UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
COMMISSION FILE NUMBER 1-13561
ENTERTAINMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 43-1790877
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
30 PERSHING ROAD, SUITE 201
KANSAS CITY, MISSOURI 64108
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (816) 472-1700
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN
ACCELERATED FILER OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED
FILER AND LARGE ACCELERATED FILER" IN RULE 12B-2 OF THE EXCHANGE ACT.
LARGE ACCELERATED FILER [X] ACCELERATED FILER [ ] NON-ACCELERATED FILER [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN
RULE 12B-2 OF THE EXCHANGE ACT).
YES [ ] NO [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At November 1, 2006, there were 26,477,367 Common Shares of Beneficial Interest
outstanding.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2006 DECEMBER 31, 2005
------------------ -----------------
(Unaudited)
ASSETS
Rental properties, net of accumulated depreciation of $134.6
million and $112.7 million at September 30, 2006 and
December 31, 2005, respectively $1,355,857 $1,283,988
Property under development 28,776 19,770
Mortgage notes and related accrued interest receivable 68,069 44,067
Investment in joint ventures 2,211 2,297
Cash and cash equivalents 7,675 6,546
Restricted cash 6,114 13,124
Intangible assets, net 10,007 10,461
Deferred financing costs, net 11,077 10,896
Other assets 31,026 23,016
---------- ----------
Total assets $1,520,812 $1,414,165
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 8,701 $ 7,928
Common dividends payable 18,201 15,770
Preferred dividends payable 2,916 2,916
Unearned rents 445 1,304
Long-term debt 766,520 714,591
---------- ----------
Total liabilities 796,783 742,509
Minority interest 4,768 5,235
Shareholders' equity:
Common Shares, $.01 par value; 50,000,000 shares authorized;
27,149,727 and 25,881,647 shares issued at September 30,
2006 and December 31, 2005, respectively 271 259
Preferred Shares, $.01 par value; 10,000,000 shares authorized:
2,300,000 Series A shares issued at September 30, 2006 and
December 31, 2005; liquidation preference of $57,500,000 23 23
3,200,000 Series B shares issued at September 30, 2006 and
December 31, 2005; liquidation preference of $80,000,000 32 32
Additional paid-in-capital 752,319 700,704
Treasury shares at cost: 675,487 and 649,142 common shares
at September 30, 2006 and December 31, 2005, respectively (15,500) (14,350)
Loans to shareholders (3,525) (3,525)
Accumulated other comprehensive income 19,221 13,402
Distributions in excess of net income (33,580) (30,124)
---------- ----------
Shareholders' equity 719,261 666,421
---------- ----------
Total liabilities and shareholders' equity $1,520,812 $1,414,165
========== ==========
2
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
2006 2005 2006 2005
------- ------- -------- --------
Rental revenue $41,117 $36,942 $124,727 $107,230
Tenant reimbursements 3,857 2,783 10,832 8,853
Other income 737 602 3,020 2,489
Mortgage financing interest 2,629 1,498 6,808 1,969
------- ------- -------- --------
Total revenue 48,340 41,825 145,387 120,541
Property operating expense 4,884 3,835 14,457 11,448
Other operating expense 897 806 2,903 1,969
General and administrative expense 2,253 1,538 10,030 5,575
Costs associated with loan refinancing -- -- 673 --
Interest expense, net 12,234 11,005 35,179 30,766
Depreciation and amortization 7,890 7,011 23,191 20,381
------- ------- -------- --------
Income before gain on sale of land and
income from joint ventures 20,182 17,630 58,954 50,402
Gain on sale of land -- -- 345 --
Equity in income from joint ventures 191 184 566 546
------- ------- -------- --------
Net income $20,373 $17,814 $ 59,865 $ 50,948
Preferred dividend requirements (2,916) (2,916) (8,747) (8,437)
------- ------- -------- --------
Net income available to common
shareholders $17,457 $14,898 $ 51,118 $ 42,511
