the Toronto Dundas Square
Project.
A group of banks (the bank syndicate) has provided first mortgage construction financing to the
Partnership totaling approximately CAD $119.0 million ($111.1 million U.S.) as of September 30,
2009. In April 2009, the bank syndicate and the Company elected to pursue a receivership after it
became apparent that a restructuring of the existing equity interests was no longer possible. On
April 27, 2009, the court appointed a receiver who is overseeing the sale of the property. As a
result of this process, the Company could become the owner of the property. The Company is
currently negotiating a refinancing of the first mortgage should it become the owner of the
property. While there can be no assurance that the Company will successfully obtain the first
mortgage refinancing, based on preliminary negotiations, the Company currently estimates a new
first mortgage loan would provide proceeds of CAD $100 million. If the Company becomes the owner
through the sale process, the Company expects to consolidate the financial results of the property
subsequent to the purchase.
The Company has evaluated this mortgage note receivable for impairment. Because repayment of the
mortgage note receivable did not meet the contractual terms of the agreement, the Company has
determined the loan is impaired and has ceased accruing interest income as of January 1, 2009 on
the loan for book purposes. Accordingly, no interest income was recognized for the nine months
ended September 30, 2009 and no interest income will be recognized in future periods. Interest
income recognized on this loan for the nine months ended September 30, 2008 was CAD $13.3 million
($13.0 million U.S.). Furthermore, management of the Company reviewed the fair value of the
property at September 30, 2009, taking into account various factors including an independent
appraisal completed in September, 2009 and determined a provision for loan loss of CAD $37.6
million ($34.8 million U.S.) was necessary. Therefore, the net carrying value of this mortgage note
receivable at September 30, 2009 was CAD $93.0 million ($86.9 million U.S.).
Cappelli Related Notes
The Company also has two $10 million notes receivable that were due on February 28, 2009 and March
1, 2009, respectively. The notes bear interest at 10%. Neither note was repaid at maturity. One
of the notes is due from the Companys minority joint venture partner in New Roc, an entertainment
retail center in New Rochelle, New York, and this note is secured by such partners interest. The
minority joint venture partner is an entity controlled by Louis Cappelli and Louis Cappelli has
also personally guaranteed the loan. The other note is due from Louis Cappelli personally and in
conjunction with this note, the Company received an option to purchase 50% of Louis Cappellis
interest (or Louis Cappellis related interests) in three other projects.
The Company has evaluated these two notes receivable for impairment, and has determined that they
are impaired due to the inability of the borrower to meet its contractual obligations per the
original agreements. Accordingly, accrual interest income recognition was ceased on January 1,
2009.
19
Interest income of $833 thousand has been recorded during the nine months ended September
30, 2009 which represents payments received by the Company prior to July 1, 2009. No interest
payments related to these two notes receivable were received by the Company for the three months
ended September 30, 2009. Interest income recognized on these loans for the three and nine months
ended September 30, 2008 was $506 thousand and $1.3 million, respectively. Management of the
Company has evaluated the fair value of the underlying collateral of the notes and has concluded
that a loan loss reserve of $18.0 million was necessary at September 30, 2009.
Additionally, the Company has a $10 million note receivable that is due May 8, 2017 and bears
interest at 10%. The note is due from the Companys minority joint venture partner in City Center
at White Plains, an entertainment retail center in White Plains, New York, and the note is secured
by such partners interest. The minority joint venture partner is an entity controlled by Louis
Cappelli and another individual, and each personally guarantees the loan.
No interest payments were received by the Company on this note receivable for the three months
ended September 30, 2009. The Company evaluated this note receivable for impairment and determined
that it is impaired due to the inability of the borrower to meet its contractual obligations per
the original agreement. Accordingly, accrual interest income recognition was ceased on July 1,
2009. Interest income of $500 thousand has been recorded during the nine months ended September
30, 2009 which represents payments received by the Company prior to July 1, 2009. Interest income
recognized on this loan for the three and nine months ended September 30, 2008 was $256 thousand
and $760 thousand, respectively. Management of the Company has evaluated the fair value of the
underlying collateral of the note and has concluded that a loan loss reserve of $10.0 million was
necessary at September 30, 2009.
Other Mortgage Notes and Notes Receivable
On January 26, 2009, a wholly-owned subsidiary of the Company entered into a credit agreement with
Rb Wine Associates, LLC to provide a $2.0 million revolving credit facility that matures on January
1, 2010. This note is secured by certain pledge agreements and other collateral. Interest accrues
on the outstanding principal balance at an annual rate of 15%. Interest is payable monthly at an
annual rate of 9.25% and the remaining accrued but unpaid interest and principal is due at
maturity. During the nine months ended September 30, 2009, the Company advanced $1.4 million under
this credit facility.
On February 20, 2009, a wholly-owned subsidiary of the Company entered into a $3.0 million
promissory note with Sapphire Wines LLC. The note bears interest at 15% and it matured on November
1, 2009. This note is secured by certain pledge agreements and other collateral. Because interest
and principal payments are not being received per the contractual terms of the agreement, this note
is considered impaired and is included in the $11.8 million of impaired notes receivable discussed
further below.
On May 8, 2009, the Company received payment in full on its mortgage note receivable and related
accrued interest of $3.7 million from Prairie Creek Properties, LLC. The Company advanced $3.5
million during the year ended December 31, 2007 under this agreement for the development of an
approximately 9,000 seat amphitheatre in Hoffman Estates, Illinois.
On June 26, 2009, the Company received payment in full on its note receivable and related accrued
interest of $1.0 million from an affiliate of one of its theatre operators. The Company advanced
$1.0 million during the year ended December 31, 2007 under this agreement for the development of a
megaplex theatre.
20
During the nine months ended September 30, 2009, the Company advanced $29.0 million under its
secured mortgage loan agreements with SVV I, LLC and an affiliate of SVV I, LLC (together SVVI) for
the development of a water-park anchored entertainment village in Kansas City, Kansas, the first
phase of which opened in July 2009. On May 6, 2009, the Company reduced its commitment on this
project from $175.0 million to $163.5 million and added to its collateral position by placing a
mortgage on the two other water-parks, located in New Braunfels and South Padre Island, Texas,
owned and operated by the entities controlled by the principals of SVVI. The mortgage note on the
property in Kansas City, Kansas and the mortgage note on the Texas properties have cross-default
and cross-collateral provisions. Pursuant to the mortgage on the Texas properties, only a seasonal
line of credit secured by the Texas parks totaling not more than $5.0 million at any time ranks
superior to the Companys collateral position. Furthermore, the interest rates increased from
LIBOR plus 3.5% points to 7% on July 4, 2009, and the loans were extended from September 30, 2012
to May 1, 2019. Interest income will continue to be recognized on the accrual basis. SVVI is
required to fund a debt service reserve for off-season fixed payments (those due from September to
May). The reserve is to be funded by equal monthly installments during the months of June, July
and August. The Company also will receive a percentage of revenue from all three parks after
certain threshold levels are achieved that may increase the return on the Companys invested
capital from 7% to as high as 10%. Through September 30, 2009, the Company has funded
approximately $163.3 million on the mortgage notes.
Additionally, the Company has three notes receivable totaling $11.8 million at September 30, 2009
that are impaired due to the inability of the borrowers to meet their contractual obligations per
the original agreements. Accordingly, accrual interest income recognition for these notes was
ceased on January 1, 2009. Interest income of $234 thousand and $597 thousand, respectively has
been recorded during the three and nine months ended September 30, 2009 which represents payments
received by the Company. Interest income recognized on these loans for the three and nine months
ended September 30, 2008 was $200 thousand and $601 thousand, respectively. Management of the
Company has evaluated the fair value of the underlying collateral of the notes and has concluded
that a loan loss reserve of $3.0 million was necessary at September 30, 2009.
The following summarizes the activity within the allowance for loan losses for the nine months
ended September 30, 2009 (in thousands):
|
|
|
|
|
|
|
2009 |
|
Allowance for loan losses at January 1 |
|
$ |
|
|
Provision for loan losses |
|
|
65,757 |
|
Charge-offs |
|
|
|
|
Recoveries |
|
|
|
|
Impact of foreign currency translation on ending balance |
|
|
361 |
|
|
|
|
|
Allowance for loan losses at September 30 |
|
$ |
66,118 |
|
|
|
|
|
There was no allowance for loan losses for the nine months ended September 30, 2008.
21
The following table summarizes the carrying amounts of mortgage notes and related accrued interest
receivable, net at September 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Mortgage notes and related
accrued interest receivable |
|
$ |
553,187 |
|
|
$ |
508,506 |
|
Less: allowance for loan losses |
|
|
(35,118 |
) |
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes and related
accrued interest receivable, net |
|
$ |
518,069 |
|
|
$ |
508,506 |
|
|
|
|
|
|
|
|
The following table summarizes the carrying amounts of notes and related accrued interest
receivable, net at September 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Notes and related accrued
interest receivable |
|
$ |
43,395 |
|
|
$ |
40,338 |
|
Less: allowance for loan losses |
|
|
(31,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Notes and related accrued
interest receivable, net |
|
$ |
12,395 |
|
|
$ |
40,338 |
|
|
|
|
|
|
|
|
6. Unconsolidated Real Estate Joint Ventures
At September 30, 2009, the Company had a 21.7% and 21.8% investment interest in two unconsolidated
real estate joint ventures, Atlantic-EPR I and Atlantic-EPR II, respectively. The Company accounts
for its investment in these joint ventures under the equity method of accounting.
The Company recognized income of $421 and $400 (in thousands) from its investment in the
Atlantic-EPR I joint venture during the first nine months of 2009 and 2008, respectively. The
Company also received distributions from Atlantic-EPR I of $465 and $449 (in thousands) during the
first nine months of 2009 and 2008, respectively. Unaudited condensed financial information for
Atlantic-EPR I is as follows as of and for the nine months ended September 30, 2009 and 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Rental properties, net |
|
$ |
27,474 |
|
|
|
28,118 |
|
Cash |
|
|
141 |
|
|
|
510 |
|
Long-term debt (due May 2010) |
|
|
15,109 |
|
|
|
15,515 |
|
Partners equity |
|
|
12,412 |
|
|
|
12,646 |
|
Rental revenue |
|
|
3,324 |
|
|
|
3,302 |
|
Net income |
|
|
1,825 |
|
|
|
1,793 |
|
The Company recognized income of $252 and $242 (in thousands) from its investment in the
Atlantic-EPR II joint venture during the first nine months of 2009 and 2008, respectively. The
Company also received distributions from Atlantic-EPR II of $279 and $272 (in thousands) during the
first nine months of 2009 and 2008, respectively. Unaudited condensed financial information for
Atlantic-EPR II is as follows as of and for the nine months ended September 30, 2009 and 2008 (in
thousands):
22
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Rental properties, net |
|
$ |
21,613 |
|
|
|
22,074 |
|
Cash |
|
|
157 |
|
|
|
100 |
|
Long-term debt (due September 2013) |
|
|
13,035 |
|
|
|
13,360 |
|
Note payable to Entertainment Properties Trust |
|
|
117 |
|
|
|
117 |
|
Partners equity |
|
|
8,351 |
|
|
|
8,496 |
|
Rental revenue |
|
|
2,154 |
|
|
|
2,083 |
|
Net income |
|
|
1,013 |
|
|
|
997 |
|
The joint venture agreements for Atlantic-EPR I and Atlantic-EPR II allow the Companys
partner, Atlantic of Hamburg, Germany (Atlantic), to exchange up to a maximum of 10% of its
ownership interest per year in each of the joint ventures for common shares of the Company or, at
the discretion of the Company, the cash value of those shares as defined in each of the joint
venture agreements. During 2008, the Company paid Atlantic-EPR I and Atlantic-EPR II cash of $133
and $79 (in thousands), respectively, in exchange for additional ownership in each joint venture of
0.7%. During the first quarter of 2009, the Company paid Atlantic cash of $105 (in thousands) in
exchange for additional ownership of 0.7% for Atlantic-EPR I. These exchanges did not impact total
partners equity in either Atlantic-EPR I or Atlantic-EPR II.
On April 2, 2008, the Company acquired, through a wholly-owned subsidiary, the remaining 50%
ownership interest in CS Fund I and CS Fund I became a wholly-owned subsidiary. Prior to the date
of this acquisition, CS Fund I was accounted for as an unconsolidated real estate joint venture.
During the first nine months of 2008, the Company recognized income of $1.1 million and received
distributions of $1.3 million related to this investment.
7. Amendment and Restatement of Revolving Credit Facility
On June 30, 2009, the Company amended and restated its unsecured revolving credit facility (the
facility). The size of the facility decreased from $235 million to $215 million and includes an
accordion feature in which the facility can be increased to up to $300 million subject to certain
conditions, including lender consent. The facility continues to be supported by a borrowing base of
assets, and is now secured by a pledge of the equity of each entity that holds a borrowing base
asset. The facility bears interest at a floating rate equal to LIBOR (subject to a 2% floor) plus
3.5%. Alternatively, the Company can elect to have interest accrue at the base rate plus 3.5%.
The base rate is defined as the greater of the prime rate, the federal funds rate plus 0.5%, or the
then current 30-day LIBOR (subject to a 2% floor). The facility has a term expiring October 26,
2011 with a one year extension available at the Companys option, subject to certain terms and
conditions including the payment of an extension fee. As a result of this amendment and
restatement, the Company expensed certain unamortized financing costs, totaling approximately $117
thousand, in the second quarter of 2009.
The facility also requires the Company to grant mortgage liens on the underlying borrowing base
properties if the ratio of its consolidated debt to the value of its consolidated assets exceeds
specified thresholds. As of September 30, 2009, this ratio was below the specified thresholds and
the Company has not granted any mortgage liens on the underlying borrowing base properties. The
financial covenant relating to minimum liquidity now requires the Company to maintain excess
availability under the facility for the 90-day period preceding the maturity date of a loan
related to development of a planned casino and resort in Sullivan County, New York, in an amount
equal to at least the unpaid balance of such loan. This loan had an unpaid balance of $56.3
million as of September 30, 2009.
23
8. Mortgage Notes Payable
On February 25, 2009, VinREIT, LLC (VinREIT), a subsidiary that holds the Companys vineyard and
winery assets, obtained a $4.0 million term loan under VinREITs $160.0 million credit facility.
