e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the quarterly period ended March 31, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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)
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Maryland
(State or other jurisdiction
of incorporation or organization)
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43-1790877
(I.R.S. Employer Identification No.) |
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30 West Pershing Road, Suite 201
Kansas City, Missouri
(Address of principal executive offices)
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64108
(Zip Code) |
Registrants telephone number, including area code: (816) 472-1700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
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 April 24, 2007, there were 26,651,870 Common Shares of beneficial interest outstanding.
FORWARD LOOKING STATEMENTS
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 financial condition, results of
operations, plans, objectives, future financial performance and business of the Company.
Forward-looking statements are not guarantees of performance. They involve 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 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. 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, 2006 filed with the SEC on February 28,
2007.
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. 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.
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ENTERTAINMENT PROPERTIES TRUST
Consolidated Balance Sheets
(Dollars in thousands, except share data)
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March 31, 2007 |
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December 31, 2006 |
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(Unaudited) |
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Assets |
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Rental properties, net of accumulated depreciation of $149.5 million and
$141.6 million at March 31, 2007 and December 31, 2006, respectively |
|
$ |
1,399,761 |
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$ |
1,395,903 |
|
Property under development |
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|
26,480 |
|
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|
19,272 |
|
Mortgage notes and related accrued interest receivable |
|
|
115,278 |
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|
76,093 |
|
Investment in joint ventures |
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2,156 |
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|
2,182 |
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Cash and cash equivalents |
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6,755 |
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9,414 |
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Restricted cash |
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7,168 |
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7,365 |
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Intangible assets, net |
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9,165 |
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9,366 |
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Deferred financing costs, net |
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9,981 |
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|
10,491 |
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Accounts and notes receivable |
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35,128 |
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30,043 |
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Other assets |
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12,454 |
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11,150 |
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Total assets |
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$ |
1,624,326 |
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$ |
1,571,279 |
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Liabilities and Shareholders Equity |
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Liabilities: |
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Accounts payable and accrued liabilities |
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$ |
8,170 |
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$ |
16,480 |
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Common dividends payable |
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20,253 |
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|
18,204 |
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Preferred dividends payable |
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4,856 |
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|
3,110 |
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Unearned rents |
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552 |
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|
1,024 |
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Long-term debt |
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734,456 |
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675,305 |
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Total liabilities |
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768,287 |
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714,123 |
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Minority interests |
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4,341 |
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4,474 |
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Shareholders equity: |
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Common Shares, $.01 par value; 50,000,000 shares authorized;
and 27,425,635 and 27,153,411 shares issued at March 31,
2007 and December 31, 2006, respectively |
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274 |
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272 |
|
Preferred Shares, $.01 par value; 15,000,000 shares authorized: |
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2,300,000 Series A shares issued at March 31, 2007 and December 31,
2006;
liquidation preference of $57,500,000 |
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23 |
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23 |
|
3,200,000 Series B shares issued at March 31, 2007 and December 31,
2006;
liquidation preference of $80,000,000 |
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32 |
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32 |
|
5,400,000 Series C convertible shares issued at March 31, 2007 and
December 31, 2006; liquidation preference of $135,000,000 |
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54 |
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54 |
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Additional paid-in-capital |
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Treasury shares at cost: 776,505 and 675,487 common shares |
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890,046 |
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883,639 |
|
at March 31, 2007 and December 31, 2006, respectively |
|
|
(21,919 |
) |
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(15,500 |
) |
Loans to shareholders |
|
|
(3,525 |
) |
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|
(3,525 |
) |
Accumulated other comprehensive income |
|
|
13,726 |
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|
12,501 |
|
Distributions in excess of net income |
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(27,013 |
) |
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(24,814 |
) |
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Shareholders equity |
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851,698 |
|
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|
852,682 |
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Total liabilities and shareholders equity |
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$ |
1,624,326 |
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$ |
1,571,279 |
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See accompanying notes to consolidated financial statements.
4
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except share data)
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Three Months Ended March 31, |
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2007 |
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2006 |
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Rental revenue |
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$ |
42,965 |
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$ |
39,473 |
|
Tenant reimbursements |
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3,642 |
|
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|
3,450 |
|
Other income |
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781 |
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1,463 |
|
Mortgage financing interest |
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3,022 |
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1,824 |
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Total revenue |
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50,410 |
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46,210 |
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Property operating expense |
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4,611 |
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4,770 |
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Other operating expense |
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606 |
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1,038 |
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General and administrative expense |
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3,232 |
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|
2,481 |
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Costs associated with loan refinancing |
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|
673 |
|
Interest expense, net |
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10,952 |
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|
11,239 |
|
Depreciation and amortization |
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8,297 |
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|
7,497 |
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|
|
|
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|
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Income before gain on
sale of land and income
from joint ventures |
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|
22,712 |
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|
18,512 |
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|
|
|
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|
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Gain on sale of land |
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|
|
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|
345 |
|
Equity in income from joint ventures |
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198 |
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|
184 |
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|
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|
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|
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|
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Net income |
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$ |
22,910 |
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$ |
19,041 |
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Preferred dividend requirements |
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(4,856 |
) |
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(2,916 |
) |
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Net income available to
common shareholders |
|
$ |
18,054 |
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|
$ |
16,125 |
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Net income per common share: |
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Basic |
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$ |
0.69 |
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$ |
0.63 |
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Diluted |
|
$ |
0.67 |
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$ |
0.62 |
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Shares used for computation (in thousands): |
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Basic |
|
|
26,282 |
|
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|
25,690 |
|
Diluted |
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|
26,820 |
|
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|
26,030 |
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|
|
|
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|
Dividends per common share |
|
$ |
0.7600 |
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|
$ |
0.6875 |
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|
|
|
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|
See accompanying notes to consolidated financial statements.