======= ======= ======== ========
Net income per common share:
Basic $ 0.66 $ 0.59 $ 1.96 $ 1.70
======= ======= ======== ========
Diluted $ 0.65 $ 0.58 $ 1.93 $ 1.67
======= ======= ======== ========
Shares used for computation (in thousands):
Basic 26,298 25,086 26,093 24,995
Diluted 26,769 25,585 26,511 25,482
Dividends per common share $0.6875 $0.6250 $ 2.0625 $ 1.8750
======= ======= ======== ========
3
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
PREFERRED ACCUMULATED
COMMON STOCK STOCK ADDITIONAL OTHER DISTRIBUTIONS
------------ ---------- PAID-IN TREASURY LOANS TO COMPREHENSIVE IN EXCESS OF
SHARES PAR SHARES PAR CAPITAL SHARES SHAREHOLDERS INCOME NET INCOME TOTAL
------ ---- ------ --- ---------- -------- ------------ ------------- ------------- --------
Balance at December 31, 2005 25,882 $259 5,500 $55 $700,704 $(14,350) $(3,525) $13,402 $(30,124) $666,421
Shares issued to Trustees 4 -- -- -- 161 -- -- -- -- 161
Issuance of restricted share
grants 83 1 -- -- (1) -- -- -- -- --
Amortization of restricted
share grants -- -- -- -- 3,586 -- -- -- -- 3,586
Share option expense -- -- -- -- 750 -- -- -- -- 750
Foreign currency translation
adjustment -- -- -- -- -- -- -- 5,819 -- 5,819
Net income -- -- -- -- -- -- -- -- 59,865 59,865
Purchase of 21,308 common
shares for treasury -- -- -- -- -- (919) -- -- -- (919)
Issuances of common shares in
Dividend Reinvestment Plan 15 -- -- -- 611 -- -- -- -- 611
Issuance of common shares,
net of costs of $1.1
million 1,150 11 -- -- 46,202 -- -- -- -- 46,213
Stock option exercise, net 16 -- -- -- 306 (231) -- -- -- 75
Dividends to common
shareholders ($2.0625 per
share) -- -- -- -- -- -- -- -- (54,574) (54,574)
Dividends to Series A
preferred shareholders
($1.7813 per share) -- -- -- -- -- -- -- -- (4,097) (4,097)
Dividends to Series B
preferred shareholders
($1.4531 per share) -- -- -- -- -- -- -- -- (4,650) (4,650)
------ ---- ----- --- -------- -------- ------- ------- -------- --------
Balance at September 30, 2006 27,150 $271 5,500 $55 $752,319 $(15,500) $(3,525) $19,221 $(33,580) $719,261
====== ==== ===== === ======== ======== ======= ======= ======== ========
4
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2006 2005 2006 2005
------- ------- ------- -------
Net income $20,373 $17,814 $59,865 $50,948
Other comprehensive income:
Foreign currency
translation adjustment (221) 6,692 5,819 5,971
------- ------- ------- -------
Comprehensive income $20,152 $24,506 $65,684 $56,919
======= ======= ======= =======
5
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2006 2005
--------- ---------
Operating activities:
Net income $ 59,865 $ 50,948
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of land (345) --
Costs associated with loan refinancing 673 --
Equity in income from joint ventures (566) (546)
Depreciation and amortization 23,191 20,381
Amortization of deferred financing costs 2,049 2,405
Share-based compensation expense to management and trustees 4,456 1,466
Increase in mortgage note accrued interest receivable (6,350) (1,947)
Increase in other assets (4,156) (2,287)
Increase in accounts payable and accrued liabilities 994 160
Decrease in unearned rents (864) (826)
--------- ---------
Net cash provided by operating activities 78,947 69,754
--------- ---------
Investing activities:
Acquisition of rental properties and other assets (63,282) (105,400)
Net proceeds from sale of real estate 591 514
Additions to property under development (32,940) (21,325)
Distributions from joint ventures 652 644
Investment in promissory note receivable (3,500) --
Investment in mortgage note receivable (15,332) (37,525)
--------- ---------
Net cash used in investing activities (113,811) (163,092)
--------- ---------
Financing activities:
Proceeds from long-term debt facilities 290,286 174,000
Principal payments on long-term debt (236,114) (105,729)
Deferred financing fees paid (2,842) (1,150)
Net proceeds from issuances of common shares 46,824 688