The loan matures on December 1, 2017, is secured by fixtures and equipment and bears interest at
LIBOR plus 2.00%. Principal and interest is due monthly and this loan will be fully amortized at
maturity. Subsequent to the closing of this loan, approximately $63.3 million of the facility
remains available. The net proceeds from the loan were used to pay down outstanding indebtedness
under the Companys revolving credit facility.
9. Derivative Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to the effect of changes in foreign currency exchange rates and interest
rates on its LIBOR based borrowings. The Company limits this risk by following established risk
management policies and procedures including the use of derivatives. The Companys objective in
using derivatives is to add stability to reported earnings and to manage its exposure to foreign
exchange and interest rate movements or other identified risks. To accomplish this objective, the
Company primarily uses interest rate swaps, cross currency swaps and foreign currency forwards.
Cash Flow Hedges of Interest Rate Risk
The Companys objectives in using interest rate derivatives are to add stability to interest
expense and to manage its exposure to interest rate movements on its LIBOR based borrowings. To
accomplish this objective, the Company currently uses interest rate swaps as its interest rate risk
management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of
variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments
over the life of the agreements without exchange of the underlying notional amount.
At September 30, 2009, the Company had nine interest rate swaps outstanding that were designated as
cash flow hedges of interest rate risk and had a combined outstanding notional amount of $204.5
million.
The effective portion of changes in the fair value of interest rate derivatives designated and that
qualify as cash flow hedges is recorded in accumulated other comprehensive income and is
subsequently reclassified into earnings in the period that the hedged forecasted transaction
affects earnings. During the nine months ending September 30, 2009, such derivatives were used to
hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion
of the change in fair value of the derivatives is recognized directly in earnings. No hedge
ineffectiveness on cash flow hedges was recognized during the nine months ending September 30,
2009.
Amounts reported in accumulated other comprehensive income related to derivatives will be
reclassified to interest expense as interest payments are made on the Companys variable-rate debt.
As of September 30, 2009, the Company estimates that during the twelve months ending September 30,
2010, $6.7 million will be reclassified from accumulated other comprehensive income to interest
expense.
24
Cash Flow Hedges of Foreign Exchange Risk
The Company is exposed to foreign currency exchange risk against its functional currency, the US
dollar, on its four Canadian properties and its mortgage note receivable denominated in Canadian
dollars. The Company uses a cross currency swap to mitigate its exposure to fluctuations in the
CAD to U.S. dollar exchange rate on its four Canadian properties. This foreign currency derivative
should hedge a significant portion of the Companys expected CAD denominated cash flow of the four
Canadian properties through February 2014 as their impact on the Companys cash flow when settled
should move in the opposite direction of the exchange rates utilized to translate revenues and
expenses of these properties.
At September 30, 2009, the Companys cross-currency swap had a fixed notional value of $76.0
million CAD and $71.5 million U.S. The net effect of this swap is to lock in an exchange rate of
$1.05 CAD per U.S. dollar on approximately $13 million of annual CAD denominated cash flows.
The effective portion of changes in the fair value of foreign currency derivatives designated and
that qualify as cash flow hedges of foreign exchange risk is recorded in accumulated other
comprehensive income and subsequently reclassified into earnings in the period that the hedged
forecasted transaction affects earnings. The ineffective portion of the change in fair value of
the derivative, as well as amounts excluded from the assessment of hedge effectiveness, is
recognized directly in earnings. No hedge ineffectiveness on foreign currency derivatives has been
recognized for the nine months ended September 30, 2009.
Net Investment Hedges
As discussed above, the Company is exposed to fluctuations in foreign exchange rates on its four
Canadian properties and its mortgage note receivable denominated in Canadian dollars. As such, the
Company also uses currency forward agreements to hedge its exposure to changes in foreign exchange
rates on these investments. Currency forward agreements involve fixing the CAD to U.S. dollar
exchange rate for delivery of a specified amount of foreign currency on a specified date. The
currency forward agreements are typically cash settled in US dollars for their fair value at or
close to their settlement date. In order to hedge the net investment in the Companys four
Canadian properties, the Company entered into a forward contract with a fixed notional value of
$100 million CAD and $96.1 million U.S. with a February 2014 settlement which coincides with the
maturity of the Companys underlying mortgage on these four properties. The exchange rate of this
forward contract is approximately $1.04 CAD per U.S. dollar. This forward contract should hedge a
significant portion of the Companys CAD denominated net investment in these four centers through
February 2014 as the impact on accumulated other comprehensive income from marking the derivative
to market should move in the opposite direction of the translation adjustment on the net assets of
its four Canadian properties.
For foreign currency derivatives designated as net investment hedges, the effective portion of
changes in the fair value of the derivatives are reported in accumulated other comprehensive income
as part of the cumulative translation adjustment. The ineffective portion of the change in fair
value of the derivatives is recognized directly in earnings. No hedge ineffectiveness on net
investment hedges has been recognized for the nine months ended September 30, 2009. Amounts are
reclassified out of accumulated other comprehensive income into earnings when the hedged net
investment is either sold or substantially liquidated.
See Note 10 for disclosures relating to the fair value of the Companys derivative instruments.
Below is a summary of the effect of derivative instruments on the consolidated statement of income
for the nine months ended September 30, 2009:
25
Effect of Derivative Instruments on the Consolidated Statement of Income
for the nine months ended September 30, 2009
(Unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
|
Amount of Income |
|
|
Amount of Gain |
|
|
|
or (Loss) Recognized |
|
|
or (Expense) Reclassified |
|
|
or (Loss) Recognized |
|
|
|
in AOCI on |
|
|
from AOCI |
|
|
in Earnings |
|
|
|
Derivative |
|
|
into Earnings |
|
|
on Derivative |
|
Description |
|
(Effective Portion) |
|
|
(Effective Portion) |
|
|
(Ineffective Portion) |
|
Interest Rate Swaps |
|
$ |
3,921 |
|
|
$ |
(5,273 |
)* |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross Currency Swaps |
|
|
(6,204 |
) |
|
|
875 |
** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Forward
Agreements |
|
|
(4,741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(7,024 |
) |
|
$ |
(4,398 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Included in Interest expense in accompanying consolidated statements of income. |
|
** |
|
Included in Other income in the accompanying consolidated statements of income. |
Credit-risk-related Contingent Features
The Company has agreements with each of its interest rate derivative counterparties that contain a
provision where if the Company defaults on any of its indebtedness, including default where
repayment of the indebtedness has not been accelerated by the lender, then the Company could also
be declared in default on its interest rate derivative obligations.
As of September 30, 2009, the fair value of derivatives in a liability position related to these
agreements was $11.6 million. If the Company breached any of the contractual provisions of the
derivative contracts, it would be required to settle its obligations under the agreements at their
termination value of $12.4 million.
10. Fair Value Disclosures
The FASB ASC Topic on Fair Value Measurements (Topic 820) defines fair value, establishes a
26
framework for measuring fair value, and expands disclosures about fair value measurements. It
applies to reported balances that are required or permitted to be measured at fair value and does
not require any new fair value measurements of reported balances. Topic 820 emphasizes that fair
value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value
measurement should be determined based on the assumptions that market participants would use in
pricing the asset or liability. As a basis for considering market participant assumptions in fair
value measurements, Topic 820 establishes a fair value hierarchy that distinguishes between market
participant assumptions based on market data obtained from sources independent of the reporting
entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the
reporting entitys own assumptions about market participant assumptions (unobservable inputs
classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted
prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active
markets, as well as inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and yield curves that are observable at
commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which
are typically based on an entitys own assumptions, as there is little, if any, related market
activity. In instances where the determination of the fair value measurement is based on inputs
from different levels of the fair value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The Companys assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment,
and considers factors specific to the asset or liability.
Derivative Financial Instruments
The Company uses interest rate swaps, foreign currency forwards and cross currency swaps to manage
its interest rate and foreign currency risk. The valuation of these instruments is determined
using widely accepted valuation techniques including discounted cash flow analysis on the expected
cash flows of each derivative. This analysis reflects the contractual terms of the derivatives,
including the period to maturity, and uses observable market-based inputs, including interest rate
curves, foreign exchange rates, and implied volatilities. The fair values of interest rate swaps
are determined using the market standard methodology of netting the discounted future fixed cash
receipts and the discounted expected variable cash payments. The variable cash payments are based
on an expectation of future interest rates (forward curves) derived from observable market interest
rate curves. To comply with the provisions of Topic 820, the Company incorporates credit valuation
adjustments to appropriately reflect both its own nonperformance risk and the respective
counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of
its derivative contracts for the effect of nonperformance risk, the Company has considered the
impact of netting and any applicable credit enhancements, such as collateral postings, thresholds,
mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives
fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with
its derivatives also utilize Level 3 inputs, such as estimates of current credit spreads, to
evaluate the likelihood of default by itself and its counterparties. As of September 30, 2009, the
Company has assessed the significance of the impact of the credit valuation adjustments on the
overall valuation of its derivative positions and has determined that the credit valuation
adjustments are significant to the overall valuation of its currency forward agreements, cross
currency swaps and five of its interest rate swaps and therefore, has classified these derivatives
as Level 3 within the fair value reporting hierarchy.
27
The table below presents the Companys assets and liabilities measured at fair value on a
recurring basis as of September 30, 2009, aggregated by the level in the fair value hierarchy
within which those measurements fall and by derivative type.
Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2009
(Unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
|
|
Active Markets |
|
Other |
|
Significant |
|
Balance at |
|
|
for Identical |
|
Observable |
|
Unobservable |
|
September 30, |
Description |
|
Assets (Level I) |
|
Inputs (Level 2) |
|
Inputs (Level 3) |
|
2009 |
Interest Rate
Swaps* |
|
$ |
|
|
|
$ |
(3,155 |
) |
|
$ |
(8,487 |
) |
|
$ |
(11,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross Currency
Swaps** |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,428 |
|
|
$ |
1,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Forward
Agreements** |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,331 |
|
|
$ |
3,331 |
|
|
|
|
* |
|
Included in Accounts payable and accrued liabilities in the accompanying
consolidated balance sheet. |
|
** |
|
Included in Other Assets in the accompanying consolidated balance sheet. |
The table below presents a reconciliation of the Companys beginning and ending balances of
liabilities having fair value measurements based on significant unobservable inputs (Level 3) for
the nine months ended September 30, 2009.
28
Level 3 Fair Value Measurements for the Nine Months Ended September 30, 2009
(Unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
|
|
|
|
|
|
|
Gains |
|
Gains |
|
|
|
|
|
Ending |
|
|
Balance as of |
|
Transfers |
|
Transfers |
|
(Losses) |
|
(Losses) |
|
|
|
|
|
Balance as of |
|
|
December 31, |
|
into |
|
out of |
|
Included |
|
Included |
|
Total Gains |
|
September 30, |
Description |
|
2008 |
|
Level 3 |
|
Level 3 |
|
in Income |
|
in OCI |
|
(Losses) |
|
2009 |
Interest Rate
Swaps |
|
|
|
|
|
$ |
(15,564 |
) |
|
$ |
2,114 |
|
|
|
|
|
|
$ |
4,963 |
|
|
$ |
4,963 |
|
|
$ |
(8,487 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross Currency
Swaps |
|
|
|
|
|
|
5,474 |
|
|
|
|
|
|
|
|
|
|
$ |
(4,046 |
) |
|
$ |
(4,046 |
) |
|
$ |
1,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Forward
Agreements |
|
|
|
|
|
|
14,059 |
|
|
|
|
|
|
|
|
|
|
$ |
(10,728 |
) |
|
$ |
(10,728 |
) |
|
$ |
3,331 |
|
Non-recurring fair value measurements
The table below presents the Companys assets measured at fair value on a non-recurring basis as of
September 30, 2009, aggregated by the level in the fair value hierarchy within which those
measurements fall.
Assets Measured at Fair Value on a Non-Recurring Basis at September 30, 2009
(Unaudited, dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
|
|
Active Markets |
|
Other |
|
Significant |
|
Balance at |
|
|
for Identical |
|
Observable |
|
Unobservable |
|
September 30, |
Description |
|
Assets (Level I) |
|
Inputs (Level 2) |
|
Inputs (Level 3) |
|
2009 |
Rental properties, net |
|
$ |
|
|
|
$ |
|
|
|
$ |
118,000 |
|
|
$ |
118,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes and
related accrued
interest receivable,
net |
|
$ |
|
|
|
$ |
|
|
|
$ |
86,878 |
|
|
$ |
86,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and related
accrued interest
receivable, net |
|
$ |
|
|
|
$ |
|
|
|
$ |
7,073 |
|
|
$ |
7,073 |
|
During the three months ended September 30, 2009, the Company recognized a nonrecurring
non-cash impairment charge of $35.8 million relating to adjustment to a property carrying value.
Management of the Company estimated the fair value of the property taking into account an
independent appraisal completed in October 2009. Based on this input, the Company determined that
its valuation of this
investment was classified within Level 3 of the fair value hierarchy.
During the three months ended September 30, 2009, the Company measured one mortgage note receivable
at fair value as a result of the establishment of the allowance for loan losses as further
discussed in Note 5. Management estimated the fair value of the underlying collateral for this
note
29
and the Company determined that its valuation of this investment was classified within Level 3
of the fair value hierarchy. Additionally, the Company measured five notes receivable at fair
value as a result of the establishment of the allowance for loan losses as further discussed in
Note 5. Management estimated the fair value of the underlying collateral for these notes and the
Company determined that its valuation of these investments was classified within Level 3 of the
fair value hierarchy.
11. Fair Value of Financial Instruments
Management compares the carrying value and the estimated fair value of the Companys financial
instruments. The following methods and assumptions were used by the Company to estimate the fair
value of each class of financial instruments at September 30, 2009:
Mortgage notes and related accrued interest receivable, net:
The fair value of the Companys mortgage notes and related accrued interest receivable as of
September 30, 2009 is estimated by discounting the future cash flows of each instrument using
current market rates. At September 30, 2009, the Company had a carrying value of $518.1 million
in fixed rate mortgage notes receivable outstanding, including related accrued interest and net
of loan loss reserve, with a weighted average interest rate of approximately 10.05%. The fixed
rate mortgage notes bear interest at rates of 7.00% to 15.00%. Discounting the future cash flows
for fixed rate mortgage notes receivable using an estimated weighted average market rate of
10.67%, management estimates the fixed rate mortgage notes receivables fair value to be
approximately $510.1 million at September 30, 2009.