5
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statement of Changes in Shareholders Equity
Three Months Ended March 31, 2007
(Unaudited)
(Dollars in thousands, except share data)
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Accumulated |
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Additional |
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other |
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Distributions |
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|
Common Stock |
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Preferred Stock |
|
|
paid-in |
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Treasury |
|
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Loans to |
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comprehensive |
|
|
in excess of |
|
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Shares |
|
|
Par |
|
|
Shares |
|
|
Par |
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|
capital |
|
|
shares |
|
|
shareholders |
|
|
income (loss) |
|
|
net income |
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|
Total |
|
Balance at December 31, 2006 |
|
|
27,153 |
|
|
$ |
272 |
|
|
|
10,900 |
|
|
$ |
109 |
|
|
$ |
883,639 |
|
|
$ |
(15,500 |
) |
|
$ |
(3,525 |
) |
|
$ |
12,501 |
|
|
$ |
(24,814 |
) |
|
$ |
852,682 |
|
Issuance of restricted shares, including restricted shares issued
for payment of bonuses |
|
|
129 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,335 |
|
Amortization of restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
634 |
|
Share option expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,400 |
|
|
|
|
|
|
|
1,400 |
|
Unrealized loss on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(175 |
) |
|
|
|
|
|
|
(175 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,910 |
|
|
|
22,910 |
|
Purchase of 24,740 common shares for treasury in conjunction
with vesting of employees restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,448 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,448 |
) |
Issuances of common shares in Dividend Reinvestment Plan |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197 |
|
Stock option exercises, net |
|
|
140 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
4,135 |
|
|
|
(4,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(835 |
) |
Dividends to common shareholders ($0.76 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,253 |
) |
|
|
(20,253 |
) |
Dividends to Series A preferred shareholders ($0.5938 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,366 |
) |
|
|
(1,366 |
) |
Dividends to Series B preferred shareholders ($0.4844 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,550 |
) |
|
|
(1,550 |
) |
Dividends to Series C preferred shareholders ($0.3594 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,940 |
) |
|
|
(1,940 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
27,426 |
|
|
$ |
274 |
|
|
|
10,900 |
|
|
$ |
109 |
|
|
$ |
890,046 |
|
|
$ |
(21,919 |
) |
|
$ |
(3,525 |
) |
|
$ |
13,726 |
|
|
$ |
(27,013 |
) |
|
$ |
851,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
6
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
22,910 |
|
|
$ |
19,041 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
1,400 |
|
|
|
(764 |
) |
Unrealized loss on derivatives |
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
24,135 |
|
|
$ |
18,277 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
7
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,910 |
|
|
$ |
19,041 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Gain on sale of land |
|
|
|
|
|
|
(345 |
) |
Costs associated with loan refinancing (non-cash portion) |
|
|
|
|
|
|
673 |
|
Equity in income from joint ventures |
|
|
(198 |
) |
|
|
(184 |
) |
Depreciation and amortization |
|
|
8,297 |
|
|
|
7,497 |
|
Amortization of deferred financing costs |
|
|
662 |
|
|
|
768 |
|
Share-based compensation expense to management and trustees |
|
|
781 |
|
|
|
666 |
|
Increase in mortgage notes accrued interest receivable |
|
|
(2,745 |
) |
|
|
(1,809 |
) |
Increase in accounts receivable |
|
|
(23 |
) |
|
|
(1,343 |
) |
Increase in other assets |
|
|
(1,379 |
) |
|
|
(128 |
) |
Increase (decrease) in accounts payable and accrued liabilities |
|
|
(331 |
) |
|
|
380 |
|
Decrease in unearned rents |
|
|
(472 |
) |
|
|
(194 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
27,502 |
|
|
|
25,022 |
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Acquisition of rental properties and other assets |
|
|
(16,725 |
) |
|
|
(38,462 |
) |
Net proceeds from sale of real estate |
|
|
|
|
|
|
603 |
|
Additions to properties under development |
|
|
(7,433 |
) |
|
|
(7,097 |
) |
Distributions from joint ventures |
|
|
224 |
|
|
|
213 |
|
Investment in promissory note receivable |
|
|
(5,000 |
) |
|
|
(3,500 |
) |
Investment in mortgage notes receivable |
|
|
(35,921 |
) |
|
|
(15,332 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(64,855 |
) |
|
|
(63,575 |
) |
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from long-term debt facilities |
|
|
100,415 |
|
|
|
135,196 |
|
Principal payments on long-term debt |
|
|
(42,095 |
) |
|
|
(121,912 |
) |
Deferred financing fees paid |
|
|
(142 |
) |
|
|
(2,114 |
) |
Net proceeds from issuance of common shares |
|
|
197 |
|
|
|
46,389 |
|
Impact of stock option exercises, net |
|
|
(835 |
) |
|
|
|
|
Purchase of common shares for treasury in conjunction with vesting of
employees restricted stock |
|
|
(1,448 |
) |
|
|
(919 |
) |
Distributions paid to minority interests |
|
|
(133 |
) |
|
|
(133 |
) |
Dividends paid to shareholders |
|
|
(21,314 |
) |
|
|
(18,686 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
34,645 |
|
|
|
37,821 |
|
Effect of exchange rate changes on cash |
|
|
49 |
|
|
|
(26 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(2,659 |
) |
|
|
(758 |
) |
Cash and cash equivalents at beginning of year |
|
|
9,414 |
|
|
|
6,546 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
6,755 |
|
|
$ |
5,788 |
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash activity: |
|
|
|
|
|
|
|
|
Transfer of property under development to rental property |
|
$ |
264 |
|
|
$ |
4,774 |
|
Issuance of restricted shares, including restricted shares
issued for payment of bonuses |
|
$ |
8,402 |
|
|
$ |
3,441 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
11,015 |
|
|
$ |
11,031 |
|
Cash paid during the year for income taxes |
|
$ |
317 |
|
|
$ |
224 |
|
See accompanying notes to consolidated financial statements.
8
ENTERTAINMENT PROPERTIES TRUST
Notes to Consolidated Financial Statements (Unaudited)
1. Organization
Description of Business
Entertainment Properties Trust (the Company) is a Maryland real estate investment trust (REIT)
organized on August 29, 1997. The Company was formed to acquire and develop 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 three-month period
ended March 31, 2007 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2007.
The consolidated balance sheet as of December 31, 2006 has been derived from the audited
consolidated balance sheet at that date but does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006 filed
with the SEC on February 28, 2007.
Revenue Recognition
Rents that are fixed and determinable are recognized on a straight-line basis over the minimum
terms of the leases. Base rent escalation in those of the Companys 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 $17.1 million and $16.4 million at March 31,
2007 and December 31, 2006, 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 $474 thousand and
$469 thousand were recognized during the three months ended March 31, 2007 and 2006, 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 three months ended March 31, 2007 and 2006.
9
Concentrations of Risk
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (53%) of the megaplex
theatre rental properties held by the Company (including joint venture properties) at March 31,
2007 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 $23.3 million, or
54%, and $23.0 million, or 58%, for the three months ended March 31, 2007 and 2006, 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 has publicly held debt and
accordingly, its consolidated financial information is publicly available.
For the three months ended March 31, 2007 and 2006, respectively, approximately $8.0 million, or
16%, and $7.7 million, or 17%, of total revenue was derived from the Companys four entertainment
retail centers in Ontario, Canada. For the three months ended March 31, 2007 and 2006,
respectively, approximately $10.6 million, or 21%, and $9.5 million, or 21%, 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. The Companys wholly owned subsidiaries that hold the
Canadian entertainment retail centers, third party debt and mortgage note receivable represent
approximately $166.5 million or 19.5% and $164.0 million or 19.2% of the Companys net assets as of
March 31, 2007 and December 31, 2006, respectively.
Share-Based Compensation
The Company accounts for share based compensation under the Financial Accounting Standard (SFAS)
No. 123R Share-Based Payment. Share based compensation expense consists of share option
expense, amortization of restricted share grants and shares issued to 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 $781 thousand and $666 thousand for
the three months ended March 31, 2007 and 2006, respectively.
Share Options
The fair value of share options granted under the Companys Share Incentive Plan is estimated at
the date of grant using the Black-Scholes option pricing model. Awards under the Companys plan
vest either immediately or up to a period of 5 years. Share option expense for all options is
recognized on a straight-line basis over the vesting period.
The expense related to share options included in the determination of net income for the three
months ended March 31, 2007 and 2006 was $107 thousand and $66 thousand, respectively. The
following assumptions were used in applying the Black-Sholes option pricing model at the grant
dates: risk-free interest rate of 4.8% for both the three months ended March 31, 2007 and 2006,
dividend yield of 5.4% and 5.8% for the three months ended March 31, 2007 and 2006, respectively,
volatility factors in the expected market price of the Companys common shares of 19.5% and 21.1%
for the three months ended March 31, 2007 and 2006, respectively; and an expected life of eight
years.