Net proceeds from issuance of preferred shares -- 77,261
Impact of stock option exercises, net 75 (983)
Purchase of common shares for treasury (919) (759)
Distributions paid to minority interest (467) (583)
Dividends paid to shareholders (60,889) (52,405)
--------- ---------
Net cash provided by financing activities 35,954 90,340
Effect of exchange rate changes on cash 39 107
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,129 (2,891)
Cash and cash equivalents at beginning of period 6,546 11,255
--------- ---------
Cash and cash equivalents at end of period $ 7,675 $ 8,364
========= =========
Supplemental schedule of non-cash activity:
Transfer of property under development to rental property $ 24,112 $ 27,925
Issuance of shares to management and trustees $ 3,601 $ 2,786
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 34,121 $ 30,029
Cash paid (received) during the period for income taxes $ 150 $ (441)
6
ENTERTAINMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
DESCRIPTION OF BUSINESS
Entertainment Properties Trust (the Company) is a Maryland real estate
investment trust (REIT) organized on August 29, 1997. The Company was formed to
acquire and develop megaplex theatres, entertainment retail centers (centers
generally anchored by an entertainment component such as a megaplex theatre and
containing other entertainment-related properties) and other specialty
properties. The Company's properties are located in the United States and
Canada.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates. In addition, operating results for the
nine-month period ended September 30, 2006 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2006.
The consolidated balance sheet as of December 31, 2005 has been derived from the
audited consolidated balance sheet at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2005.
REVENUE RECOGNITION
Rents that are fixed and determinable are recognized on a straight-line basis
over the minimum terms of the leases. Base rent escalation in those of the
Company's leases that are dependent upon increases in the Consumer Price Index
(CPI) is recognized when known. Straight-line rent receivable is included in
other assets and was $6.6 million and $4.7 million at September 30, 2006 and
December 31, 2005, respectively. In addition, most of the Company's tenants are
subject to additional rents if gross revenues of the properties exceed certain
thresholds defined in the lease agreements (percentage rents). Percentage rents
are recognized at the time when specific triggering events occur as provided by
the lease agreements. Percentage rents of $1.3 million and $1.4 million were
recognized during the nine months ended September 30, 2006 and 2005,
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. Termination fees of $4.1 million were recognized during the nine months
ended September 30, 2006. No termination fees were recognized during the nine
months ended September 30, 2005.
CONCENTRATION OF RISK
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (56%)
of the megaplex theatre rental properties held by the Company (including joint
venture properties) at September 30, 2006 as a result of a series of sale
leaseback transactions pertaining to a number of AMC megaplex theatres. A
substantial portion of the Company's rental revenues (approximately 55%) result
from the rental payments by AMC under the leases, or its parent, AMC
Entertainment, Inc.
7
(AMCE), as the guarantor of AMC's obligations under the leases. AMCE has
publicly held debt and accordingly, its consolidated financial information is
publicly available.
SHARE-BASED COMPENSATION
Share based compensation expense, including both share option expense and
restricted share expense, is included in general and administrative expense in
the accompanying consolidated statements of income, and totaled $4.5 million and
$1.5 million for the nine months ended September 30, 2006 and 2005,
respectively.