Investment in a direct financing lease, net:
The fair value of the Companys investment in a direct financing lease as of September 30, 2009
is estimated by discounting the future cash flows of the instrument using current market rates.
At September 30, 2009, the Company had an investment in a direct financing lease with a carrying
value of $168.9 million and a weighted average effective interest rate of 12.01%. The investment
in direct financing lease bears interest at effective interest rates of 11.90% to 12.40%. The
carrying value of the investment in a direct financing lease approximates the fair market value
at September 30, 2009.
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, net:
The carrying values of accounts receivable approximate the fair market value at September 30,
2009.
Notes and related accrued interest receivable, net:
The fair value of the Companys notes and related accrued interest receivable as of September 30,
2009 is estimated by discounting the future cash flows of each instrument using current market
rates. At September 30, 2009, the Company had a carrying value of $12.4 million in fixed rate notes
receivable outstanding, including related accrued interest and net of loan loss reserve, with a
weighted average interest rate of approximately 11.11%. The fixed rate notes bear interest at
rates of 6.33% to 15.00%. Discounting the future cash flows for fixed rate notes receivable
using an estimated market rate of 10.16%, management estimates the fixed rate notes receivables
fair value to be approximately $12.1 million at September 30, 2009.
30
Derivative instruments:
Derivative instruments are carried at their fair market value.
Debt instruments:
The fair value of the Companys debt as of September 30, 2009 is estimated by discounting the
future cash flows of each instrument using current market rates. At September 30, 2009, the
Company had a carrying value of $352.0 million in variable rate debt outstanding with an average
weighted interest rate of approximately 5.38%. Discounting the future cash flows for variable
rate debt using an estimated market rate of 5.44%, management estimates the variable rate debts
fair value to be approximately $345.2 million at September 30, 2009. As described in Note 9,
$204.5 million of variable rate debt outstanding at September 30, 2009 has been converted to a
fixed rate by interest rate swap agreements.
At September 30, 2009, the Company had a carrying value of $832.1 million in fixed rate long-term
debt outstanding with an average weighted interest rate of approximately 6.01%. Discounting the
future cash flows for fixed rate debt using an estimated market rate of 5.71%, management
estimates the fixed rate debts fair value to be approximately $835.0 million at September 30,
2009.
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.
12. Earnings Per Share
The following table summarizes the Companys common shares used for computation of basic and
diluted earnings per share for the three and nine months ended September 30, 2009 and 2008
(unaudited, amounts in thousands except per share information):
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
Nine Months Ended September 30, 2009 |
|
|
|
Income |
|
|
Shares |
|
|
Per Share |
|
|
Income |
|
|
Shares |
|
|
Per Share |
|
|
|
(numerator) |
|
|
(denominator) |
|
|
Amount |
|
|
(numerator) |
|
|
(denominator) |
|
|
Amount |
|
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(75,362 |
) |
|
|
35,445 |
|
|
$ |
(2.13 |
) |
|
$ |
(25,271 |
) |
|
|
34,937 |
|
|
$ |
(0.72 |
) |
Add: net loss attributable to
noncontrolling interests |
|
|
16,071 |
|
|
|
|
|
|
|
0.45 |
|
|
|
19,014 |
|
|
|
|
|
|
|
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
attributable to Entertainment
Properties Trust |
|
|
(59,291 |
) |
|
|
|
|
|
|
(1.68 |
) |
|
|
(6,257 |
) |
|
|
|
|
|
|
(0.18 |
) |
Preferred dividend requirements |
|
|
(7,552 |
) |
|
|
|
|
|
|
(0.21 |
) |
|
|
(22,655 |
) |
|
|
|
|
|
|
(0.65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
available to common shareholders
of Entertainment Properties Trust |
|
$ |
(66,843 |
) |
|
|
35,445 |
|
|
$ |
(1.89 |
) |
|
$ |
(28,912 |
) |
|
|
34,937 |
|
|
$ |
(0.83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008 |
|
|
Nine Months Ended September 30, 2008 |
|
|
|
Income |
|
|
Shares |
|
|
Per Share |
|
|
Income |
|
|
Shares |
|
|
Per Share |
|
|
|
(numerator) |
|
|
(denominator) |
|
|
Amount |
|
|
(numerator) |
|
|
(denominator) |
|
|
Amount |
|
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
35,570 |
|
|
|
32,033 |
|
|
|
1.11 |
|
|
$ |
93,024 |
|
|
|
30,252 |
|
|
|
3.07 |
|
Add: net loss attributable to
noncontrolling interests |
|
|
488 |
|
|
|
|
|
|
|
0.02 |
|
|
|
1,474 |
|
|
|
|
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
attributable to Entertainment
Properties Trust |
|
$ |
36,058 |
|
|
|
|
|
|
|
1.13 |
|
|
$ |
94,498 |
|
|
|
|
|
|
|
3.12 |
|
Preferred dividend requirements |
|
|
(7,552 |
) |
|
|
|
|
|
|
(0.24 |
) |
|
|
(20,714 |
) |
|
|
|
|
|
|
(0.68 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
available to common shareholders
of Entertainment Properties Trust |
|
|
28,506 |
|
|
|
32,033 |
|
|
|
0.89 |
|
|
|
73,784 |
|
|
|
30,252 |
|
|
|
2.44 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share options |
|
|
|
|
|
|
332 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
313 |
|
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings: Income from
continuing operations
attributable
to Entertainment Properties Trust |
|
$ |
28,506 |
|
|
|
32,365 |
|
|
$ |
0.88 |
|
|
$ |
73,784 |
|
|
|
30,565 |
|
|
$ |
2.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
available to common shareholders
of Entertainment Properties Trust |
|
$ |
28,506 |
|
|
|
32,033 |
|
|
$ |
0.89 |
|
|
$ |
73,784 |
|
|
|
30,252 |
|
|
$ |
2.44 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders of Entertainment
Properties Trust |
|
$ |
28,506 |
|
|
|
32,033 |
|
|
$ |
0.89 |
|
|
$ |
73,876 |
|
|
|
30,252 |
|
|
$ |
2.44 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share options |
|
|
|
|
|
|
332 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
313 |
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment Properties Trust |
|
$ |
28,506 |
|
|
|
32,365 |
|
|
$ |
0.88 |
|
|
$ |
73,876 |
|
|
|
30,565 |
|
|
$ |
2.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dilutive effect of potential common shares from the exercise of share options is
included in diluted earnings per share except in those periods with a loss from continuing
operations.
The additional 1.9 million common shares that would result from the conversion of the Companys
5.75% Series C cumulative convertible preferred shares and the additional 1.6 million common
shares that would result from the conversion of the Companys 9.0% Series E cumulative
convertible
preferred shares and the corresponding add-back of the preferred dividends declared on those
shares are not included in the calculation of diluted earnings per share for the three and nine
months ended September 30, 2009 and 2008 because the effect is anti-dilutive.
The Companys nonvested share awards are considered participating securities and are included in
the calculation of earnings per share under the two-class method as required by the Earnings Per
Share Topic of the FASB ASC. Prior-period earnings per share data was computed using the treasury
32
stock method and has been adjusted retrospectively, which lowered basic and diluted earnings per
share by $0.01 for the three months ended September 30, 2008 and lowered basic earnings per share
by $0.03 and diluted earnings per share by $0.02 for the nine months ended September 30, 2008.
During the second quarter of 2009, the Company issued 20,508 restricted share units to its
non-employee trustees. The restricted share units are entitled to receive dividend payments from
the date of grant and are therefore considered participating securities under the two-class method.
As such, the weighted average shares used in the computation of basic earnings per share include
the nonvested restricted share units.
13. Equity Incentive Plans
All grants of common shares and options to purchase common shares were issued under the 1997 Share
Incentive Plan prior to May 9, 2007, and under the 2007 Equity Incentive Plan on and after May 9,
2007. Under the 2007 Equity Incentive Plan, an aggregate of 1,950,000 common shares, options to
purchase common shares and restricted share units, subject to adjustment in the event of certain
capital events, may be granted. At September 30, 2009, there were 1,059,818 shares available for
grant under the 2007 Equity Incentive Plan.
Share Options
Share options granted under both the 1997 Share Incentive Plan and the 2007 Equity Incentive 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 for employees typically
become exercisable at a rate of 20% per year over a fiveyear period, however, this was reduced to
a rate of 25% per year over a four year period for options granted in the first quarter of 2009.
For non-employee Trustees, share options are vested upon issuance, however, the share options may
not be exercised for a one year period subsequent to the grant date. The Company generally issues
new common shares upon option exercise. A summary of the Companys share option activity and
related information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Number of |
|
Option Price |
|
Average |
|
|
Shares |
|
Per Share |
|
Exercise Price |
Outstanding at December 31, 2008 |
|
|
911,117 |
|
|
$ |
14.00 |
- |
$65.50 |
|
|
$ |
34.07 |
|
Exercised |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Granted |
|
|
422,093 |
|
|
|
18.18 |
- |
19.41 |
|
|
|
18.36 |
|
Forfeited |
|
|
(23,994 |
) |
|
|
18.18 |
- |
60.03 |
|
|
|
32.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009 |
|
|
1,309,216 |
|
|
|
14.00 |
- |
65.50 |
|
|
|
29.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted was $2.68 and $4.31 during the nine months ended
September 30, 2009 and 2008, respectively. During the nine months ended September 30, 2009, there
were no stock options exercised. At September 30, 2009 and December 31, 2008, stock-option expense
to be recognized in future periods was $1.6 million and $1.0 million, respectively.
33
The following table summarizes outstanding options at September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
Options |
|
Weighted avg. |
|
Weighted avg. |
|
Aggregate intrinsic |
price range |
|
outstanding |
|
life remaining |
|
exercise price |
|
value (in thousands) |
$ |
14.00 - 19.99 |
|
|
|
609,167 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
20.00 - 29.99 |
|
|
|
251,127 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
30.00 - 39.99 |
|
|
|
79,267 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
40.00 - 49.99 |
|
|
|
254,768 |
|
|
|
6.8 |
|
|
|
|
|
|
|
|
|
|
50.00 - 59.99 |
|
|
|
10,000 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
60.00 - 65.50 |
|
|
|
104,887 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,309,216 |
|
|
|
6.0 |
|
|
$ |
29.03 |
|
|
$ |
11,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes exercisable options at September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
Options |
|
Weighted avg. |
|
Weighted avg. |
|
Aggregate intrinsic |
price range |
|
outstanding |
|
life remaining |
|
exercise price |
|
value (in thousands) |
$ |
14.00 - 19.99 |
|
|
|
203,937 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
20.00 - 29.99 |
|
|
|
264,127 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
30.00 - 39.99 |
|
|
|
82,222 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
40.00 - 49.99 |
|
|
|
122,174 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
50.00 - 59.99 |
|
|
|
10,000 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
60.00 - 65.50 |
|
|
|
48,785 |
|
|
|
7.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731,245 |
|
|
|
3.8 |
|
|
$ |
29.43 |
|
|
$ |
6,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested Shares
A summary of the Companys nonvested share activity and related information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
Average |
|
Average |
|
|
Number of |
|
Grant Date |
|
Life |
|
|
Shares |
|
Fair Value |
|
Remaining |
Outstanding at December 31, 2008 |
|
|
282,328 |
|
|
$ |
52.18 |
|
|
|
|
|
Granted |
|
|
218,797 |
|
|
|
18.18 |
|
|
|
|
|
Vested |
|
|
(96,309 |
) |
|
|
50.61 |
|
|
|
|
|
Forfeited |
|
|
(4,175 |
) |
|
|
33.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2009 |
|
|
400,641 |
|
|
|
34.19 |
|
|
|
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The holders of nonvested shares have voting rights and receive dividends from the date of grant.
These shares vest ratably over a period of three to five years. The fair value of the nonvested
shares
34
that vested during the nine months ended September 30, 2009 and September 30, 2008 was $2.8
million and $3.6 million, respectively. At September 30, 2009 and December 31, 2008, unamortized
share-based compensation expense related to nonvested shares was $6.9 million and $8.0 million,
respectively.
Restricted Share Units
A summary of the Companys restricted share unit activity and related information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
Average |
|
Average |
|
|
Number of |
|
Grant Date |
|
Life |
|
|
Shares |
|
Fair Value |
|
Remaining |
Outstanding at
December 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
Granted |
|
|
20,508 |
|
|
|
19.02 |
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2009 |
|
|
20,508 |
|
|
|
19.02 |
|
|
|
0.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The holders of restricted share units have voting rights and receive dividends from the date of
grant. The share units vest upon the earlier of the day preceding the next annual meeting of
shareholders or a change of control. The settlement date for the shares is selected by the
non-employee trustee, and ranges from three years from the grant date to upon termination of
service. At September 30, 2009, unamortized share-based compensation expense related to restricted
share units was $228 thousand. There was no unamortized share-based compensation expense related
to restricted share units at December 31, 2008.
14. Issuances of Common Shares
During January 2009, the Company issued pursuant to a registered public offering 1,551,000 common
shares under the direct share purchase component of the Companys Dividend Reinvestment and Direct
Share Purchase Plan. These shares were sold at an average price of $23.86 per share and total net
proceeds after expenses were approximately $36.8 million. Additionally, during February 2009, the
Company issued pursuant to a registered public offering 339,000 common shares under this plan.
These shares were sold at an average price of $22.12 per share and total net proceeds after
expenses were approximately $7.5 million.
During August 2009, the Company issued pursuant to a registered public offering 652,000 common
shares under the direct share purchase component of the Companys Dividend Reinvestment and Direct
Share Purchase Plan. These shares were sold at an average price of $30.65 per share and total net
proceeds after expenses were approximately $19.9 million. Additionally, during September 2009, the
Company issued pursuant to a registered public offering 911,000 common shares under this plan.
These shares were sold at an average price of $32.92 per share and total net proceeds after
expenses were approximately $29.9 million.
15. Discontinued Operations
Included in discontinued operations for the nine months ended September 30, 2008 is a land parcel
sold in June of 2008 for $1.1 million. The land parcel was previously leased under a ground lease.
35
The operating results relating to assets sold are as follows (unaudited, in thousands):
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
Rental revenue |
|
$ |
|
|
Tenant reimbursements |
|
|
|
|
Other income |
|
|
|
|
|
|
|
|
Total revenue |
|
|
|
|
|
|
|
|
|
Property operating expense |
|
|
27 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before gain on sale of real estate |
|
|
(27 |
) |
|
Gain on sale of real estate |
|
|
119 |
|
|
|
|
|
Net income |
|
$ |
92 |
|
|
|
|
|
|
|
|
|
|
16.