Restricted Shares
The Company grants restricted shares to employees pursuant to both its Annual Incentive Program and
its Share Incentive Plan. The Company amortizes the expense related to the shares awarded under
the Share Incentive Plan and the premium awarded under the restricted share alternative of the
Annual Incentive Program on a straight-line basis over the future vesting period (usually three to
five years). Total expense recognized related to all restricted shares was $634 thousand and $559
thousand for the three months ended March 31, 2007 and 2006, respectively.
10
Shares Issued to Trustees
The Company issues shares to Trustees for payment of their annual retainers. This expense is
amortized by the Company on a straight-line basis over the year of service by the Trustees. Total
expense recognized related to shares issued to Trustees was $40 thousand for both the three months
ended March 31, 2007 and 2006.
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform to the current
period presentation.
3. Rental Properties
The following table summarizes the carrying amounts of rental properties as of March 31, 2007 and
December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
December 31, 2006 |
|
Buildings and improvements |
|
$ |
1,190,898 |
|
|
$ |
1,189,676 |
|
Furniture, fixtures & equipment |
|
|
8,206 |
|
|
|
8,147 |
|
Land |
|
|
350,171 |
|
|
|
339,716 |
|
|
|
|
|
|
|
|
|
|
|
1,549,275 |
|
|
|
1,537,539 |
|
Accumulated depreciation |
|
|
(149,514 |
) |
|
|
(141,636 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
1,399,761 |
|
|
$ |
1,395,903 |
|
|
|
|
|
|
|
|
Depreciation expense on rental properties was $7.8 million and $7.0 million for the three months
ended March 31, 2007 and 2006, respectively.
4. Unconsolidated Real Estate Joint Ventures
At March 31, 2007, the Company had a 20% investment interest in each of two unconsolidated real
estate joint ventures, Atlantic-EPR I and Atlantic-EPR II. The Company accounts for its
investment in these joint ventures under the equity method of accounting.
The Company recognized income of $120 and $112 (in thousands) from its investment in the
Atlantic-EPR I joint venture during the first three months of 2007 and 2006, respectively. The
Company also received distributions from Atlantic-EPR I of $136 and $129 (in thousands) during the
first three months of 2007 and 2006, respectively. Condensed financial information for Atlantic-EPR
I is as follows as of and for the three months ended March 31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Rental properties, net |
|
$ |
29,084 |
|
|
|
29,728 |
|
Cash |
|
|
141 |
|
|
|
141 |
|
Long-term debt |
|
|
16,057 |
|
|
|
16,387 |
|
Partners equity |
|
|
13,063 |
|
|
|
13,375 |
|
Rental revenue |
|
|
1,065 |
|
|
|
1,044 |
|
Net income |
|
|
560 |
|
|
|
525 |
|
11
The Company recognized income of $78 and $72 (in thousands) from its investment in the
Atlantic-EPR II joint venture during the first three months of 2007 and 2006, respectively. The
Company also received distributions from Atlantic-EPR II of $88 and $84 (in thousands) during the
first three months of 2007 and 2006, respectively. Condensed financial information for
Atlantic-EPR II is as follows as of and for the three months ended March 31, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Rental properties, net |
|
$ |
22,765 |
|
|
|
23,226 |
|
Cash |
|
|
99 |
|
|
|
87 |
|
Long-term debt |
|
|
13,803 |
|
|
|
14,080 |
|
Note payable to Entertainment Properties
Trust |
|
|
117 |
|
|
|
117 |
|
Partners equity |
|
|
8,747 |
|
|
|
8,937 |
|
Rental revenue |
|
|
694 |
|
|
|
694 |
|
Net income |
|
|
336 |
|
|
|
319 |
|
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.
5. Share Incentive Plan
The Company maintains a Share Incentive Plan under which an aggregate of 3,000,000 common shares
and options to purchase common shares, subject to adjustment in the event of certain capital
events, may be granted. At March 31, 2007, there were 1,026,167 shares available for grant under
the Share Incentive Plan.
Share Options
Share options granted under the Share 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 typically become exercisable at a rate of 20% per year over a
fiveyear period. For trustees, share options become exercisable over a one-year period. 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, 2006 |
|
|
981,673 |
|
|
$ |
14.00 $43.75 |
|
|
$ |
28.33 |
|
Exercised |
|
|
(140,470 |
) |
|
|
16.05 43.75 |
|
|
|
29.41 |
|
Granted |
|
|
86,945 |
|
|
|
60.03 65.50 |
|
|
|
64.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2007 |
|
|
928,148 |
|
|
|
14.00 65.50 |
|
|
|
31.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted was $7.91 and $5.03 during the three months
ended March 31, 2007 and 2006, respectively. At March 31, 2007 and December 31, 2006, stock-option
expense to be recognized in future periods was $1.2 million and $648 thousand, respectively.
During the three months ended March 31, 2007, the intrinsic value of stock options exercised was
$5.0 million.
12
The following table summarizes outstanding options at March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
Options |
|
Weighted avg. |
|
Weighted avg. |
|
Aggregate intrinsic |
price range |
|
outstanding |
|
life remaining |
|
exercise price |
|
value (in thousands) |
$14.00 19.99
|
|
|
196,372 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
20.00 29.99
|
|
|
335,333 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
30.00 39.99
|
|
|
100,776 |
|
|
|
7.0 |
|
|
|
|
|
|
|
|
|
40.00 49.99
|
|
|
208,722 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
50.00 59.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60.00 65.50
|
|
|
86,945 |
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
928,148 |
|
|
|
6.4 |
|
|
$ |
31.59 |
|
|
$ |
26,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes exercisable options at March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
Options |
|
Weighted avg. |
|
Weighted avg. |
|
Aggregate intrinsic |
price range |
|
outstanding |
|
life remaining |
|
exercise price |
|
value (in thousands) |
$14.00 19.99
|
|
|
196,372 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
20.00 29.99
|
|
|
239,501 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
30.00 39.99
|
|
|
55,343 |
|
|
|
7.0 |
|
|
|
|
|
|
|
|
|
40.00 49.99
|
|
|
33,051 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
50.00 59.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60.00 65.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
524,267 |
|
|
|
5.2 |
|
|
$ |
23.39 |
|
|
$ |
19,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Shares
A summary of the Companys restricted 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, 2006 |
|
|
169,554 |
|
|
$ |
39.50 |
|
|
|
|
|
Granted |
|
|
128,563 |
|
|
|
65.17 |
|
|
|
|
|
Vested |
|
|
(59,564 |
) |
|
|
37.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
March 31, 2007 |
|
|
238,553 |
|
|
|
53.80 |
|
|
|
2.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The holders of restricted shares have voting rights and receive dividends from the date of grant.
These shares vest ratably over a period of three to five years. At March 31, 2007 and December 31,
2006, unamortized share-based compensation expense related to non-vested restricted shares was $9.3
million and $2.9 million, respectively. The fair value of the restricted shares that vested during
the three months ended March 31, 2007 was $3.5 million.