Share Options
During 2004, the Financial Accounting Standards Board (FASB) revised Statement
of Financial Accounting Standard (SFAS) No. 123 "Accounting for Stock-Based
Compensation." The Company was required to adopt SFAS No. 123R, "Share-Based
Payment," beginning January 1, 2006. In compliance with this standard, the
Company has recorded share-based compensation expense in the current year
related to all options for employees and trustees. The fair value of share
options granted under the Company's Share Incentive Plan is determined using the
Black-Scholes model. Prior to 2006, the Company accounted for share options
granted under the Share Incentive Plan using the fair value recognition
provisions of SFAS No. 123 for all awards granted, modified, or settled after
January 1, 2003. Prior to January 1, 2003, the Company accounted for share
options issued under the Share Incentive Plan under APB Opinion No. 25
"Accounting for Stock Issued to Employees," and, accordingly, recognized no
expense for options granted to employees and trustees. Awards under the
Company's 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, except for those unvested options held by a retired executive
discussed in Note 12 below which were fully expensed as of June 30, 2006.
The expense related to share options included in the determination of net income
for the nine months ended September 30, 2006 and 2005 was $750 thousand
(including $522 thousand in expense recognized related to unvested share options
held by a retired executive discussed in Note 12 below) and $68 thousand,
respectively. The expense related to share options included in the determination
of net income for the nine months ended September 30, 2005 was less than that
which would have been recognized if the fair value based method had been applied
to all awards (as required in SFAS No. 123R). If the fair value based method had
been applied to all outstanding and unvested awards for the nine months ended
September 30, 2005, total share option expense would have been $125 thousand.
This difference in expense had no material impact on either reported basic or
reported diluted earnings per share for the nine months ended September 30,
2005.
The fair value for all outstanding and unvested awards was estimated at the date
of grant dates using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 4.8% to 5.0% and 4.0% for the nine
months ended September 30, 2006 and 2005, respectively, dividend yield of 5.8%
and 6.0% for the nine months ended September 30, 2006 and 2005, respectively,
volatility factors in the expected market price of the Company's common shares
of 21.1% and 20.7% for the nine months ended September 30, 2006 and 2005,
respectively; and an expected life of the options of eight years.
Restricted Shares
The Company grants restricted shares pursuant to both its Annual Incentive Plan
and its Share Incentive Plan. Historically, awards granted pursuant to the
Annual Incentive Plan have allowed employees the choice to receive their bonuses
either in cash or restricted shares. If an employee elected to receive
restricted shares, the employee received a premium over the corresponding cash
amount (25% or 50%) and the shares would vest over the following three years. In
years prior to 2006, most of the value of bonus awards issued pursuant to the
Annual Incentive Plan went to employees who elected to receive restricted
shares. Consistent with the accounting for restricted shares issued pursuant to
the Share Incentive Plan, which vest over periods of three to five years, the
Company has historically amortized the expense related to restricted shares
issued pursuant to the Annual Incentive Plan on a straight-line basis over the
future vesting period.
Because employees can require awards under the Annual Incentive Plan to be
settled in cash, the Company has determined that such awards should be expensed
in the period earned rather than over the future vesting period, even if such
employees
8
elect to take their bonuses in restricted shares. It was also determined that
any premium awarded under the restricted share alternative should continue to be
amortized over the future vesting period consistent with the Company's past
practice. As a result, the Company recognized additional expense of $1.7 million
in the quarter ended June 30, 2006 for unvested awards from prior years related
to the Annual Incentive Plan. This additional expense represents $0.07 per basic
common share and per fully diluted common share for the nine months ended
September 30, 2006. The Company has concluded that the amounts not expensed in
prior quarterly and annual periods are immaterial to those financial statements
on both a quantitative and qualitative basis. The impact of this adjustment is
also immaterial to the estimated results for the year ending December 31, 2006
and accordingly, the adjustment was recorded in the quarter ended June 30, 2006.
Total expense recognized related to all restricted shares was $3.7 million
(including the $1.7 million discussed above and $852 thousand related to the
retired executive discussed in Note 12) and $1.4 million for the nine months
ended September 30, 2006 and 2005, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period amounts to conform
to the current period presentation.