Other Commitments and Contingencies
As of September 30, 2009, the Company had one winemaking and storage facility project under
development for which it has agreed to finance the development costs. Through September 30, 2009,
the Company has invested approximately $10.1 million in this project for the purchase of land and
development in Sonoma County, California, and has commitments to fund approximately $2.4 million of
additional improvements. Development costs are advanced by the Company in periodic draws. 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. The Company has
agreed to lease the facility to the operator at pre-determined rates.
Additionally, as of September 30, 2009, the Company has agreed to finance $5.2 million in
development costs for an expansion at one of its existing public charter school properties.
Development costs are advanced by the Company in periodic draws. 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. The Company has agreed to lease the expansion
facility to the operator at pre-determined rates.
The Company has provided a guarantee of the payment of certain economic development revenue bonds
related to three theatres in Louisiana for which the Company earns a fee at an annual rate of 1.75%
over the 30 year term of the bond. The Company evaluated this guarantee in connection with the
provisions of the FASB ASC Topic 450 on Guarantees (Topic 450). Based on certain criteria, Topic
450 requires a guarantor to record an asset and a liability at inception. Accordingly, the Company
had recorded $4.0 million as a deferred asset included in accounts receivable and $4.0 million
included in other liabilities in the accompanying consolidated balance sheet as of December 31,
2008, which represented managements best estimate of the fair value of the guarantee at inception
which will be realized over the term of the guarantee. During the third quarter of 2009, the
outstanding principal amount of the bonds was reduced from $22 million to $14.4 million due to a
principal repayment. Accordingly, the Company reduced the asset and liability recorded to reflect
the decrease in the outstanding principal balance. The Company has recorded $2.6 million as a
deferred asset included in accounts receivable and $2.6 million included in other liabilities in
the
36
accompanying consolidated balance sheet as of September 30, 2009. No amounts have been accrued
as a loss contingency related to this guarantee because payment by the Company is not probable.
The Company has certain commitments related to its mortgage note investments that it may be
required to fund in the future. The Company is generally obligated to fund these commitments at
the request of the borrower or upon the occurrence of events outside of its direct control. As of
September 30, 2009, the Company had four mortgage notes receivable with commitments totaling
approximately $20 million. The $20 million excludes any future amounts that may or may not be
funded related to the planned casino and resort development discussed in Note 5. If commitments
are funded in the future, interest will be charged at rates consistent with the existing
investments.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements
and Notes thereto included in this Quarterly Report on Form 10-Q of Entertainment Properties Trust
(the Company, EPR, we or us). The forward-looking statements included in this discussion
and elsewhere in this Quarterly Report on Form 10-Q involve risks and uncertainties, including
anticipated financial performance, business prospects, industry trends, shareholder returns,
performance of leases by tenants, performance on loans to customers and other matters, which
reflect managements best judgment based on factors currently known. See Cautionary Statement
Concerning Forward Looking Statements which is incorporated herein by reference. 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 Item 1A, Risk Factors in our Annual Report on Form
10-K for the year ended December 31, 2008 filed with the SEC on February 24, 2009, and, to the
extent applicable, our Quarterly Reports on Form 10-Q.
Overview
Our principal business objective is to be the nations leading destination entertainment,
entertainment-related, recreation and specialty real estate company by continuing to develop,
acquire or finance high-
quality properties. As of September 30, 2009, our total assets exceeded $2.5 billion, and included
investments in 80 megaplex theatre properties (including four joint venture properties) and various
restaurant, retail, entertainment, destination recreational and specialty properties located in 29
states, the District of Columbia and Ontario, Canada. As of September 30, 2009, we had invested
approximately $20.6 million in development land and construction in progress and approximately
$518.1 million (including accrued interest and net of loan loss reserve) in mortgage financing for
entertainment, recreational and specialty properties, including certain such properties under
development.
Historically, our primary challenges have been locating suitable properties, negotiating favorable
lease or financing terms, and managing our portfolio as we have continued to grow. We believe the
knowledge and industry relationships of our management have facilitated opportunities for us to
acquire, finance and lease properties. During 2009, as a result of the economic downturn and
related challenges in the credit market that have increased our cost of capital, we have tempered
our focus on FFO growth, with a greater concern for maintaining adequate liquidity and a strong
balance sheet. As a result, our capital spending for the nine months ended September 30, 2009 was
much lower than for the same period in 2008 as we focused primarily on funding existing commitments
(see
37
Liquidity and Capital Resources-Commitments for more discussion regarding outstanding
commitments at September 30, 2009). We expect to continue our focus on liquidity and a strong
balance sheet for the remainder of 2009 and into 2010. However, we also believe the steps taken
thus far in 2009 position us to consider acquisitions that may present themselves as the economy
begins to stabilize, particularly theatre and charter school properties which allow us to utilize
our experience to mitigate some of the risks inherent in the current economic environment.
Depending on our capital needs, from time to time we may opportunistically access the equity
markets and may continue to issue shares under the direct share purchase plan of our Dividend
Reinvestment and Direct Share Purchase Plan.
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 typically
required to pay common area maintenance charges to reimburse us for their pro rata portion of these
costs.
Our real estate mortgage portfolio consists of nine mortgage notes. Of the outstanding gross
balance of $553.2 million at September 30, 2009, four notes comprise $418.4 million of the balance
and the remainder relates to financing provided for ski areas. Two of the four mortgage notes,
totaling $163.3 million at September 30, 2009, are secured by a water-park anchored entertainment
village in Kansas City, Kansas (the first phase of which opened in July 2009) as well as two other
water-parks in Texas. The other two mortgage notes, together totaling $255.1 million at September
30, 2009, relate to the Toronto Dundas Square Project, an entertainment retail center in Ontario,
Canada that was completed in May 2008, and a planned casino and resort development in Sullivan
County, New York.
As discussed in more detail in Recent Developments below, as of September 30, 2009, $255.1
million of mortgage notes and $41.8 million of notes receivable were considered impaired and during
the three months ended September 30, 2009, a total of $65.8 million of loan loss provisions were
recognized on these notes. In addition, during the three months ended September 30, 2009, we
recorded an impairment charge of $35.8 million related to our entertainment retail center in White
Plains, New York.
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 and mortgage notes. We are
self-administered and managed by our Board of Trustees and executive officers. Our primary non-cash
expense is the depreciation of our properties. We depreciate buildings and improvements on our
properties over a 3 to 40 year period for tax purposes and financial reporting purposes.
Our property acquisitions and financing commitments are financed by cash from operations,
borrowings under our revolving credit facilities, term loan facilities and 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 that are not significantly pre-leased. We have also entered into certain joint ventures
and we have provided mortgage note financing as described above. We intend to continue entering
into some or all of these
38
types of arrangements in the foreseeable future, subject to our ability
to do so in light of the current financial and economic environment.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States (GAAP) 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 consolidation, revenue recognition, depreciable lives of the real estate,
the valuation of real estate, accounting for real estate acquisitions, estimating reserves for
uncollectible receivables and the accounting for mortgage and other notes receivable. Application
of these assumptions requires the exercise of judgment as to future uncertainties and, as a result,
actual results could differ from these estimates.
Consolidation
We consolidate certain entities if we are deemed to be the primary beneficiary in a variable
interest entity (VIE), as defined in Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic on Consolidation (Topic 810). The equity method of
accounting is applied to entities in which we are not the primary beneficiary as defined in Topic
810, or do not have effective control, but can exercise influence over the entity with respect to
its operations and major decisions.
Revenue Recognition
Rents that are fixed and determinable are recognized on a straight-line basis over the minimum
terms of the leases. Base rent escalation in other leases is dependent upon increases in the
Consumer Price Index (CPI) and accordingly, management does not include any future base rent
escalation amounts on these leases in current revenue. Most of our leases provide for percentage
rents based upon the level of sales achieved by the tenant. These percentage rents are recognized
once the required sales level is achieved. Lease termination fees are recognized when the related
leases are canceled and we have no continuing obligation to provide services to such former
tenants.
Direct financing lease income is recognized on the effective interest method to produce a level
yield on funds not yet recovered. Estimated unguaranteed residual values at the date of lease
inception represent managements initial estimates of fair value of the leased assets at the
expiration of the lease, not to exceed original cost. Significant assumptions used in estimating
residual values include estimated net cash flows over the remaining lease term and expected future
real estate values. The estimated unguaranteed residual value is reviewed on an annual basis. We
evaluate the collectibility of our direct financing lease receivable to determine whether it is
impaired. A direct financing lease receivable is considered to be impaired when, based on current
information and events, it is probable that we will be unable to collect all amounts due according
to the existing contractual terms. When a direct financing lease receivable is considered to be
impaired, the amount of loss is calculated by comparing the recorded investment to the value
determined by discounting the expected future cash flows at the direct financing lease receivables
effective interest rate or to the value of the underlying collateral, less costs to sell, if such
receivable is collateralized.
Real Estate Useful Lives
We are required to make subjective assessments as to the useful lives of our properties for the
39
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 25 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 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. 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 utilizing independent
appraisals and based on projected discounted cash flows using a discount rate determined by
management to be commensurate with the risk inherent in the Company. During the three months ended
September 30, 2009, we recorded an impairment charge related to our entertainment retail center in
White Plains, New York. For further detail, see Note 4 to the consolidated financial statements in
this Quarterly Report on Form 10-Q.
Real Estate Acquisitions
Upon acquisitions of real estate properties, we record 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) as well as any noncontrolling interest in accordance with FASB ASC Topic 805 on Business
Combinations (Topic 805). In addition, in accordance with Topic 805, acquisition-related costs
are expensed as incurred, rather than capitalized.
Allowance for Doubtful Accounts
Management makes quarterly estimates of the collectibility of its accounts receivable related to
base rents, tenant escalations (straight-line rents), reimbursements and other revenue or income.
Management specifically analyzes trends in accounts receivable, 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 customers 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.
40
Mortgage Notes and Other Notes Receivable
Mortgage notes and other notes receivable, including related accrued interest receivable, consist
of loans that we originated and the related accrued and unpaid interest income as of the balance
sheet date. Mortgage notes and other notes receivable are initially recorded at the amount
advanced to the borrower and we defer certain loan origination and commitment fees, net of certain
origination costs, and amortize them over the term of the related loan. Interest income on
performing loans is accrued as earned. We evaluate the collectibility of both interest and
principal for each loan to determine whether it is impaired. A loan is considered to be impaired
when, based on current information and events, we determine it is probable that we will be unable
to collect all amounts due according to the existing contractual terms. When a loan is considered
to be impaired, the amount of loss is calculated by comparing the recorded investment to the value
determined by discounting the expected future cash flows at the loans effective interest rate or
to the fair value of the underlying collateral, less costs to sell, if the loan is collateralized.
For impaired loans, interest income is recognized on a cash basis, unless we determine based on the
loan to estimated fair value ratio the loan should be on the cost recovery method, and any cash
payments received would then be reflected as a reduction of principal. Interest income recognition
is recommenced when the impaired loan becomes contractually current and performance is demonstrated
to be resumed. We determined certain of our mortgage and other notes receivable were impaired at
September 30, 2009 and, based on a review of the underlying collateral, we recorded a provision for
loan losses of $65.8 million for the first nine months of 2009. For further detail, see Note 5 to
the consolidated financial statements in this Quarterly Report on Form 10-Q.
Recent Developments
Amendment and Restatement of Revolving Credit Facility
On June 30, 2009, we amended and restated our unsecured revolving credit facility (the facility).
The size of the facility decreased from $235 million to $215 million and includes an accordion
feature in which the facility can be increased to up to $300 million subject to certain conditions,
including lender consent. The facility continues to be supported by a borrowing base of assets, and
is now secured by a pledge of the equity of each entity that holds a borrowing base asset. The
facility bears interest at a floating rate equal to LIBOR (subject to a 2% floor) plus 3.5%.
Alternatively, we can elect to have interest accrue at the base rate plus 3.5%. The base rate is
defined as the greater of the
prime rate, the federal funds rate plus 0.5%, or the then current 30-day LIBOR (subject to a 2%
floor). The facility has a term expiring October 26, 2011 with a one year extension available at
our option, subject to certain terms and conditions including the payment of an extension fee. As
a result of this amendment and restatement, we expensed certain unamortized financing costs,
totaling approximately $117 thousand, in the second quarter of 2009.
The facility also requires us to grant mortgage liens on the underlying borrowing base properties
if the ratio of our consolidated debt to the value of our consolidated assets exceeds specified
thresholds. As of September 30, 2009, this ratio was below the specified thresholds and we have
not granted any mortgage liens on the underlying borrowing base properties. The financial covenant
relating to minimum liquidity now requires us to maintain excess availability under the facility
for the 90-day period preceding the maturity date of a loan related to a planned casino and resort
development in Sullivan County, New York, in an amount equal to at least the unpaid balance of such
loan. This loan had an unpaid balance of $56.3 million as of September 30, 2009.
41
Debt Financing
On February 25, 2009, VinREIT, LLC (VinREIT), a subsidiary that holds our vineyard and winery
assets, obtained a $4.0 million term loan under VinREITs $160.0 million credit facility. The
loan matures on December 1, 2017 and is secured by fixtures and equipment. The loan bears interest
at LIBOR plus 2.00%. Subsequent to the closing of this loan, approximately $63.3 million of the
facility remains available. The net proceeds from the loan were used to pay down outstanding
indebtedness under our revolving credit facility.
Dividend Reinvestment and Direct Share Purchase Plan
During January 2009, we issued pursuant to a registered public offering 1,551,000 common shares
under the direct share purchase component of the Dividend Reinvestment and Direct Share Purchase
Plan (the Plan). These shares were sold at an average price of $23.86 per share and total net
proceeds after expenses were approximately $36.8 million.
During February 2009, we issued pursuant to a registered public offering 339,000 common shares
under the direct share purchase component of the Plan. These shares were sold at an average price
of $22.12 per share and total net proceeds after expenses were approximately $7.5 million.
During August 2009, we issued pursuant to a registered public offering 652,000 common shares under
the direct share purchase component of the Plan. These shares were sold at an average price of
$30.65 per share and total net proceeds after expenses were approximately $19.9 million.