13
6. Earnings Per Share
The following table summarizes the Companys common shares used for computation of basic and
diluted earnings per share for the three months ended March 31, 2007 and 2006 (in thousands except
per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2007 |
|
|
|
Income |
|
|
Shares |
|
|
Per Share |
|
|
|
(numerator) |
|
|
(denominator) |
|
|
Amount |
|
|
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
18,054 |
|
|
|
26,282 |
|
|
$ |
0.69 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Share options |
|
|
|
|
|
|
447 |
|
|
|
(0.01 |
) |
Non-vested common share grants |
|
|
|
|
|
|
91 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings |
|
$ |
18,054 |
|
|
|
26,820 |
|
|
$ |
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006 |
|
|
|
Income |
|
|
Shares |
|
|
Per Share |
|
|
|
(numerator) |
|
|
(denominator) |
|
|
Amount |
|
|
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
16,125 |
|
|
|
25,690 |
|
|
$ |
0.63 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Share options |
|
|
|
|
|
|
315 |
|
|
|
(0.01 |
) |
Non-vested common share grants |
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings |
|
$ |
16,125 |
|
|
|
26,030 |
|
|
$ |
0.62 |
|
|
|
|
|
|
|
|
|
|
|
The additional 1.9 million common shares that would result from the conversion of the
Companys Series C 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 months ended March 31, 2007 because the effect is antidilutive.
7. Investment in Mortgage Notes
On March 13, 2007, a wholly-owned subsidiary of the Company entered into a secured mortgage loan
agreement for $93.0 million with SVV I, LLC for the development of a water-park anchored
entertainment village. The Company advanced $35.9 million during March of 2007 under this
agreement. The secured property is approximately 368 acres of development land located in Kansas
City, Kansas. The carrying value of this mortgage note receivable at March 31, 2007 was $36.1
million, including related accrued interest receivable of $156 thousand. This loan is guaranteed
by the Schlitterbahn New Braunfels Group (Bad-Schloss, Inc., Waterpark Management, Inc., Golden
Seal Investments, Inc., Liberty Partnership, Ltd., Henry Condo I, Ltd., and Henry-Walnut, Ltd.) and
has a maturity date of March 12, 2008. Monthly interest payments are made to the Company and the
unpaid principal balance bears interest at LIBOR plus 3.5%. During April of 2007, the Company
advanced an additional $45.7 million on this mortgage note.
14
8. Mortgage Notes Payable
On February 21, 2007, a wholly-owned subsidiary of the Company obtained a non-recourse mortgage
loan of $11.6 million. This mortgage is secured by a theatre property located in Biloxi,
Mississippi. The mortgage loan bears interest at 6.06%, matures on March 1, 2017 and requires
monthly principal and interest payments of $75 thousand with a final principal payment at maturity
of $9.0 million. The net proceeds from this loan were used to pay down the Companys unsecured
revolving credit facility.
On March 23, 2007, a wholly-owned subsidiary of the Company obtained a non-recourse mortgage loan
of $11.9 million. This mortgage is secured by a theatre property located in Fresno, California.
The mortgage loan bears interest at 6.07%, matures on April 6, 2017 and requires monthly principal
and interest payments of $77 thousand with a final principal payment at maturity of $9.2 million.
The net proceeds from this loan were used to pay down the Companys unsecured revolving credit
facility.
9. Staff Accounting Bulletin No. 108 (SAB 108)
In September 2006, the SEC released SAB 108. SAB 108 permitted the Company to adjust for the
cumulative effect of errors relating to prior years previously considered to be immaterial by
adjusting the opening balance of retained earnings in the year of adoption. SAB 108 also required
the adjustment of any prior quarterly financial statements within the fiscal year of adoption for
the effects of such errors on the quarters when the information is next presented. Such
adjustments did not require previously filed reports with the SEC to be amended.
Effective January 1, 2006, the Company adopted SAB 108. In accordance with SAB 108, the Company
increased distributions in excess of net income as of January 1, 2006, and its rental revenue and
net income for the year ended December 31, 2006 for the recognition of straight-line rental
revenues and net
receivables as further described below. SFAS No. 13 Accounting for Leases requires rental income
that is fixed and determinable to be recognized on a straight-line basis over the minimum term of
the lease. Certain leases executed or acquired between 1998 and 2003 contain rental income
provisions that are fixed and determinable yet straight line revenue recognition in accordance with
SFAS No. 13 was not applied. Accordingly, the implementation of SAB 108 corrects the revenue
recognition related to such leases. The first quarter 2006 impact of this adjustment is summarized
below (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended March 31, 2006 |
|
Previously Reported |
|
Adjustment |
|
As Adjusted |
Rental revenue |
|
|
39,130 |
|
|
|
343 |
|
|
|
39,473 |
|
Net income |
|
|
18,698 |
|
|
|
343 |
|
|
|
19,041 |
|
Net income available to common shareholders |
|
|
15,782 |
|
|
|
343 |
|
|
|
16,125 |
|
Diluted net income per common share |
|
|
0.61 |
|
|
|
0.01 |
|
|
|
0.62 |
|
10. Subsequent Developments
On April 4, 2007, a wholly-owned subsidiary of the Company entered into two secured first
mortgage loan agreements totaling $73.5 million with Peak Resorts, Inc. The Company advanced $48.5
million during April of 2007 under these agreements. The loans are secured by two ski resorts
located in Vermont and New Hampshire. Mount Snow is approximately 2,378 acres and is located in
15
both West Dover and Wilmington, Vermont. Mount Attitash is approximately 1,250 acres
and is located in Bartlett, New Hampshire. The loans have a maturity date of April 3, 2027.
Monthly interest payments are made to the Company and the unpaid principal balance initially bears
interest at 10%.
Additionally, on April 4, 2007, a wholly-owned subsidiary of the Company entered into a third
secured first mortgage loan agreement for $25.0 million with Peak Resorts, Inc. for the further
development of Mount Snow. The loan is secured by approximately 696 acres of development land.
The Company advanced the full amount of the loan during April of 2007. The loan has a maturity
date of April 2, 2010 at which time the unpaid principal balance and all accrued interest is due.
The unpaid principal balance bears interest at 10%.
As further described in Note 7, on April 13, 2007, a wholly-owned subsidiary of the Company
advanced an additional $45.7 million under a secured mortgage for the development of a water-park
anchored entertainment village in Kansas City, KS.
On April 18, 2007, the Company amended its unsecured revolving credit facility. The amendment
allows additional assets, subject to certain limitations, to be included in the Companys borrowing
base, and provides a more favorable valuation of the Companys megaplex theatres and entertainment
related retail assets in the calculation of the borrowing base and the leverage ratio.
Additionally, the amendment relaxes the covenants that limit the Companys investment in certain
types of assets, raises its capacity to issue letters of credit and provides the Company with the
flexibility to incur other unsecured recourse indebtedness, subject to certain limitations, beyond
the unsecured revolving credit facility. The size, term and pricing of the unsecured revolving
credit facility were not impacted by the amendment.
On April 20, 2007, the Company issued a notice of redemption to the registered holders of all 2.3
million outstanding shares of its 9.5% Series A preferred shares notifying such holders of the
Companys intent to redeem all such shares outstanding on May 29, 2007. The shares are expected to
be redeemed at a redemption price of $25.3892361 per share. This price is the sum of the $25.00
per share liquidation preference and a quarterly dividend per share of $0.59375 prorated through
the redemption date. In conjunction with the anticipated redemption, the Company expects to
recognize both a non-cash charge representing the original issuance costs that were paid in 2002
and also other redemption related expenses. The aggregate reduction to net income available to
common shareholders is expected to be approximately $2.1 million ($0.08 per fully diluted common
share) in the second quarter of 2007.
11. Commitments and Contingencies
As of March 31, 2007, the Company had three theatre development projects under construction for
which it has agreed to finance the development costs. These theatres are expected to have a total
of 46 screens and their development costs (including land) are expected to be approximately $38.4
million. Through March 31, 2007, the Company has invested $20.4 million in these projects
(including land), and has commitments to fund approximately $18.0 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 theatres to the operators at pre-determined rates.