3. RENTAL PROPERTIES
The following table summarizes the carrying amounts of rental properties as of
September 30, 2006 and December 31, 2005 (in thousands):
SEPTEMBER 30, 2006 DECEMBER 31, 2005
------------------ -----------------
Buildings and improvements $1,146,292 $1,068,569
Furniture, fixtures & equipment 5,271 5,240
Land 338,862 322,865
---------- ----------
1,490,425 1,396,674
Accumulated depreciation (134,568) (112,686)
---------- ----------
Total $1,355,857 $1,283,988
========== ==========
Depreciation expense on rental properties was $21.6 million and $19.9 million
for the nine months ended September 30, 2006 and 2005, respectively.
9
4. UNCONSOLIDATED REAL ESTATE JOINT VENTURES
At September 30, 2006, 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 $346 and $325 (in thousands) from its
investment in the Atlantic-EPR I joint venture during the first nine months of
2006 and 2005, respectively. The Company also received distributions from
Atlantic-EPR I of $398 and $381 (in thousands) during the first nine months of
2006 and 2005, respectively. Condensed financial information for Atlantic-EPR I
is as follows as of and for the nine months ended September 30, 2006 and 2005
(in thousands):
2006 2005
------- ------
Rental properties, net $29,406 30,050
Cash 141 141
Long-term debt 16,231 16,548
Partners' equity 13,214 13,538
Rental revenue 3,174 3,112
Net income 1,619 1,540
The Company recognized income of $220 and $221 (in thousands) from its
investment in the Atlantic-EPR II joint venture during the first nine months of
2006 and 2005, respectively. The Company also received distributions from
Atlantic-EPR II of $254 and $263 (in thousands) during the first nine months of
2006 and 2005, respectively. Condensed financial information for Atlantic-EPR II
is as follows as of and for the nine months ended September 30, 2006 and 2005
(in thousands):
2006 2005
------- ------
Rental properties, net $22,995 23,456
Cash 116 130
Long-term debt 13,947 14,215
Note payable to Entertainment Properties Trust 117 117
Partners' equity 8,838 9,037
Rental revenue 2,083 2,083
Net income 960 977
The joint venture agreement for Atlantic-EPR I allows for the Company's partner,
Atlantic of Hamburg, Germany (Atlantic), to exchange up to a maximum of 10% of
its ownership interest per year in Atlantic-EPR I for common shares of the
Company or, at the discretion of the Company, the cash value of those shares as
defined in the joint venture agreement. This same provision exists in the
Atlantic-EPR II joint venture agreement, except that Atlantic's right to such
exchange does not commence until 2007.
10
5. SHARE INCENTIVE PLAN
The Company maintains a Share Incentive Plan (the 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 September
30, 2006, there were 1,366,311 shares available for grant under the Plan.
SHARE OPTIONS
Share options granted under the Plan have exercise prices equal to the fair
market value of a common share at the date of grant. The options may be granted
for any reasonable term, not to exceed 10 years, and typically become
exercisable at a rate of 20% per year over a five-year period. For trustees,
share options become exercisable over a one-year period. The Company generally
issues new common shares upon option exercise. A summary of the Company's share
option activity and related information is as follows:
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
--------- --------------- --------
Outstanding at
December 31, 2005 890,176 $14.00 - $43.75 $26.52
Exercised (16,326) 16.05 - 41.65 18.77
Granted 107,823 40.55 - 42.46 41.86
-------
Outstanding at
September 30, 2006 981,673 14.00 - 43.75 28.33
-------
The weighted average fair value of options granted was $5.19 and $3.47 during
the nine months ended September 30, 2006 and 2005, respectively.