During September 2009, we issued pursuant to a registered public offering 911,000 common shares
under the direct share purchase component of the Plan. These shares were sold at an average price
of $32.92 per share and total net proceeds after expenses were approximately $29.9 million.
Impairment Charge
Our entertainment retail center in White Plains, New York, held in a consolidated joint venture,
was acquired with mortgage financing that had a loan to fair value
ratio of approximately 70% at
the time of our acquisition of our interests in May 2007. The loan is personally guaranteed by the
principals of our minority partner, one of which is the same individual that is either personally,
or through his related interests, in default on several other obligations to us (see Note 5 to the
consolidated financial statements on this Form 10-Q). The debt on this center is due in October
2010, and absent any improvement in the performance of the asset, the lender will likely require
additional credit support
and fees to extend the loan. Any such extension would also require the cooperation of the partners
in the joint venture. Without a resolution of our disputes with the principals of our minority
partner, there can be no assurance that the minority partner and us will cooperate. Given that
the debt is currently non-recourse to us, we may elect not to further support the joint venture,
which may include a decision to surrender the property at the loans maturity. Accordingly, we
performed an impairment assessment of this asset at September 30, 2009. It was determined that the
carrying value of the asset exceeded the estimated fair value by $35.8 million, and an impairment
charge was recorded at September 30, 2009 for this amount, which was comprised of $32.4 million
related to real estate investment and $3.4 million related to in-place leases. Our management
determined the fair value of the asset taking into account various factors, including an
independent appraisal prepared as of September 30, 2009 which indicated a value of $118.0 million.
In accordance with the FABS ASC Topic on Consolidation and our policy for allocation of income and
loss for this joint venture, a loss of $15.1 million related to the impairment charge was allocated
to the noncontrolling interest related to this venture. The noncontrolling interest related to
White Plains was a deficit balance of $8.0 million at September 30, 2009 which is recorded as a
component of shareholders equity.
42
Investments
Concord Resorts
On August 20, 2008, we provided a secured first mortgage loan of $225.0 million to Concord Resorts,
LLC (Concord Resorts), an entity controlled by Louis Cappelli, related to a planned casino and
resort development in Sullivan County, New York. Our investment is secured by a first mortgage on
the resort complex real estate totaling 1,584 acres. In addition, we have a second mortgage on the
remaining 139 acres of the casino related real estate and the loan is personally guaranteed by
Louis Cappelli. We have certain rights to convert our mortgage interest into fee ownership as the
project is further developed. The net carrying value of this mortgage note receivable at September
30, 2009 was $133.2 million which was funded under our original $225.0 million secured first
mortgage commitment.
Due to the economic downturn, certain other lenders on the development have either reduced their
commitments or withdrawn from the project. The planned initial phase of the casino and resort
development has been downsized from an estimated $1 billion to an estimated $600 million and Mr.
Cappelli is attempting to secure the necessary financing. The New York legislature has passed
legislation authorizing the benefits of a special reduced tax rate on gaming receipts in Sullivan
County, New York if at least $600 million is invested and 1,000 new jobs are created. As a result
of these issues, the development project has been slowed, and there can be no assurance that Mr.
Cappelli will obtain the financing necessary to complete the project. Due to these challenges,
Concord Resorts has ceased making interest payments to us as contractually obligated under the loan
agreement. We have evaluated our mortgage note receivable for impairment and have determined it is
impaired due to the inability of the borrower to meet its contractual obligations per the
agreement. Our accounting policy is to recognize interest income on impaired loans on a cash
basis. Accrual interest income recognition for book purposes was ceased on January 1, 2009 and
therefore no interest income has been recorded during the nine months ended September 30, 2009.
Interest income recognized on this mortgage note receivable for the nine months ended September 30,
2008 was $1.6 million. Our management determined that no loan loss reserve was necessary for this
note taking into account an independent appraisal as of April 30, 2009 of the primary collateral,
1,584 acres of land, which indicated a value in excess of the loan balance.
Our original loan commitment to fund an additional $91.8 million to Concord Resorts is no longer
applicable due to the developers decision to downsize the initial phase of the project to an
investment level of $600 million. The funding of any additional investment in the project by us
will be subject to satisfaction of certain conditions, including but not limited to a reduction
from the aforementioned $91.8 million.
Toronto Dundas Square Project
During the nine months ended September 30, 2009, we invested an additional $5.1 million Canadian
(CAD) ($4.6 million U.S.) bringing the total investment to CAD $130.6 million ($122.0 million
U.S.) in the mortgage note receivable from Metropolis Limited Partnership (the Partnership)
related to the construction of the Toronto Dundas Square Project, a 13 level entertainment retail
center in downtown Toronto that was completed in May 2008 for a total cost of approximately CAD
$330 million. Additionally, as of September 30, 2009, we had posted irrevocable stand-by letters
of credit related to this project totaling $4.0 million U.S. which are expected to be cancelled or
drawn upon during 2009. The loan is denominated in Canadian dollars and is secured by a second
mortgage on the Toronto Dundas Square Project.
43
A group of banks (the bank syndicate) has provided first mortgage construction financing to the
Partnership totaling approximately CAD $119.0 million ($111.1 million U.S.) as of September 30,
2009. In April 2009, we along with the bank syndicate elected to pursue a receivership after it
became apparent that a restructuring of the existing equity interests was no longer possible. On
April 27, 2009, the court appointed a receiver who is overseeing the sale of the property. As a
result of this process, we could become the owner of the property. We are currently negotiating a
refinancing of the first mortgage should we become the owner of the property. While there can be
no assurance that we will successfully obtain the first mortgage refinancing, based on preliminary
negotiations, we currently estimate a new first mortgage loan would provide proceeds of CAD $100
million. We expect to consolidate the financial results of the property subsequent to the
purchase.
We have evaluated this mortgage note receivable for impairment. Because repayment of the mortgage
note receivable did not meet the contractual terms of the agreement, we have determined the loan is
impaired and have ceased accruing interest income as of January 1, 2009 on the loan for book
purposes. Accordingly, no interest income was recognized for the nine months ended September 30,
2009 and no interest income will be recognized in future periods. Interest income recognized on
this loan for the nine months ended September 30, 2008 was CAD $13.3 million ($13.0 million U.S.).
Furthermore, our management reviewed the fair value of the property at September 30, 2009, taking
into account an independent appraisal completed in September, 2009 and determined a provision for
loan loss of CAD $37.6 million ($34.8 million U.S.) was necessary. Therefore, the net carrying
value of this mortgage note receivable at September 30, 2009 was CAD $93.0 million ($86.9 million
U.S.).
Cappelli Related Notes
We also have two $10 million notes receivable that were due on February 28, 2009 and March 1, 2009,
respectively. The notes bear interest at 10%. Neither note was repaid at maturity. One of the
notes is due from our minority joint venture partner in New Roc, an entertainment retail center in
New Rochelle, New York, and this note is secured by such partners interest. The minority joint
venture partner is an entity controlled by Louis Cappelli and Louis Cappelli has also personally
guaranteed the loan. The other note is due from Louis Cappelli personally and in conjunction with
this note, we received an option to purchase 50% of Louis Cappellis interest (or Louis Cappellis
related interests) in three other projects.
We have evaluated these two notes receivable for impairment, and have determined that they are
impaired due to the inability of the borrower to meet its contractual obligations per the original
agreements. Accordingly, accrual interest income recognition was ceased on January 1, 2009.
Interest income of $833 thousand has been recorded during the nine months ended September 30, 2009
which represents payments received by us prior to July 1, 2009. No interest payments related to
these two notes receivable were received by us for the three months ended September 30, 2009.
Interest income recognized on these loans for the three and nine months ended September 30, 2008
was $506 thousand and $1.3 million, respectively. Our management evaluated the fair value of the
underlying collateral of the notes and has concluded that a loan loss reserve of $18.0 million was
necessary at September 30, 2009.
Additionally, we have a $10 million note receivable that is due May 8, 2017 and bears interest at
10%. The note is due from the our minority joint venture partner in City Center at White Plains, an
entertainment retail center in White Plains, New York, and the note is secured by such partners
interest. The minority joint venture partner is an entity controlled by Louis Cappelli and another
individual, and each personally guarantees the loan.
44
No interest payments were received by us on this note receivable for the three months ended
September 30, 2009. We evaluated this note receivable for impairment and determined that it is
impaired due to the inability of the borrower to meet its contractual obligations per the original
agreement. Accordingly, accrual interest income recognition was ceased on July 1, 2009. Interest
income of $500 thousand has been recorded during the nine months ended September 30, 2009 which
represents payments received by us prior to July 1, 2009. Interest income recognized on this loan
for the three and nine months ended September 30, 2008 was $256 thousand and $760 thousand,
respectively. Our management evaluated the fair value of the underlying collateral of the note and
has concluded that a loan loss reserve of $10.0 million was necessary at September 30, 2009.
Other Mortgage Notes and Notes Receivable
On January 26, 2009, we entered into a credit agreement with Rb Wine Associates, LLC to provide a
$2.0 million revolving credit facility that matures on January 1, 2010. This note is secured by
certain pledge agreements and other collateral. Interest accrues on the outstanding principal
balance at an annual rate of 15%. Interest is payable monthly at an annual rate of 9.25% and the
remaining accrued but unpaid interest and principal is due at maturity. During the nine months
ended September 30, 2009, we advanced $1.4 million under this credit facility.
On February 20, 2009, we entered into a $3.0 million promissory note with Sapphire Wines LLC. The
note bears interest at 15% and matured on November 1, 2009. This note is secured by certain pledge
agreements and other collateral. Because interest and principal payments have not been received
per the contractual terms of the agreement, this note is considered impaired and is included in the
$11.8 million of impaired notes receivable discussed further below.
On May 8, 2009, we received payment in full on our mortgage note receivable and related accrued
interest of $3.7 million from Prairie Creek Properties, LLC. We advanced $3.5 million during the
year ended December 31, 2007 under this agreement for the development of an approximately 9,000
seat amphitheatre in Hoffman Estates, Illinois.
On June 26, 2009, we received payment in full on our note receivable and related accrued interest
of $1.0 million from an affiliate of one of our theatre operators. We advanced $1.0 million during
the year ended December 31, 2007 under this agreement for the development of a megaplex theatre.
During the nine months ended September 30, 2009, we advanced $29.0 million under our secured
mortgage loan agreements with SVV I, LLC and an affiliate of SVV I, LLC (together SVVI) for the
development of a water-park anchored entertainment village in Kansas City, Kansas, the first phase
of which opened in July 2009. On May 6, 2009, we reduced our commitment on this project from
$175.0 million to $163.5 million and added to our collateral position by placing a mortgage
position on two other water-parks, located in New Braunfels and South Padre Island, Texas owned and
operated by the entities controlled by the principals of SVVI. The mortgage note on the property
in Kansas City, Kansas and the mortgage note on the Texas properties have cross-default and
cross-collateral provisions. Pursuant to the mortgage on the Texas properties, only a seasonal
line of credit secured by the Texas parks totaling not more than $5.0 million at any time ranks
superior to our collateral position. Furthermore, the interest rates increased from LIBOR plus
3.5% to 7% on July 4, 2009, and the loans were extended from September 30, 2012 to May 1, 2019.
Interest income will continue to be recognized on the accrual basis. SVVI is required to fund a
debt service reserve for off-season fixed payments (those due from September to May). The reserve
is to be funded by equal monthly installments during the months of June, July and August. We will
also receive a percentage
45
of revenue from all three parks after certain threshold levels are
achieved that may increase the return
on our invested capital from 7% to as high as 10%. Through September 30, 2009, we have funded
approximately $163.3 million on the mortgage notes.
Additionally, we have three notes receivable totaling $11.8 million at September 30, 2009 that are
impaired due to the inability of the borrowers to meet their contractual obligations per the
original agreements. Accordingly, accrual interest income recognition for these notes was ceased
on January 1, 2009. Interest income of $234 thousand and $597 thousand, respectively has been
recorded during the three and nine months ended September 30, 2009 which represents payments
received by us. Interest income recognized on these loans for the three and nine months ended
September 30, 2008 was $200 thousand and $601 thousand, respectively. Our management evaluated the
fair value of the underlying collateral of the notes and has concluded that a loan loss reserve of
$3.0 million was necessary at September 30, 2009.
Tenant Defaults
Both Ballys and Circuit City have filed bankruptcy proceedings. Ballys has rejected our lease
and has vacated its space at our entertainment retail center in New Rochelle, New York. Circuit
City terminated its lease and vacated its space at our entertainment retail center in White Plains,
New York. Revenue from these tenants totaled approximately $790 thousand and $1.9 million for the
nine months ended September 30, 2009 and 2008, respectively. There were outstanding receivables of
$248 thousand related to these tenants at September 30, 2009 that have been fully reserved.
Additionally, at our entertainment retail center in White Plains, New York, we had one lease with
Filenes Basement who vacated the center despite a substantial remaining lease term. This tenant
was disputing certain non-compete provisions in its lease and we were working on a settlement;
however, on May 4, 2009, Filenes Basement filed bankruptcy proceedings and rejected our lease.
Revenue from this tenant totaled approximately $2.0 million for the nine months ended September 30,
2008 and no revenue was recognized for this tenant for the nine months ended September 30, 2009.
There were outstanding receivables of $1.1 million related to this tenant at September 30, 2009
that have been fully reserved.
During the nine months ended September 30, 2009, two of our vineyard and winery tenants defaulted
under the provisions of their leases for failure to pay rent at four properties. Revenue from one
of the tenants totaled approximately $388 thousand for the nine months ended September 30, 2009.
Total quarterly rent related to this property prior to default was $194 thousand. Outstanding
receivables of $383 thousand (including $266 thousand of straight-line rent) have been fully
reserved at September 30, 2009. No rental income was recognized for the nine months ended
September 30, 2009 related to the second tenant. Total quarterly rent related to this tenant prior
to the default was $455 thousand. We reclaimed possession of three of the four properties and they
are being operated through a wholly-owned taxable REIT subsidiary. Due to the tenants defaults,
we have assessed the carrying value of the properties for impairment and no provisions for
impairment were considered necessary based on this analysis.