16
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. 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 and other matters, which reflect managements
best judgment based on factors currently known. See Forward Looking Statements. 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, 2006 filed with the SEC on February 28, 2007.
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 March 31, 2007, we had invested approximately
$1.5 billion (before accumulated depreciation) in 75 megaplex theatre properties and various
restaurant, retail, entertainment, destination recreational and specialty properties located in 25
states and Ontario, Canada. As of March 31, 2007, we had invested approximately $26.5 million in
development land and construction in progress for real-estate development. Also, as of March 31,
2007, we had invested approximately US $63.0 million (including accrued interest) in mortgage
financing for the development of a new entertainment retail center located in downtown Toronto,
Ontario, Canada, $8.1 million (including accrued interest) in mortgage financing for the Crotched
Mountain Ski Resort located in New Hampshire, $8.1 million in mortgage financing (including accrued
interest) for the development of a megaplex theatre property in Louisiana and $36.1 million in
mortgage financing (including accrued interest) for the development of a water-park anchored
entertainment village in Kansas City, Kansas.
Substantially all of our single-tenant properties are leased pursuant to long-term, triple-net
leases, under which the tenants typically pay all operating expenses of a property, including, but
not limited to, all real estate taxes, assessments and other governmental charges, insurance,
utilities, repairs and maintenance. A majority of our revenues are derived from rents received or
accrued under long-term, triple-net leases. Tenants at our multi-tenant properties are required to
pay common area maintenance charges to reimburse us for their pro rata portion of these costs.
We incur general and administrative expenses including compensation expense for our executive
officers and other employees, professional fees and various expenses incurred in the process of
identifying, evaluating, acquiring and financing additional properties and mortgage notes. We are
self-administered and managed by our 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 five-year to 40-year period for tax purposes and financial reporting purposes.
Our property acquisitions and development financing commitments are financed by cash from
operations, borrowings under our unsecured revolving credit facility, long-term mortgage debt and
the sale of equity securities. It has been our strategy to structure leases and financings to
ensure a positive spread between our cost of capital and the rentals paid by our tenants. We have
primarily acquired or developed new properties that are pre-leased to a single tenant or
multi-tenant properties
17
that have a high occupancy rate. We do not typically develop or acquire properties on a speculative basis or
that are not significantly pre-leased. As of March 31, 2007, we have also entered into three joint
ventures formed to own and lease single properties, and have provided mortgage note financing as
described above. We intend to continue entering into some or all of these types of arrangements in
the foreseeable future.
Our primary challenges have been locating suitable properties, negotiating favorable lease and
financing terms, and managing our portfolio as we have continued to grow. Because of our emphasis
on the entertainment and entertainment-related sector of the real estate industry and the knowledge
and industry relationships of our management, we have enjoyed favorable opportunities to acquire,
finance and lease properties. We believe those opportunities will continue during the remainder of
2007.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions in certain circumstances
that affect amounts reported in the accompanying consolidated financial statements and related
notes. In preparing these financial statements, management has made its best estimates and
assumptions that affect the reported assets and liabilities. The most significant assumptions and
estimates relate to revenue recognition, depreciable lives of the real estate, the valuation of
real estate, accounting for real estate acquisitions and estimating reserves for uncollectible
receivables. Application of these assumptions requires the exercise of judgment as to future
uncertainties and, as a result, actual results could differ from these estimates.
Revenue Recognition
Rents that are fixed and determinable are recognized on a straight-line basis over the minimum
terms of the leases. Base rent escalation in 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.
Real Estate Useful Lives
We are required to make subjective assessments as to the useful lives of our properties for the
purpose of determining the amount of depreciation to reflect on an annual basis with respect to
those properties. These assessments have a direct impact on our net income. Depreciation and
amortization are provided on the straight-line method over the useful lives of the assets, as
follows:
|
|
|
|
|
|
|
Buildings |
|
40 years |
|
|
Tenant improvements |
|
Base term of |
|
|
|
|
lease or useful |
|
|
|
|
life, whichever |
|
|
|
|
is shorter |
|
|
Furniture, fixtures and equipment |
|
3 to 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.
18
We apply the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. We assess the carrying value of our rental
properties whenever events or changes in circumstances indicate that the carrying amount of a
property may not be recoverable. Certain factors that may occur and indicate that impairments may
exist include, but are not limited to: underperformance relative to projected future operating
results, tenant difficulties and significant adverse industry or market economic trends. No such
indicators existed during the first three months of 2007. If an indicator of possible impairment
exists, a property is evaluated for impairment by comparing the carrying amount of the property to
the estimated undiscounted future cash flows expected to be generated by the property. If the
carrying amount of a property exceeds its estimated future cash flows on an undiscounted basis, an
impairment charge is recognized in the amount by which the carrying amount of the property exceeds
the fair value of the property. Management estimates fair value of our rental properties based on
projected discounted cash flows using a discount rate determined by management to be commensurate
with the risk inherent in the Company. Management did not record any impairment charges for the
first three months of 2007.
Real Estate Acquisitions
Upon acquisitions of real estate properties, we make subjective estimates of the fair value of
acquired tangible assets (consisting of land, building, tenant improvements, and furniture,
fixtures and equipment) and identified intangible assets and liabilities (consisting of above and
below market leases, in-place leases, tenant relationships and assumed financing that is determined
to be above or below market terms) in accordance with Statement of Financial Accounting Standards
(SFAS) No.141, Business Combinations. We utilize methods similar to those used by independent
appraisers in making these estimates. Based on these estimates, we allocate the purchase price to
the applicable assets and liabilities. These estimates have a direct impact on our net income.
Allowance for Doubtful Accounts
Management makes quarterly estimates of the collectibility of its accounts and notes receivable
related to base rents, tenant escalations (straight-line rents) and reimbursements, interest
income, note principal and other revenue or income. Management specifically analyzes trends in
accounts and notes 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.
Recent Developments
Debt Financing
On February 21, 2007, we obtained a non-recourse mortgage loan of $11.6 million. This mortgage is
secured by a theatre property located in Biloxi, Mississippi. The mortgage loan bears interest at
6.06%, matures on March 1, 2017 and requires monthly principal and interest payments of $75
thousand with a final principal payment at maturity of $9.0 million. The net proceeds from this
loan were used to pay down our unsecured revolving credit facility.
On March 23, 2007, we obtained a non-recourse mortgage loan of $11.9 million. This mortgage is
secured by a theatre property located in Fresno, California. The mortgage loan bears interest at
6.07%, matures on April 6, 2017 and requires monthly principal and interest payments of $77 thousand with
a final principal payment at maturity of $9.2 million. The net proceeds from this loan were used
to pay down our unsecured revolving credit facility.
19
Credit Facility
On April 18, 2007 we amended our unsecured revolving credit facility. The amendment allows
additional assets, subject to certain limitations, to be included in our borrowing base, and
provides a more favorable valuation of our megaplex theatres and entertainment related retail
assets in the calculation of the borrowing base and the leverage ratio. Additionally, the
amendment relaxes the covenants that limit our investment in certain types of assets, raises our
capacity to issue letters of credit and provides us with the flexibility to incur other unsecured
recourse indebtedness, subject to certain limitations, beyond the unsecured revolving credit
facility. The size, term and pricing of the unsecured revolving credit facility were not impacted
by the amendment.