The following table summarizes outstanding options at September 30, 2006:
EXERCISE OPTIONS WEIGHTED AVG. WEIGHTED AVG. AGGREGATE INTRINSIC
PRICE RANGE OUTSTANDING LIFE REMAINING EXERCISE PRICE VALUE (IN THOUSANDS)
-------------- ----------- -------------- -------------- --------------------
$14.00 - 19.99 218,810 3.9
20.00 - 29.99 383,565 6.1
30.00 - 39.99 147,171 7.6
40.00 - 43.75 232,127 9.2
------- ---
981,673 6.6 $28.33 $20,601
======= ===
The following table summarizes exercisable options at September 30, 2006:
EXERCISE OPTIONS WEIGHTED AVG. WEIGHTED AVG. AGGREGATE INTRINSIC
PRICE RANGE EXERCISABLE LIFE REMAINING EXERCISE PRICE VALUE (IN THOUSANDS)
-------------- ----------- -------------- -------------- --------------------
$14.00 - 19.99 217,811 3.9
20.00 - 29.99 225,195 5.9
30.00 - 39.99 85,020 7.6
40.00 - 43.75 21,225 8.6
------- ---
549,251 5.5 $23.10 $14,402
======= ===
RESTRICTED SHARES
11
A summary of the Company's 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, 2005 140,133 $35.32
Granted 83,205 41.36
Vested (53,784) 31.49
-------
Outstanding at
September 30, 2006 169,554 39.50 1.50
-------
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 September 30, 2006, unamortized share-based compensation expense
related to non-vested restricted shares was $3.2 million.
6. EARNINGS PER SHARE
The following table summarizes the Company's common shares used for computation
of basic and diluted earnings per share (in thousands except per share
information):
THREE MONTHS ENDED SEPTEMBER 30, 2006 NINE MONTHS ENDED SEPTEMBER 30, 2006
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
Basic earnings:
Income available to common shareholders $17,457 26,298 $ 0.66 $51,118 26,093 $ 1.96
Effect of dilutive securities:
Stock options -- 369 (0.01) -- 322 (0.03)
Non-vested common share grants -- 102 -- -- 96 --
------- ------ ------ ------- ------ ------
Diluted earnings $17,457 26,769 $ 0.65 $51,118 26,511 $ 1.93
======= ====== ====== ======= ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2005 NINE MONTHS ENDED SEPTEMBER 30, 2005
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
Basic earnings:
Income available to common shareholders $14,898 25,086 $ 0.59 $42,511 24,995 $ 1.70
Effect of dilutive securities:
Stock options -- 359 (0.01) -- 347 (0.02)
Non-vested common share grants -- 140 -- -- 140 (0.01)
------- ------ ------ ------- ------ ------
Diluted earnings $14,898 25,585 $ 0.58 $42,511 25,482 $ 1.67
======= ====== ====== ======= ====== ======
7. PROPERTY ACQUISITIONS
12
On March 30, 2006, the Company acquired, through a wholly-owned subsidiary, two
megaplex theatre properties in Garland, Texas and Columbia, Maryland. The
Firewheel 18 and Columbia 14 are both operated by AMC and were acquired for a
total cost of approximately $35.0 million. Of this cost, the Company allocated
$14.8 million to the building and $8.0 million to the land at Firewheel 18. For
Columbia 14, the Company allocated $12.2 million to the building. As Columbia 14
is subject to a third-party ground lease, for which the tenant is responsible,
no amount was allocated to land. Both theatres are leased under long-term
triple-net leases.
During the three months ended June 30, 2006, the Company completed development
of a megaplex theatre property in Garner, North Carolina. The White Oak Village
Cinema 14 is operated by Consolidated Theatres and was completed for a total
development cost (including land and building) of approximately $8.2 million.
The land was purchased in 2005 by the Company for $1.3 million. This theatre is
leased under a long-term triple-net lease.
On August 17, 2006, the Company completed the acquisition of a megaplex theatre
property in Huntsville, Alabama. The Valley Bend 18 is operated by Rave Motion
Pictures and was acquired for a total cost (including land and building) of
approximately $18.3 million. This theatre is leased under a long-term triple-net
lease.
On September 1, 2006, the Company exercised its option to purchase 25 acres of
development land adjacent to its property in Suffolk, Virginia. The land was
acquired for a total cost of approximately $5.0 million. The Company intends to
develop this property into additional retail opportunities.