Results of Operations
Three months ended September 30, 2009 compared to three months ended September 30, 2008
Rental revenue was $51.3 million for the three months ended September 30, 2009, compared to $52.1
million for the three months ended September 30, 2008. The $0.8 million decrease resulted
primarily from a reduction in rent due to increased vacancies and the impact of a weaker Canadian
dollar
46
exchange rate. Percentage rents of $0.6 million were recognized during both the three
months ended
September 30, 2009 and 2008. Straight-line rents of $0.6 million and $1.0 million were recognized
during the three months ended September 30, 2009 and 2008, respectively.
Tenant reimbursements totaled $4.7 million for the three months ended September 30, 2009 compared
to $5.2 million for the three months ended September 30, 2008. These tenant reimbursements arise
from the operations of our retail centers. The $0.5 million decrease is primarily due to vacancies
related to certain non-theatre retail tenants and the impact of a weaker Canadian dollar exchange
rate for the three months ended September 30, 2009 compared to the three months ended September 30,
2008.
Mortgage and other financing income for the three months ended September 30, 2009 was $11.7 million
compared to $17.1 million for the three months ended September 30, 2008. The $5.4 million decrease
is primarily due to less interest income recognized during the three months ended September 30,
2009 due to impairment of certain of our mortgage and other notes receivable as further discussed
in Note 5 to the consolidated financial statements in this Form 10-Q.
Our property operating expense totaled $6.7 million for the three months ended September 30, 2009
compared to $6.6 million for the three months ended September 30, 2008. These property operating
expenses arise from the operations of our retail centers. The $0.1 million increase resulted from
an increase in expenses at our retail centers in Ontario, Canada partially offset by the impact of
a weaker Canadian dollar exchange rate and decreases in expenses at other of our retail centers.
Our net interest expense increased by $1.7 million to $19.4 million for the three months ended
September 30, 2009 from $17.7 million for the three months ended September 30, 2008. This increase
resulted from the increase in the average long-term debt outstanding used to finance our real
estate acquisitions and fund our new mortgage notes receivable as well as an increased interest
rate on our amended and restated revolving credit facility as further discussed in Note 7 to the
consolidated financial statements in this Form 10-Q.
Provision for loan losses for the three months ended September 30, 2009 was $65.8 million and
related to a mortgage note receivable and other notes receivable as further discussed in Note 5 to
the consolidated financial statements in this Form 10-Q. There was no provision for loan losses
for the three months ended September 30, 2008.
The impairment charge for the three months ended September 30, 2009 was $35.8 million and related
to our entertainment retail center in White Plains, New York. For further detail, see Note 4 to
the consolidated financial statements in this Quarterly Report on Form 10-Q. There was no
impairment charge recorded for the three months ended September 30, 2008.
Depreciation and amortization expense totaled $11.9 million for the three months ended September
30, 2009 compared to $11.2 million for the three months ended September 30, 2008. The $0.7 million
increase resulted from our real estate acquisitions completed in 2008 and from accelerated
depreciation and amortization as a result of the revision of the estimated useful lives of certain
structural improvements.
Net loss attributable to noncontrolling interests totaled $16.1 million for the three months ended
September 30, 2009 compared to $0.5 million for the three months ended September 30, 2008 and
47
primarily relates to the consolidation of a VIE in which our variable interest is debt. The
increase is
due to a greater net loss incurred by the VIE due to the impairment charge at our entertainment
retail center in White Plains, New York. For further discussion, see Note 4 to the consolidated
financial statements in this Form 10-Q.
Nine months ended September 30, 2009 compared to nine months ended September 30, 2008
Rental revenue was $152.2 million for the nine months ended September 30, 2009, compared to $151.2
million for the nine months ended September 30, 2008. The $1.0 million increase resulted primarily
from the acquisitions and developments completed in 2008 and base rent increases on existing
properties, partially offset by a reduction in rent from defaulting tenants and the impact of a
weaker Canadian dollar exchange rate. Percentage rents of $1.2 million and $1.5 million were
recognized during the nine months ended September 30, 2009 and 2008, respectively. Straight-line
rents of $1.8 million and $2.9 million were recognized during the nine months ended September 30,
2009 and 2008, respectively.
Tenant reimbursements totaled $13.6 million for the nine months ended September 30, 2009 compared
to $16.1 million for the nine months ended September 30, 2008. These tenant reimbursements arise
from the operations of our retail centers. The $2.5 million decrease is primarily due to vacancies
related to certain non-theatre retail tenants and the impact of a weaker Canadian dollar exchange
rate for the nine months ended September 30, 2009 compared to the nine months ended September 30,
2008.
Other income was $2.3 million for the nine months ended September 30, 2009 compared to $1.7 million
for the nine months ended September 30, 2008. The increase of $0.6 million is primarily due to a
gain of $0.8 million recognized upon settlement of foreign currency forward contracts, partially
offset by a $0.2 million decrease in income from a family bowling center in Westminster, Colorado
operated through a wholly-owned taxable REIT subsidiary.
Mortgage and other financing income for the nine months ended September 30, 2009 was $33.4 million
compared to $40.6 million for the nine months ended September 30, 2008. The $7.2 million decrease
relates to less interest income recognized during the nine months ended September 30, 2009 due to
impairment of certain of our mortgage and other notes receivable as further discussed in Note 5 to
the consolidated financial statements in this Form 10-Q.
Our property operating expense totaled $21.1 million for the nine months ended September 30, 2009
compared to $19.9 million for the nine months ended September 30, 2008. These property operating
expenses arise from the operations of our retail centers. The $1.2 million increase resulted
primarily from an increase in the provision for bad debts, included in property operating expense,
of $2.1 million to a total of $3.0 million for the nine months ended September 30, 2009. Partially
offsetting this increase is the impact of a weaker Canadian dollar exchange rate.
Costs associated with loan refinancing for the nine months ended September 30, 2009 were $0.1
million. These costs related to the amendment and restatement of our revolving credit facility and
consisted of the write-off of $0.1 million of certain unamortized financing costs. No such costs
were incurred during the nine months ended September 30, 2008.
Our net interest expense increased by $2.2 million to $54.3 million for the nine months ended
September 30, 2009 from $52.1 million for the nine months ended September 30, 2008. This increase
resulted from the increase in the average long-term debt outstanding used to finance our real
estate
48
acquisitions and fund our new mortgage notes receivable as well as an increased interest
rate on our
amended and restated revolving credit facility as further discussed in Note 7 to the consolidated
financial statements in this Form 10-Q.
Provision for loan losses for the nine months ended September 30, 2009 was $65.8 million and
related to a mortgage note receivable and other notes receivable as further discussed in Note 5 to
the consolidated financial statements in this Form 10-Q. There was no provision for loan losses
for the nine months ended September 30, 2008.
The impairment charge for the nine months ended September 30, 2009 was $35.8 million and related to
our entertainment retail center in White Plains, New York. For further detail, see Note 4 to the
consolidated financial statements in this Quarterly Report on Form 10-Q. There was no impairment
charge recorded for the nine months ended September 30, 2008.
Depreciation and amortization expense totaled $36.4 million for the nine months ended September 30,
2009 compared to $32.2 million for the nine months ended September 30, 2008. The $4.2 million
increase resulted primarily from our real estate acquisitions and developments completed in 2008.
Equity in income from joint ventures totaled $0.7 million for the nine months ended September 30,
2009 compared to $1.7 million for the nine months ended September 30, 2008. The $1.0 million
decrease resulted from the investment in the remaining 50% ownership of CS Fund I on April 2, 2008,
which is classified as a direct financing lease.
Loss from discontinued operations totaled $0.03 million for the nine months ended September 30,
2008 and was due to the sale of a land parcel in Powder Springs, Georgia in June of 2008. There
was no income or loss from discontinued operations for the nine months ended September 30, 2009.
The gain on sale of real estate from discontinued operations of $0.1 million for the nine months
ended September 30, 2008 was due to the sale of a land parcel in Powder Springs, Georgia in June of
2008. There was no gain on sale of real estate from discontinued operations for the nine months
ended September 30, 2009.
Net loss attributable to noncontrolling interests totaled $19.0 million for the nine months ended
September 30, 2009 compared to $1.5 million for the nine months ended September 30, 2008 and
primarily relates to the consolidation of a VIE in which our variable interest is debt. The
increase is due to a greater net loss incurred by the VIE due to the impairment charge at our
entertainment retail center in White Plains, New York. For further discussion, see Note 4 to the
consolidated financial statements in this Form 10-Q.
Preferred dividend requirements for the nine months ended September 30, 2009 were $22.7 million
compared to $20.7 million for the same period in 2008. The $2.0 million increase is due to the
issuance of 3.5 million Series E convertible preferred shares in April 2008.
Liquidity and Capital Resources
Cash and cash equivalents were $11.2 million at September 30, 2009. In addition, we had restricted
cash of $15.9 million at September 30, 2009. Of the restricted cash at September 30, 2009, $9.7
million relates to cash held for our borrowers debt service reserves for mortgage notes receivable
49
and the balance represents deposits required in connection with debt service, payment of real
estate taxes and capital improvements.
Mortgage Debt, Credit Facilities and Term Loan
As of September 30, 2009, we had total debt outstanding of $1.2 billion. As of September 30, 2009,
$1.0 billion of debt outstanding was fixed rate mortgage debt secured by a substantial portion of
our rental properties and mortgage notes receivable, with a weighted average interest rate of
approximately 5.9%. This $1.0 billion of fixed rate mortgage debt includes $204.5 million of LIBOR
based debt that has been converted to fixed rate debt with interest rate swaps as further described
below.
As described in Note 7 to the consolidated financial statements included in this Quarterly Report
on Form 10-Q, our revolving credit facility was amended on June 30, 2009. At September 30, 2009,
we had $73.0 million in debt outstanding under our $215.0 million revolving credit facility, with
interest at a floating rate. The facility has a term expiring October 26, 2011 with a one year
extension available at our option, subject to certain terms and conditions including the payment of
an extension fee. The amount that we are able to borrow on our revolving credit facility is a
function of the values and advance rates, as defined by the credit agreement, assigned to the
assets included in the borrowing base less outstanding letters of credit and less other
liabilities, excluding our $117.9 million term loan, that are recourse obligations of the Company.
As of September 30, 2009, our total availability under the revolving credit facility was $137.9
million.
Through September 30, 2009, VinREIT, a subsidiary that holds our vineyard and winery assets, had
drawn nine term loans aggregating $96.7 million in initial principal under our $160.0 million
credit facility. These term loans have maturities ranging from December 1, 2017 to June 5, 2018,
are 30% recourse to us and have stated interest rates of LIBOR plus 175 basis points on loans
secured by real property and LIBOR plus 200 basis points on loans secured by fixtures and
equipment. We entered into seven interest rate swaps during 2008 that fixed the interest rates on
the outstanding loans at a weighted average rate of 5.2%. Term loans can be drawn through
September 26, 2010 under the credit facility. The credit facility provides for an aggregate advance
rate of 65% based on the lesser of cost or appraised value. At September 30, 2009, the term loans
outstanding under the credit facility had an aggregate balance of $94.3 million and approximately
$63.3 million of the facility remains available. The credit facility also contains an accordion
feature, whereby, subject to lender approval, we may obtain additional term loan commitments in an
aggregate principal amount not to exceed $140.0 million.
Our principal investing activities are acquiring, developing and financing entertainment,
entertainment-related, recreational and specialty properties. These investing activities have
generally been financed with mortgage debt and the proceeds from equity offerings. Our revolving
credit facility and our term loans are also used to finance the acquisition or development of
properties, and to provide mortgage financing. Continued growth of our rental property and
mortgage financing portfolios will depend in part on our continued ability to access funds through
additional borrowings and securities offerings.
Certain of our long-term debt agreements contain customary restrictive covenants related to
financial and operating performance. At September 30, 2009, we were in compliance with all
restrictive covenants.
50
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. Net cash provided by operating activities
was $112.9 million for the nine months ended September 30, 2009 and $110.4 million for the nine
months ended September 30, 2008. Net cash used in investing activities was $54.0 million and
$473.6 million for the nine months ended September 30, 2009 and 2008, respectively. Net cash used
by financing activities was $98.2 million for the nine months ended September 30, 2009 and net cash
provided by financing activities was $359.7 million for the nine months ended September 30, 2008.
We anticipate that our cash on hand, cash from operations, and funds available under our revolving
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 avoid corporate level federal
income or excise tax in accordance with REIT Internal Revenue Code requirements.
We have also posted $4.0 million of irrevocable stand-by letters of credit related to the Toronto
Life Square project as further described in Note 5 to the consolidated financial statements in this
Quarterly Report on Form 10-Q.
Commitments
As of September 30, 2009, we had one winemaking and storage facility project under development for
which we have agreed to finance the development costs. Through September 30, 2009, we have
invested approximately $10.1 million in this project for the purchase of land and development in
Sonoma County, California, and have commitments to fund approximately $2.4 million of additional
improvements. Development costs are advanced by using periodic draws. If we determine that
construction is not being completed in accordance with the terms of the development agreement, we
can discontinue funding construction draws. We have agreed to lease the facility to the operator
at pre-determined rates.
Additionally, as of September 30, 2009, we have agreed to finance $5.2 million in development costs
for an expansion at one of our existing public charter school properties. Development costs are
advanced by us in periodic draws. If we determine that construction is not being completed in
accordance with the terms of the development agreement, we can discontinue funding construction
draws. We have agreed to lease the expansion facility to the operator at pre-determined rates.
On October 31, 2007, we entered into a guarantee agreement for economic development revenue bonds
with a total principal amount of $22.0 million related to three theatres in Louisiana, maturing on
October 31, 2037. The bonds were issued by Southern Theatres for the purpose of financing the
development and construction of three megaplex theatres in Louisiana. We earn an annual fee of
1.75% on the outstanding principal amount of the bonds and the fee is paid by Southern Theatres
monthly. We evaluated this guarantee in connection with the provisions of FASB ASC Topic 450 on
Guarantees (Topic 450). Based on certain criteria, Topic 450 requires a guarantor to record an
asset and a liability at inception. Accordingly, we had recorded $4.0 million as a deferred asset
included in accounts receivable and $4.0 million included in other liabilities in the accompanying
consolidated balance sheet as of December 31, 2008, which represented managements best estimate of
the fair value of the guarantee at inception which will be realized over the term of the guarantee.
During the third quarter of 2009, the outstanding principal amount of the bonds was reduced from
$22 million to $14.4 million due to a principal repayment. Accordingly, we reduced the asset and
liability recorded
51
to reflect the decrease in the outstanding principal balance. We have recorded
$2.6 million as a deferred asset included in accounts receivable and $2.6 million included in other
liabilities in the
accompanying consolidated balance sheet as of September 30, 2009.