Series A Preferred Shares Redemption
On April 20, 2007, we issued a notice of redemption to the registered holders of all 2.3 million
outstanding shares of our Series A preferred shares notifying such holders of our intent to redeem
all such shares outstanding on May 29, 2007. The shares are expected to be redeemed at a
redemption price of $25.3892361 per share. This price is the sum of the $25.00 per share
liquidation preference and a quarterly dividend per share of $0.59375 prorated through the
redemption date. In conjunction with the anticipated redemption, we expect to recognize both a
non-cash charge representing the original issuance costs that were paid in 2002 and also other
redemption related expenses. The aggregate reduction to net income available to common
shareholders is expected to be approximately $2.1 million ($0.08 per fully diluted common share) in
the second quarter of 2007.
Investments
On March 13, 2007, we entered into a secured first mortgage loan agreement for $93.0 million to SVV
I, LLC for the development of a water-park anchored entertainment village. We advanced $35.9
million during March of 2007 under this agreement. The secured property is approximately 368 acres
of development land located in Kansas City, Kansas. The carrying value of this mortgage note
receivable at March 31, 2007 was $36.1 million, including related accrued interest receivable of
$156 thousand. This loan is guaranteed by the Schlitterbahn New Braunfels Group (Bad-Schloss,
Inc., Waterpark Management, Inc., Golden Seal Investments, Inc., Liberty Partnership, Ltd., Henry
Condo I, Ltd., and Henry-Walnut, Ltd.) and has a maturity date of March 12, 2008. Monthly interest
payments are made to the Company and the unpaid principal balance bears interest at LIBOR plus
3.5%. During April of 2007, we advanced an additional $45.7 million on this mortgage note.
On April 4, 2007, we entered into two secured first mortgage loan agreements totaling $73.5 million
with Peak Resorts, Inc. We advanced $48.5 million during April of 2007 under these agreements.
The loans are secured by two ski resorts located in Vermont and New Hampshire. Mount Snow is approximately 2,378 acres and is located in both West
Dover and Wilmington, Vermont. Mount Attitash is approximately 1,250 acres and is located in
Bartlett, New Hampshire. The loans have a maturity date of April 3, 2027. Monthly interest
payments are made to us and the unpaid principal balance initially bears interest at 10%.
Additionally, on April 4, 2007, we entered into a third secured first mortgage loan agreement for
$25.0 million with Peak Resorts, Inc. for further development of Mount Snow. The loan is secured
by approximately 696 acres of development land. We advanced the full amount of the loan during
April of 2007. The loan has a maturity date of April 2, 2010 at which time the unpaid principal
balance and all accrued interest is due. The unpaid principal balance bears interest at 10%.
20
Results of Operations
Three months ended March 31, 2007 compared to three months ended March 31, 2006
Rental revenue was $43.0 million for the three months ended March 31, 2007, compared to $39.5
million for the three months ended March 31, 2006. The $3.5 million increase resulted primarily
from the property acquisitions and developments completed in 2006 and 2007 and base rent increases
on existing properties. Percentage rents of $0.5 million were recognized during both the three
months ended March 31, 2007 and 2006. Straight-line rents of $1.0 million and $0.8 million were
recognized during the three months ended March 31, 2007 and 2006, respectively. As of March 31,
2007 and December 31, 2006, the receivable for straight-line rents was $17.1 million and $16.4
million, respectively.
Tenant reimbursements totaled $3.6 million for the three months ended March 31, 2007 compared to
$3.5 million for the three months ended March 31, 2006. These tenant reimbursements arise from the
operations of our retail centers. The $0.1 million increase is due primarily to increases in
tenant reimbursements, primarily driven by the expansion and leasing of the gross leasable area at
our retail centers in Ontario, Canada.
Other income was $0.8 million for the three months ended March 31, 2007 compared to $1.5 million
for the three months ended March 31, 2006. The decrease of $0.7 million is due to the following:
|
|
|
A decrease of $0.3 million in revenues from a restaurant in Southfield, Michigan opened
in September 2005 and previously operated through a wholly-owned taxable REIT subsidiary.
The restaurant in Southfield, Michigan was closed during the third quarter of 2006 and the
space was leased to an unrelated restaurant tenant. |
|
|
|
A decrease of $0.4 million related to the recognition of a gain for the three months
ended March 31, 2006 resulting from an insurance claim. As a result of the hurricane
events of October 2005, one non triple-net retail property in Pompano Beach, Florida
suffered significant damage to its roof. The insurance company reimbursed us for the
replacement of the roof less our deductible in January 2006. |
Mortgage financing interest for the three months ended March 31, 2007 was $3.0 million compared to
$1.8 million for the three months ended March 31, 2006 and relates to the following:
|
|
|
mortgage financing for the development of an entertainment retail center in Canada
provided in June of 2005 and March of 2006 |
|
|
|
mortgage financing for a ski resort in New Hampshire provided in March of 2006 |
|
|
|
mortgage financing for the development of a megaplex theatre in Louisiana provided in
November of 2006 |
|
|
|
mortgage financing for the development of a water-park entertainment village in Kansas
provided in March of 2007 |
Our property operating expense totaled $4.6 million for the three months ended March 31, 2007
compared to $4.8 million for the three months ended March 31, 2006. These property operating
21
expenses arise from the operations of our retail centers. The $0.2 million decrease is primarily
due to a decrease in bad debt expense related to our entertainment retail enter in New Rochelle,
New York.
Other operating expense totaled $0.6 million for the three months ended March 31, 2007 compared to
$1.0 million for the three months ended March 31, 2006. The decrease of $0.4 million relates to
expenses from a restaurant in Southfield, Michigan opened in September 2005, and previously
operated through a wholly-owned taxable REIT subsidiary. The restaurant in Southfield Michigan was
closed during the third quarter of 2006 and the space was leased to an unrelated restaurant tenant.
Our general and administrative expense totaled $3.2 million for the three months ended March 31,
2007 compared to $2.5 million for the three months ended March 31, 2006. The increase of $0.7
million primarily resulted from payroll and related expenses attributable to increases in base and
incentive compensation, additional employees and amortization resulting from grants of restricted
shares to management, as well as increases in franchise taxes and professional fees.
Costs associated with loan refinancing for the three months ended March 31, 2006 were $0.7 million.
These costs related to the amendment and restatement of our revolving credit facility and consisted
of the write-off of $0.7 million of certain unamortized financing costs. No such costs were
incurred during the three months ended March 31, 2007.
Depreciation and amortization expense totaled $8.3 million for the three months ended March 31,
2007 compared to $7.5 million for the three months ended March 31, 2006. The $0.8 million increase
resulted primarily from the property acquisitions completed in 2006 and 2007.
The gain on sale of land of $0.3 million for the three months ended March 31, 2006 was due to the
sale of an acre of land that was originally purchased along with one of our megaplex theatres.
There was no gain on sale of land recognized for the three months ended March 31, 2007.
Preferred dividend requirements for the three months ended March 31, 2007 were $4.9 million
compared to $2.9 million for the same period in 2006. The $2.0 million increase is due to the
issuance of 5.4 million Series C preferred shares in December of 2006.
Liquidity and Capital Resources
Cash and cash equivalents were $6.8 million at March 31, 2007. In addition, we had restricted cash
of $7.2 million at March 31, 2007 required in connection with debt service, payment of real estate
taxes and capital improvements.