We have certain commitments related to our mortgage note investments that we may be required to
fund in the future. We are generally obligated to fund these commitments at the request of the
borrower or upon the occurrence of events outside of our direct control. As of September 30, 2009,
we had four mortgage notes receivable with commitments totaling approximately $20 million. The $20
million excludes any future amounts that may or may not be funded related to the planned casino and
resort development discussed in Note 5 to the consolidated financial statements included in this
Quarterly Report on Form 10-Q. If commitments are funded in the future, interest will be charged
at rates consistent with the existing investments.
Liquidity Analysis
In analyzing our liquidity, we generally expect that our cash provided by operating activities will
meet our normal recurring operating expenses, recurring debt service requirements and distributions
to shareholders.
We have no debt maturities in 2009 and our cash commitments as of September 30, 2009 described
above include additional amounts expected to be funded in 2009 for the winemaking and storage
facility of $2.4 million, $5.2 million for the public charter school expansion and additional
commitments under various mortgage notes receivable totaling $20 million. Of the $20 million of
commitments, approximately $1.0 million is expected to be funded in 2009. In addition to these
commitments, as discussed above we may fund the refinancing shortfall, if any, related to the
Toronto Dundas Square Project which is expected to be approximately CAD $20 million (approximately
$19 million U.S. using exchange rates at September 30, 2009) as well as the costs to close the
transaction.
Our sources of liquidity for 2009 to pay the above commitments and the acquisition for the Toronto
Dundas Square Project (if any) include the remaining amount available under our revolving credit
facility of $137.9 million at September 30, 2009 and unrestricted cash on hand at September 30,
2009 of $11.2 million. Accordingly, while there can be no assurance, we expect that our sources of
cash will significantly exceed our expected uses of cash over the remainder of 2009.
In looking at liquidity requirements beyond 2009 and considering extensions, our only consolidated
debt maturity in 2010 and 2011 is a $56.25 million mortgage note payable due in September 2010. The
$113.5 million mortgage note that is due in October 2010 has a two to four year extension option,
upon meeting certain conditions and is related to our entertainment retail center in White Plains,
New York that is held in a consolidated joint venture. As further described in Note 4 to the
consolidated financial statements on this Form 10-Q, the Company may elect not to further support
the joint venture, which may include a decision to surrender the property at the loans maturity.
We believe that we will be able to repay, extend, refinance or otherwise settle our debt
obligations for 2010 and thereafter as the debt comes due, and that we will be able to fund our
remaining commitments as necessary. Other sources of capital available to us primarily include
further equity issuances, securing other debt (such as on unpledged assets), sales of properties,
collection or sales of mortgage or other notes receivable, and reducing our dividends paid in cash
(subject to maintaining our qualification as a REIT). However, there can be no assurance that
additional financing or capital
52
will be available, or that terms will be acceptable or advantageous
to us.
Our primary use of cash after paying operating expenses, debt service, distributions to
shareholders
and funding existing commitments is in growing our investment portfolio through the acquisition,
development and financing of additional properties. We expect to finance these investments with
borrowings under our revolving credit facility, as well as long-term debt 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 revolving credit facility, there
can be no assurance that we will be able to obtain additional investment financing (See Risk
Factors in the Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC
on February 24, 2009).
Off Balance Sheet Arrangements
At September 30, 2009, we had a 21.7% and 21.8% investment interest in two unconsolidated real
estate joint ventures, Atlantic-EPR I and Atlantic-EPR II, respectively, which are accounted for
under the equity method of accounting. We do not anticipate any material impact on our liquidity as
a result of commitments involving those joint ventures. We recognized income of $421 and $400 (in
thousands) from our investment in the Atlantic-EPR I joint venture during the nine months ended
September 30, 2009 and 2008, respectively. We recognized income of $252 and $242 (in thousands)
from our investment in the Atlantic-EPR II joint venture during the nine months ended September 30,
2009 and 2008, respectively. The joint ventures have two mortgage notes payable each secured by a
megaplex theatre. The notes held by Atlantic EPR-I and Atlantic EPR-II total $15.1 million and
$13.0 million, respectively, at September 30, 2009, and mature in May 2010 and September 2013,
respectively. Condensed financial information for Atlantic-EPR I and Atlantic-EPR II joint
ventures is included in Note 6 to the consolidated financial statements included in this Quarterly
Report on Form 10-Q.
The joint venture agreements for Atlantic-EPR I and Atlantic-EPR II allow our partner, Atlantic of
Hamburg, Germany (Atlantic), to exchange up to a maximum of 10% of its ownership interest per
year in each of the joint ventures for common shares of the Company or, at our discretion, the cash
value of those shares as defined in each of the joint venture agreements. During 2008, we paid
Atlantic-EPR I and Atlantic-EPR II cash of $133 and $79 (in thousands), respectively, in exchange
for additional ownership in each joint venture of 0.7%. During the first nine months of 2009, we
paid Atlantic cash of $105 (in thousands) in exchange for additional ownership of 0.7% for
Atlantic-EPR I. These exchanges did not impact total partners equity in either Atlantic-EPR I or
Atlantic-EPR II.
Capital Structure and Coverage Ratios
We believe that our shareholders are best served by a conservative capital structure. Therefore, we
seek to maintain a conservative debt level on our balance sheet and solid interest, fixed charge
and debt service coverage ratios. We expect to maintain our leverage ratio (i.e. total-long term
debt of the Company as a percentage of shareholders equity plus total liabilities) below 50%.
However, the timing and size of our equity offerings may cause us to temporarily operate over this
threshold. At September 30, 2009, our leverage ratio was 46%. Our long-term debt as a percentage
of our total market capitalization at September 30, 2009 was 42%; however, we do not manage to a
ratio based on total market capitalization due to the inherent variability that is driven by
changes in the market price of our common shares. We calculate our total market capitalization of
$2.8 billion by
53
aggregating the following at September 30, 2009:
|
|
|
Common shares outstanding of 36,514,575 multiplied by the last reported sales price of
our common shares on the NYSE of $34.14 per share, or $1.2 billion; |
|
|
|
|
Aggregate liquidation value of our Series B preferred shares of $80 million; |
|
|
|
|
Aggregate liquidation value of our Series C convertible preferred shares of $135
million; |
|
|
|
|
Aggregate liquidation value of our Series D preferred shares of $115 million; |
|
|
|
|
Aggregate liquidation value of our Series E convertible preferred shares of $86 million
and |
|
|
|
|
Total long-term debt of $1.2 billion |
Our
interest coverage ratio for the nine months ended September 30,
2009 and 2008 was 3.1 times and
3.3 times, respectively. Interest coverage is calculated as the interest coverage amount (as
calculated in the following table) divided by interest expense, gross (as calculated in the
following table). We consider the interest coverage ratio to be an appropriate supplemental measure
of a companys ability to meet its interest expense obligations. Our calculation of the interest
coverage ratio may be different from the calculation used by other companies, and therefore,
comparability may be limited. This information should not be considered as an alternative to any
U.S. generally accepted accounting principles (GAAP) liquidity measures. The following table
shows the calculation of our interest coverage ratios (unaudited, dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
(25,271 |
) |
|
$ |
93,116 |
|
Interest expense, gross |
|
|
54,846 |
|
|
|
53,495 |
|
Interest cost capitalized |
|
|
(517 |
) |
|
|
(603 |
) |
Depreciation and amortization |
|
|
36,383 |
|
|
|
32,184 |
|
Share-based compensation expense
to management and trustees |
|
|
3,238 |
|
|
|
2,975 |
|
Costs associated with loan refinancing |
|
|
117 |
|
|
|
|
|
Straight-line rental revenue |
|
|
(1,787 |
) |
|
|
(2,909 |
) |
Gain on sale of real estate from discontinued operations |
|
|
|
|
|
|
(119 |
) |
Provision for loan losses |
|
|
65,757 |
|
|
|
|
|
Impairment charges |
|
|
35,801 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest coverage amount |
|
$ |
168,567 |
|
|
$ |
178,139 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
$ |
54,274 |
|
|
$ |
52,117 |
|
Interest income |
|
|
55 |
|
|
|
775 |
|
Interest cost capitalized |
|
|
517 |
|
|
|
603 |
|
|
|
|
|
|
|
|
Interest expense, gross |
|
$ |
54,846 |
|
|
$ |
53,495 |
|
|
|
|
|
|
|
|
|
|
Interest coverage ratio |
|
|
3.1 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
The interest coverage amount per the above table is a non-GAAP financial measure and should not be
considered an alternative to any GAAP liquidity measures. It is most directly comparable to the
GAAP liquidity measure, Net cash provided by operating activities, and is not directly comparable
to the GAAP liquidity measures, Net cash used in investing activities and Net cash provided by
financing activities. The interest coverage amount can be reconciled to Net cash provided by
operating activities per the consolidated statements of cash flows included in this Quarterly
Report on
Form 10-Q as follows (unaudited, dollars in thousands):
54
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
Net cash provided by operating activities |
|
$ |
112,866 |
|
|
$ |
110,377 |
|
Equity in income from joint ventures |
|
|
673 |
|
|
|
1,743 |
|
Distributions from joint ventures |
|
|
(743 |
) |
|
|
(2,017 |
) |
Amortization of deferred financing costs |
|
|
(2,552 |
) |
|
|
(2,402 |
) |
Increase in mortgage notes accrued interest receivable |
|
|
516 |
|
|
|
15,570 |
|
Decrease in restricted cash |
|
|
(1,315 |
) |
|
|
(2,304 |
) |
Decrease (increase) in accounts receivable |
|
|
(2,977 |
) |
|
|
2,477 |
|
Decrease (increase) in notes and accrued interest receivable |
|
|
(535 |
) |
|
|
(456 |
) |
Increase in direct financing lease receivable |
|
|
2,795 |
|
|
|
1,363 |
|
Increase in other assets |
|
|
4,561 |
|
|
|
3,452 |
|
Decrease in accounts payable and accrued liabilities |
|
|
969 |
|
|
|
551 |
|
Decrease in unearned rents |
|
|
1,767 |
|
|
|
(198 |
) |
Straight-line rental revenue |
|
|
(1,787 |
) |
|
|
(2,909 |
) |
Interest expense, gross |
|
|
54,846 |
|
|
|
53,495 |
|
Interest cost capitalized |
|
|
(517 |
) |
|
|
(603 |
) |
|
|
|
|
|
|
|
Interest coverage amount |
|
$ |
168,567 |
|
|
$ |
178,139 |
|
|
|
|
|
|
|
|
Our fixed charge coverage ratio for the nine months ended September 30, 2009 and 2008 was 2.2 times
and 2.4 times, respectively. The fixed charge coverage ratio is calculated in exactly the same
manner as the interest coverage ratio, except that preferred share dividends are also added to the
denominator. We consider the fixed charge coverage ratio to be an appropriate supplemental measure
of a companys ability to make its interest and preferred share dividend payments. Our calculation
of the fixed charge coverage ratio may be different from the calculation used by other companies
and, therefore, comparability may be limited. This information should not be considered as an
alternative to any GAAP liquidity measures. The following table shows the calculation of our fixed
charge coverage ratios (unaudited, dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
Interest coverage amount |
|
$ |
168,567 |
|
|
|
178,139 |
|
|
|
|
|
|
|
|
|
|
Interest expense, gross |
|
|
54,846 |
|
|
|
53,495 |
|
Preferred share dividends |
|
|
22,655 |
|
|
|
20,714 |
|
|
|
|
|
|
|
|
Fixed charges |
|
$ |
77,501 |
|
|
|
74,209 |
|
|
|
|
|
|
|
|
|
|
Fixed charge coverage ratio |
|
|
2.2 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
Our debt service coverage ratio for the nine months ended September 30, 2009 and 2008 was 2.3 times
and 2.5 times, respectively. The debt service coverage ratio is calculated in exactly the same
manner as the interest coverage ratio, except that recurring principal payments are also added to
the denominator. We consider the debt service coverage ratio to be an appropriate supplemental
measure of a companys ability to make its debt service payments. Our calculation of the debt
service coverage ratio may be different from the calculation used by other companies and,
therefore, comparability may be limited. This information should not be considered as an
alternative to any GAAP liquidity measures. The following table shows the calculation of our debt
service coverage
55
ratios (unaudited, dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
Interest coverage amount |
|
$ |
168,567 |
|
|
|
178,139 |
|
|
|
|
|
|
|
|
|
|
Interest expense, gross |
|
|
54,846 |
|
|
|
53,495 |
|
Recurring principal payments |
|
|
18,579 |
|
|
|
17,170 |
|
|
|
|
|
|
|
|
Debt service |
|
$ |
73,425 |
|
|
|
70,665 |
|
|
|
|
|
|
|
|
|
|
Debt service coverage ratio |
|
|
2.3 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
Funds From Operations (FFO)
The National Association of Real Estate Investment Trusts (NAREIT) developed FFO as a relative
non-GAAP financial measure of performance 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 GAAP net income available to common shareholders and earnings per
share. FFO, as defined under the NAREIT definition and presented by us, is net income available to
common shareholders, 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. It
should also be noted that not all REITs calculate FFO the same way so comparisons with other REITs
may not be meaningful.
The additional 1.9 million common shares that would result from the conversion of our 5.75% Series
C cumulative convertible preferred shares and the additional 1.6 million common shares that would
result from the conversion of our 9.0% Series E cumulative convertible preferred shares (issued on
April 2, 2008) and the corresponding add-back of the preferred dividends declared on those shares
are not included in the calculation of diluted earnings per share for the three and nine months
ended September 30, 2009 because the effect is anti-dilutive. However, because a conversion of the
5.75% Series C cumulative convertible preferred shares would be dilutive to FFO per share for the
three and nine months ended September 30, 2008, these adjustments have been made in the calculation
of diluted FFO per share for these periods.
56
As discussed in Note 12 to the consolidated financial statements on this Form 10-Q, our nonvested
share awards are considered participating securities and are included in the calculation of
earnings per share under the two-class method as required by the Earnings Per Share Topic of the
FASB ASC. Prior-period earnings per share data was computed using the treasury stock method and
has been adjusted retrospectively, which lowered basic and diluted FFO per share by $0.01 for the
three months ended September 30, 2008 and lowered basic and diluted earnings per share by $0.01 for
the nine months ended September 30, 2008.
The following table summarizes our FFO, FFO per share and certain other financial information for
the three and nine months ended September 30, 2009 and 2008 (unaudited, in thousands, except per
share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) available to common shareholders of Entertainment
Properties Trust |
|
$ |
(66,843 |
) |
|
$ |
28,506 |
|
|
|
(28,912 |
) |
|
$ |
73,876 |
|
Real estate depreciation and amortization |
|
|
11,728 |
|
|
|
10,958 |
|
|
|
35,804 |
|
|
|
31,597 |
|
Allocated share of joint venture depreciation |
|
|
66 |
|
|
|
64 |
|
|
|
197 |
|
|
|
445 |
|
Noncontrolling interest |
|
|
(16,118 |
) |
|
|
(604 |
) |
|
|
(19,188 |
) |
|
|
(1,673 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO available to
common shareholders
of Entertainment
Properties Trust |
|
|
(71,167 |
) |
|
|
38,924 |
|
|
|
(12,099 |
) |
|
|
104,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO available to common shareholders of Entertainment Properties Trust |
|
|
(71,167 |
) |
|
|
38,924 |
|
|
|
(12,099 |
) |
|
|
104,245 |
|
Preferred dividends for Series C |
|
|
|
|
|
|
1,941 |
|
|
|
|
|
|
|
5,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted FFO
available to common
shareholders of
Entertainment
Properties Trust |
|
|
(71,167 |
) |
|
|
40,865 |
|
|
|
(12,099 |
) |
|
|
110,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per common share attributable to Entertainment Properties Trust: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(2.01 |
) |
|
$ |
1.22 |
|
|
|
(0.35 |
) |
|
$ |
3.45 |
|
Diluted |
|
|
(2.01 |
) |
|
|
1.19 |
|
|
|
(0.35 |
) |
|
|
3.39 |
|
|
Shares used for computation (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
35,445 |
|
|
|
32,033 |
|
|
|
34,937 |
|
|
|
30,252 |
|
Diluted |
|
|
35,445 |
|
|
|
34,284 |
|
|
|
34,937 |
|
|
|
32,479 |
|
|
Weighted average shares outstanding-diluted EPS |
|
|
35,445 |
|
|
|
32,365 |
|
|
|
34,937 |
|
|
|
30,565 |
|
Effect of dilutive Series C preferred shares |
|
|
|
|
|
|
1,919 |
|
|
|
|
|
|
|
1,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares outstanding diluted |
|
|
35,445 |
|
|
|
34,284 |
|
|
|
34,937 |
|
|
|
32,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other financial information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Straight-lined rental revenue |
|
$ |
642 |
|
|
|
1,016 |
|
|
|
1,787 |
|
|
|
2,909 |
|
Dividends per common share |
|
$ |
0.65 |
|
|
|
0.84 |
|
|
|
1.95 |
|
|
|
2.52 |
|
Impact of Recently Issued Accounting Standards
In June 2009, the FASB issued a pronouncement establishing the FASB Accounting Standards
Codification (ASC), which officially launched July 1, 2009, to become the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. The standard is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The Company has adopted
this standard in
57
accordance with GAAP.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46R (SFAS No.
167) to be included in ASC 810 Consolidation. SFAS No. 167 amends FIN 46R to require an
analysis to determine whether a variable interest gives a company a controlling financial interest
in a variable interest entity. This statement requires an ongoing reassessment of and eliminates
the quantitative approach previously required for determining whether a company is the primary
beneficiary. This statement is effective for interim and annual reporting periods beginning after
November 15, 2009. Accordingly, the Company will adopt SFAS No. 167 during the first quarter of
2010. The Company is currently evaluating the impact that SFAS No. 167 will have on its financial
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, primarily relating to potential losses due to changes in interest
rates and foreign currency exchange 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 $215 million secured revolving credit facility with $73 million
outstanding as of September 30, 2009, a $160.0 million term loan facility with $94.3 million
outstanding as of September 30, 2009, a $10.7 million bond, a $56.25 million term loan and a $117.9
million term loan, all of which bear interest at a floating rate. As further described in Note 9
to the consolidated financial statements in this Quarterly Report on Form 10-Q, $90.5 million of
the term loans are LIBOR based debt that has been converted to a fixed rate with seven interest
rate swaps and the $117.9 million term loan includes $114.0 million of LIBOR based debt that has
been converted to a fixed rate with two interest rate swaps.
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 make additional
real estate investments may be limited.
We financed the acquisition of our four Canadian properties with non-recourse fixed rate mortgage
loans from a Canadian lender in the original aggregate principal amount of approximately U.S. $97
million. The loans were made and are payable by us in Canadian dollars (CAD), and the rents
received from tenants of the properties are payable in CAD. We have also provided a secured
mortgage construction loan totaling CAD $95.1 million as further discussed in Note 5 to the
consolidated financial statements on this Form 10-Q.
We have partially mitigated the impact of foreign currency exchange risk on our Canadian properties
by matching Canadian dollar debt financing with Canadian dollar rents. To further mitigate our
foreign currency risk in future periods on the four Canadian properties, during the second quarter
of 2007, we entered into a cross currency swap with a notional value of $76.0 million CAD and $71.5
million U.S. The swap calls for monthly exchanges from January 2008 through February 2014 with us
paying CAD based on an annual rate of 17.16% of the notional amount and receiving U.S. dollars
based on an annual rate of 17.4% of the notional amount. There is no initial or final exchange of
the notional amounts. The net effect of this swap is to lock in an exchange rate of $1.05 CAD per
U.S. dollar on approximately $13 million of annual CAD denominated cash flows. These foreign currency
58
derivatives should hedge a significant portion of our expected CAD denominated FFO of
these four Canadian properties through February 2014 as their impact on our reported FFO when
settled should move in the opposite direction of the exchange rates utilized to translate revenues
and expenses of these properties.
In order to also hedge our net investment on the four Canadian properties, we entered into a
forward contract with a notional amount of $100 million CAD and a February 2014 settlement date
which coincides with the maturity of our underlying mortgage on these four properties. The
exchange rate of this forward contract is approximately $1.04 CAD per U.S. dollar. This forward
contract should hedge a significant portion of our CAD denominated net investment in these four
centers through February 2014 as the impact on accumulated other comprehensive income from marking
the derivative to market should move in the opposite direction of the translation adjustment on the
net assets of our four Canadian properties.
We have not yet hedged any of our net investment in the CAD denominated mortgage receivable related
to Toronto Life Square or its expected CAD denominated interest income due to the uncertainty
concerning the timing and ultimate outcome of the forced sale process.
See Note 9 to the consolidated financial statements in this Quarterly Report on Form 10-Q for
additional information on our derivative financial instruments and hedging activities.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange
Act. Based upon and as of the date of that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective to provide
reasonable assurance
that information required to be disclosed by us in reports we file or submit under the Exchange Act
is (1) recorded, processed, summarized and reported within the time periods specified in Securities
and Exchange Commission rules and forms, and (2) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Our disclosure controls were designed to provide reasonable assurance that the controls and
procedures would meet their objectives. Our management, including the Chief Executive Officer and
Chief Financial Officer, does not expect that our disclosure controls will prevent all error and
all fraud. A control system, no matter how well designed and operated, can provide only reasonable
assurance of achieving the designed control objectives and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because
of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusions of two or more people, or
by management override of the control. Because of the inherent limitations in a cost-effective,
maturing control system, misstatements due to error or fraud may occur and not be detected.
59
There have not been any changes in the Companys internal control over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter of the fiscal
year to which this report relates that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Other than routine litigation and administrative proceedings arising in the ordinary course of
business, we are not presently involved in any litigation nor, to our knowledge, is any litigation
threatened against us or our properties, which is reasonably likely to have a material adverse
effect on our liquidity or results of operations.
Item 1A. Risk Factors
Except as provided below, there were no material changes during the quarter from the risk factors
previously discussed in Item 1A, Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2008 filed with the SEC on February 24, 2009. The information below updates and
replaces the risk factor We have made a significant loan commitment to a developer; however, there
is no assurance that the project to which the commitment relates will be completed as planned
previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008 and as
updated on our prior Quarterly Reports on Form 10-Q:
We previously made several investments with a developer, including a significant loan commitment on
a planned resort development. There can be no assurance that the project to which the loan
commitment related will be completed or that the deterioration of the developers financial
condition or sources of liquidity will not have a material adverse effect on our investments with
the developer.
Our remaining loan commitment to fund an additional $91.8 million to Concord Resorts, LLC (Concord
Resorts), which is the remaining loan commitment under the $225.0 million secured first mortgage
loan commitment related to a planned resort development in Sullivan County, New York, is no longer
applicable due to the developers decision to downsize the initial phase of the Concord project to
an investment level of $600 million. The funding of any additional investment in the Concord
project by the Company will be subject to satisfaction of certain conditions, including but not
limited to a reduction in the aforementioned $91.8 million. The Concord project has been unable to
satisfy the conditions to an additional investment by us, and there can be no assurance that the
developer will satisfy these conditions or receive the other financing necessary to complete the
project. Due to these challenges, Concord Resorts has ceased making interest payments to us as
contractually obligated under the loan agreement. If the development is cancelled or delayed
indefinitely, there can be no assurance that our investment in Concord Resorts (the net carrying
value of which was $133.2 million at September 30, 2009) may not be subject to an impairment loss,
which could result in a material adverse impact on our financial condition and results of
operations. In addition, Concord Resorts is controlled by Louis Cappelli, a real estate developer
with whom we have several other investments, including the entertainment retail centers in New
Rochelle, New York and White Plains, New York and $30 million of loans to Mr. Cappelli and his
affiliates. During the quarter ended September 30, 2009, we recorded an impairment charge for our
interest in the White Plains entertainment retail center of $35.8 million, and have established a
$28 million loan loss
60
reserve on impaired loans to Mr. Cappelli and his affiliates. There can be
no assurance that the cancellation or indefinite delay of the Concord Resorts development, or the
deterioration of Mr. Cappellis financial condition or sources of liquidity, would not have a
material adverse effect on our investments with Mr. Cappelli and our ability to collect amounts due
under the loans to Mr. Cappelli and his affiliates.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended September 30, 2009, we did not sell any unregistered securities.
On June 26, 2008, we filed an automatic shelf registration statement on Form S-3 (File No.
333-151978) covering our revised Dividend Reinvestment and Direct Share Purchase Plan (the Plan).
Pursuant to the Plan we may issue from time to time on the terms and conditions set forth in the
Plan up to 6,000,000 common shares at prices to be determined as described in the Plan. We intend
to use the proceeds from the common shares sold pursuant to the Plan for general corporate
purposes.
During August 2009, we issued 652,000 common shares under the Plan at an average purchase price of
$30.65 per share. Total net proceeds after expenses were approximately $19.9 million. Additionally,
during September 2009, we issued 911,000 common shares under the Plan at an average price of
$32.92. Total net proceeds after expenses were approximately $29.9 million.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended September 30, 2009.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended September 30, 2009.
Item 5. Other Information
There were no reportable events during the quarter ended September 30, 2009.
Item 6. Exhibits
|
|
|
31.1*
|
|
Certification of David M. Brain, Chief Executive Officer, pursuant
to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
|
|
31.2*
|
|
Certification of Mark A. Peterson, Chief Financial Officer, pursuant
to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
|
|
32.1*
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.2*
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
PLEASE NOTE: Pursuant to the rules and regulations of the Securities and Exchange Commission, we
have filed or incorporated by reference the agreements referenced above as exhibits to this
61
Quarterly Report on Form 10-Q. The agreements have been filed to provide investors with information
regarding their respective terms. The agreements are not intended to provide any other factual
information about the Company or its business or operations. In particular, the assertions embodied
in any representations, warranties and covenants contained in the agreements may be subject to
qualifications with respect to knowledge and materiality different from those applicable to
investors and may be qualified by information in confidential disclosure schedules not included
with the exhibits. These disclosure schedules may contain information that modifies, qualifies and
creates exceptions to the representations, warranties and covenants set forth in the agreements.
Moreover, certain representations, warranties and covenants in the agreements may have been used
for the purpose of allocating risk between the parties, rather than establishing matters as facts.
In addition, information concerning the subject matter of the representations, warranties and
covenants may have changed after the date of the respective agreement, which subsequent information
may or may not be fully reflected in the Companys public disclosures. Accordingly, investors
should not rely on the representations, warranties and covenants in the agreements as
characterizations of the actual state of facts about the Company or its business or operations on
the date hereof.
62
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
ENTERTAINMENT PROPERTIES TRUST |
|
|
|
|
|
|
|
|
|
Dated: November 5, 2009
|
|
By
|
|
/s/ David M. Brain
|
|
|
|
|
David M. Brain, President Chief Executive
Officer (Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
Dated: November 5, 2009
|
|
By
|
|
/s/ Mark A. Peterson
|
|
|
|
|
Mark A. Peterson, Vice President Chief
Financial Officer (Principal Financial Officer
and Chief Accounting Officer) |
|
|
63
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Document |
|
|
|
31.1*
|
|
Certification of David M. Brain, Chief Executive Officer,
pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2*
|
|
Certification of Mark A. Peterson, Chief Financial Officer,
pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1*
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.2*
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
PLEASE NOTE: Pursuant to the rules and regulations of the Securities and Exchange Commission, we
have filed or incorporated by reference the agreements referenced above as exhibits to this
Quarterly Report on Form 10-Q. The agreements have been filed to provide investors with information
regarding their respective terms. The agreements are not intended to provide any other factual
information about the Company or its business or operations. In particular, the assertions embodied
in any representations, warranties and covenants contained in the agreements may be subject to
qualifications with respect to knowledge and materiality different from those applicable to
investors and may be qualified by information in confidential disclosure schedules not included
with the exhibits. These disclosure schedules may contain information that modifies, qualifies and
creates exceptions to the representations, warranties and covenants set forth in the agreements.
Moreover, certain representations, warranties and covenants in the agreements may have been used
for the purpose of allocating risk between the parties, rather than establishing matters as facts.
In addition, information concerning the subject matter of the representations, warranties and
covenants may have changed after the date of the respective agreement, which subsequent information
may or may not be fully reflected in the Companys public disclosures. Accordingly, investors
should not rely on the representations, warranties and covenants in the agreements as
characterizations of the actual state of facts about the Company or its business or operations on
the date hereof.
64