Mortgage Debt and Credit Facilities
As of March 31, 2007, we had total debt outstanding of $734.5 million. As of March 31, 2007,
$670.5 million of debt outstanding was fixed rate mortgage debt secured by a substantial portion of
our rental properties, with a weighted average interest rate of approximately 6.1%.
At March 31, 2007, we had $64.0 million in debt outstanding under our $235.0 million unsecured
revolving credit facility, with interest at a floating rate. The unsecured revolving credit
facility matures in January of 2009 and was recently amended (described in Note 10 to the
consolidated financial statements in this Quarterly Report on Form 10-Q).
22
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 unsecured
revolving credit facility is 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.
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 55%.
However, the timing and size of our equity offerings may cause us to temporarily operate over this
threshold. At March 31, 2007, our leverage ratio was 45%. Our long-term debt as a percentage of
our total market capitalization at March 31, 2007 was 28%. 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 $2.6 billion as follows
at March 31, 2007:
|
|
|
Common shares outstanding of 26,649,130, multiplied by the last reported sales price of
our common shares on the NYSE of $60.25 per share, or $1.61 billion; |
|
|
|
|
Aggregate liquidation value of our Series A preferred shares of $57.5 million; |
|
|
|
|
Aggregate liquidation value of our Series B preferred shares of $80 million; |
|
|
|
|
Aggregate liquidation value of our Series C preferred shares of $135 million; and |
|
|
|
|
Total long-term debt of $734.5 million |
Our interest coverage ratio for the three months ended March 31, 2007 and 2006 was 3.7 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
Generally Accepted Accounting Principals (GAAP) liquidity measures. The following table shows the
calculation of our interest coverage ratios (dollars in thousands):
23
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,910 |
|
|
|
19,041 |
|
Interest expense, gross |
|
|
11,577 |
|
|
|
11,641 |
|
Interest cost capitalized |
|
|
(102 |
) |
|
|
(4 |
) |
Depreciation and amortization |
|
|
8,297 |
|
|
|
7,497 |
|
Share-based compensation expense
to management and trustees |
|
|
781 |
|
|
|
666 |
|
Gain on sale of land |
|
|
|
|
|
|
(345 |
) |
Costs associated with loan refinancing |
|
|
|
|
|
|
673 |
|
Straight-line rental revenue |
|
|
(956 |
) |
|
|
(836 |
) |
|
|
|
|
|
|
|
Interest coverage amount |
|
$ |
42,507 |
|
|
|
38,333 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
$ |
10,952 |
|
|
|
11,239 |
|
Interest income |
|
|
523 |
|
|
|
398 |
|
Interest cost capitalized |
|
|
102 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Interest expense, gross |
|
$ |
11,577 |
|
|
|
11,641 |
|
|
|
|
|
|
|
|
|
|
Interest coverage ratio |
|
|
3.7 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
The interest coverage amount per the above table 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
27,503 |
|
|
|
25,022 |
|
|
|
|
|
|
|
|
|
|
Equity in income from joint ventures |
|
|
198 |
|
|
|
184 |
|
Amortization of deferred financing costs |
|
|
(662 |
) |
|
|
(768 |
) |
Increase in mortgage notes accrued interest receivable |
|
|
2,745 |
|
|
|
1,809 |
|
Increase in accounts receivable |
|
|
23 |
|
|
|
1,343 |
|
Increase in other assets |
|
|
1,378 |
|
|
|
128 |
|
Decrease (increase) in accounts payable and accrued
liabilities |
|
|
331 |
|
|
|
(380 |
) |
Increase in unearned rents |
|
|
472 |
|
|
|
194 |
|
Straight-line rental revenue |
|
|
(956 |
) |
|
|
(836 |
) |
Interest expense, gross |
|
|
11,577 |
|
|
|
11,641 |
|
Interest cost capitalized |
|
|
(102 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
Interest coverage amount |
|
$ |
42,507 |
|
|
|
38,333 |
|
|
|
|
|
|
|
|
Our fixed charge coverage ratio for both the three months ended March 31, 2007 and 2006 was
2.6 times. 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 (dollars in thousands):
24
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Interest coverage amount |
|
$ |
42,507 |
|
|
|
38,333 |
|
|
|
|
|
|
|
|
|
|
Interest expense, gross |
|
|
11,577 |
|
|
|
11,641 |
|
Preferred share dividends |
|
|
4,856 |
|
|
|
2,916 |
|
|
|
|
|
|
|
|
Fixed charges |
|
$ |
16,433 |
|
|
|
14,557 |
|
|
|
|
|
|
|
|
|
|
Fixed charge coverage ratio |
|
|
2.6 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
Our debt service coverage ratio for the three months ended March 31, 2007 and 2006 was 2.7
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 ratios (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Interest coverage amount |
|
$ |
42,507 |
|
|
|
38,333 |
|
|
|
|
|
|
|
|
|
|
Interest expense, gross |
|
|
11,577 |
|
|
|
11,641 |
|
Recurring principle payments |
|
|
4,095 |
|
|
|
3,680 |
|
|
|
|
|
|
|
|
Debt service |
|
$ |
15,672 |
|
|
|
15,321 |
|
|
|
|
|
|
|
|
|
|
Debt service coverage ratio |
|
|
2.7 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
Liquidity Requirements
Short-term liquidity requirements consist primarily of normal recurring corporate operating
expenses, debt service requirements and distributions to shareholders. We meet these requirements
primarily through cash provided by operating activities. Cash provided by operating activities was
$27.5 million for the three months ended March 31, 2007 and $25.0 million for the three months
ended March 31, 2006. We anticipate that our cash on hand, cash from operations, and funds
available under our unsecured 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 avoidance of corporate level federal income or excise tax in accordance with
Internal Revenue Code requirements for qualification as a REIT.
On April 20, 2007, we issued a notice of redemption to the registered holders of all 2.3 million
outstanding shares of our Series A preferred shares notifying such holders of our intent to redeem
all such shares outstanding on May 29, 2007. The shares will be redeemed at a redemption price of
$25.3892361 per share which represents an aggregate payment of $58.4 million. This price is the
sum of the $25.00 per share liquidation preference and a quarterly dividend per share of $0.59375
prorated through the redemption date.
25
We had three theatre projects under construction at March 31, 2007. The properties have been
pre-leased to the prospective tenants under long-term triple-net leases. The cost of development
is paid by us in periodic draws. The related timing and amount of rental payments to be received by us from
tenants under the leases correspond to the timing and amount of funding by us of the cost of
development. These theatres will have a total of 46 screens and their total development costs
(including land) will be approximately $38.4 million. Through March 31, 2007, we have invested
$20.4 million in these projects (including land), and have commitments to fund an additional $18.0
million in improvements. We plan to fund development primarily with funds generated by debt
financing and/or equity offerings. If we determine that construction is not being completed in
accordance with the terms of the development agreement, we can discontinue funding construction
draws.
Off Balance Sheet Arrangements
At March 31, 2007, we had a 20% investment interest in two unconsolidated real estate joint
ventures, Atlantic-EPR I and Atlantic-EPR II, which are accounted for under the equity method of
accounting. We do not anticipate any material impact on our liquidity as a result of any
commitments that may arise involving those joint ventures. We recognized income of $120 and $112
(in thousands) from our investment in the Atlantic-EPR I joint venture during the three months
ended March 31, 2007 and 2006, respectively. We also recognized income of $78 and $72 (in
thousands) from our investment in the Atlantic-EPR II joint venture during the three months ended
March 31, 2007 and 2006, respectively. Condensed financial information for Atlantic-EPR I and
Atlantic-EPR II joint ventures is included in Note 4 to the consolidated financial statements
included 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 our common shares or, at our discretion, the cash value of those
shares as defined in each of the joint venture agreements.
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 revised 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.
26
The following tables summarize the Companys FFO and certain other financial information for the
three months ended March 31, 2007 and March 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Net income available to common shareholders |
|
$ |
18,054 |
|
|
|
16,125 |
|
Add: Real estate depreciation and amortization |
|
|
8,084 |
|
|
|
7,295 |
|
Add: Allocated share of joint venture depreciation |
|
|
61 |
|
|
|
61 |
|
|
|
|
|
|
|
|
FFO available to
common shareholders |
|
$ |
26,199 |
|
|
|
23,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.00 |
|
|
|
0.91 |
|
Diluted |
|
|
0.98 |
|
|
|
0.90 |
|
|
|
|
|
|
|
|
|
|
Shares used for computation (in thousands): |
|
|
|
|
|
|
|
|
Basic |
|
|
26,282 |
|
|
|
25,690 |
|
Diluted |
|
|
26,820 |
|
|
|
26,030 |
|
|
|
|
|
|
|
|
|
|
Other financial information: |
|
|
|
|
|
|
|
|
Straight-lined rental revenue |
|
$ |
956 |
|
|
|
836 |
|
Dividends per common share |
|
$ |
0.7600 |
|
|
|
0.6875 |
|
FFO payout ratio* |
|
|
78 |
% |
|
|
76 |
% |
|
|
|
* |
|
FFO payout ratio is calculated by dividing dividends per common share by FFO per diluted common share. |
Impact of Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements in accordance with SFAS 109,
Accounting for Income Taxes, and it prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 was effective for us on January 1, 2007. The adoption of FIN 48 did
not have a material impact on our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157) which defines fair value, establishes a framework for measuring fair
value in accordance with GAAP, and expands disclosures about fair value measurements. Where
applicable, SFAS No. 157 simplifies and codifies related guidance within GAAP and does not require
any new fair value measurements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
Earlier adoption is encouraged. The Company does not expect the adoption of SFAS No. 157 will have
a material impact on its financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, primarily relating to potential losses due to changes in interest
rates. We seek to mitigate the effects of fluctuations in interest rates by matching the term of
new investments with new long-term fixed rate borrowings whenever possible. We also have a $235
million unsecured revolving credit facility that bears interest at a floating rate. This credit
facility is used to acquire properties, finance our development commitments and provide mortgage
financing.
27
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 have not engaged extensively in the use of derivatives to manage our interest rate and market
risk due to our limited use of variable rate debt.
We financed the acquisition of our Canadian properties with non-recourse fixed rate mortgage loans
from a Canadian lender in the original aggregate principal amount of approximately 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 Canadian dollars. We also provided a
secured mortgage construction loan totaling U.S. $45.2 million. The loan is payable to us in
Canadian dollars. 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 risk in future periods, the Company has entered into foreign currency forward
contracts with monthly settlement dates ranging from April 2007 through March 2008. These contracts
have a notional value of $18.5 million CAD and an average exchange rate of $1.16 CAD per U.S.
dollar. These forward contracts should hedge a significant portion of our expected CAD denominated
earnings through the first quarter of 2008 as their impact on our reported earnings should move in
the opposite direction of the exchange rates utilized to translate revenues and expenses of the
Canadian properties and mortgage loan. The Company intends to continue hedging a significant
portion of its rolling twelve months of expected CAD denominated earnings. To the extent that the
Company is unable to hedge a significant portion of its CAD denominated earnings in the future
periods beyond the first quarter of 2008, a significant change in the exchange rate between the
Canadian and U.S. dollar could have a significant impact on our earnings.
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 that evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that as of the end of the period covered by this report our disclosure controls and procedures were
effective to ensure 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,
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
28
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.
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 first 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
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, 2006
filed with the SEC on February 28, 2007.
Item 2 . Unregistered Sale of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Value) of Shares |
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
that May Yet Be |
|
|
|
Total Number of |
|
|
Average Price Paid |
|
|
Announced Plans or |
|
|
Purchased Under the |
|
Period |
|
Shares Purchased |
|
|
Per Share |
|
|
Programs |
|
|
Plans or Programs |
|
January 1 through
January 31, 2007
common stock |
|
|
26,013 |
(1) |
|
$ |
58.65 |
|
|
|
|
|
|
$ |
|
|
February 1 through
February 28, 2007
common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1 through
March 30, 2007
common stock |
|
|
75,005 |
(2) |
|
|
65.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
101,018 |
|
|
$ |
63.54 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
(1) |
|
The repurchase of equity securities during January of 2007 were completed in
conjunction with the vesting of employee restricted shares (24,740) and employee stock option
exercises (1,273). These repurchases were not made pursuant to a publicly announced plan or
program. |
|
(2) |
|
The repurchase of equity securities during March of 2007 was completed in
conjunction with employee stock option exercises. These repurchases were not made pursuant to
a publicly announced plan or program. |
Item 3 . Defaults upon Senior Securities
There were no reportable events during the quarter ended March 31, 2007.
Item 4 . Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended March 31, 2007.
Item 5 . Other information
There were no reportable events during the quarter ended March 31, 2007.
Item 6 . Exhibits
|
|
|
10.1
|
|
Amendment No.1 to Amended and Restated Master Credit Agreement, dated April 18, 2007,
by and among 30 West Pershing, LLC, Entertainment Properties Trust, EPR Hialeah, Inc.,
Westcol Center, LLC and EPT Melbourne, Inc., and Key Bank National Association, as
administrative agent and lender, Key Bank Capital Markets, as sole lead arranger and sole
book runner, JP Morgan Chase Bank, N.A., as documentation agent, and the other lenders
party thereto, which is attached as Exhibit 10.1 to the Companys Form 8-K filed on April
20, 2007, is here by incorporated by reference as Exhibit 10.1. |
|
|
|
31.1*
|
|
Certification of David M. Brain, Chief Executive Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2*
|
|
Certification of Mark A. Peterson, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1*
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2*
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 |
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
ENTERTAINMENT PROPERTIES TRUST
|
|
Dated: April 25, 2007 |
By |
/s/ David M. Brain
|
|
|
|
David M. Brain, President Chief Executive |
|
|
|
Officer (Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
Dated: April 25, 2007 |
By |
/s/ Mark A. Peterson
|
|
|
|
Mark A. Peterson, Vice President Chief |
|
|
|
Financial Officer (Principal Financial Officer
and Chief Accounting Officer) |
|
31
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Document |
10.1
|
|
Amendment No.1 to Amended and Restated Master Credit
Agreement, dated April 18, 2007, by among 30 West Pershing,
LLC, Entertainment Properties Trust, EPR Hialeah, Inc.,
Westcol Center, LLC and EPT Melbourne, Inc., and Key Bank
National Association, as administrative agent and lender, Key
Bank Capital Markets, as sole lead arranger and sole book
runner, JP Morgan Chase Bank, N.A., as documentation agent,
and the other lenders party thereto, which is attached as
Exhibit 10.1 to the Companys Form 8-K filed on April 20,
2007, is here by incorporated by reference as Exhibit 10.1. |
|
|
|
31.1*
|
|
Certification of David M. Brain, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2*
|
|
Certification of Mark A. Peterson, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1*
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2*
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32