During the three months ended September 30, 2006, the Company completed
development of a megaplex theatre property in Winston Salem, North Carolina. The
Grand 18 is operated by Southern Theatres and was completed for a total
development cost (including land and building) of approximately $15.8 million.
The land was purchased in 2005 by the Company for $3.6 million. This theatre is
leased under a long-term triple-net lease.
8. INVESTMENT IN MORTGAGE NOTES
On June 1, 2005, a wholly-owned subsidiary of the Company provided a secured
mortgage construction loan of $47 million Canadian (US $37.5 million) to
Metropolis Limited Partnership (the Partnership). The Partnership was formed for
the purpose of developing a 13 level entertainment retail center in downtown
Toronto, Ontario, Canada. The Partnership consists of the developer of the
center as general partner and two limited partner pension funds. It is
anticipated that the development will be completed in 2008 at a total cost of
approximately $272 million Canadian, including all capitalized costs, and will
contain approximately 360,000 square feet of net rentable area (excluding
signage).
This mortgage note receivable bears interest at 15% and has a stated maturity of
June 2, 2010. The note is senior to all other Partnership debt at September 30,
2006. The Partnership has an agreement with a bank to provide a first mortgage
construction loan to the Partnership of up to $106 million Canadian. The bank
construction financing is senior to the Company's mortgage note.
In the original loan agreement, no principal or interest payments were due to
the Company prior to November 30, 2007, at which time a 25% principal payment
was due along with all accrued interest to date (defined as the "Option Due Date
Amount"). The Partnership also had an option on November 30, 2007 (the "Option
Date") to either pay off the note in full including all accrued interest,
without penalty, or to extend the Option Due Date Amount by an additional 12
months, in which case the Option Date would be November 30, 2008. The
Partnership could also prepay the note (in full only, including all accrued
interest) at any other time with prepayment penalties as defined in the
agreement.
On March 3, 2006, the Company invested an additional $8.7 million Canadian (U.S.
$7.7 million) in this mortgage note receivable and the original mortgage note
was amended and restated. No principal or interest payments on the mortgage note
receivable are now due prior to May 31, 2008. In addition, the Option Date was
changed to May 31, 2008 and the
13
Partnership's extension right was reduced from 12 months to 6 months such that
the outside Option Date remains November 30, 2008. The additional $8.7 million
Canadian bears interest at 15% and has a stated maturity of February 9, 2011. If
not paid in full by May 31, 2008, interest is payable monthly beginning in June
2008. The Company received a loan origination fee at closing of $400,000
Canadian which is being amortized as additional mortgage financing interest
income over the term of the loan.
On the maturity date or any other date that the Partnership elects to prepay the
note in full, the Company has the option to purchase a 50% equity interest in
the Partnership or alternative joint venture vehicle that is established. The
purchase price stipulated in the option is based on estimated fair market value
of the entertainment retail center at the time of exercise, defined as the then
existing stabilized net operating income capitalized at a pre-determined rate. A
subscription agreement governs the terms of the cash flow sharing with the other
partners should the Company elect to become an owner.
The carrying value of the Company's mortgage note receivable at September 30,
2006 was US $60.0 million, including related accrued interest receivable of US
$10.5 million. Cost overruns of the project, if any, are the responsibility of
the Partnership.
On June 13, 2006, the Company posted two irrevocable standby letters of credit
that totaled $7.4 million (U.S.) for the benefit of the Partnership's first
mortgage construction financing lender. These letters of credit expire on June
13, 2007, but they automatically renew each year unless the Partnership's first
mortgage construction lender cancels them or the construction loan is paid off.
The Company will accrue interest income on these outstanding letters of credit
at a rate of 12% (15% if drawn upon by the construction lender) and the
outstanding balance, with accrued interest, will be due from the Partnership on
the maturity date of the original mortgage note from the Partnership. The
Company has no obligation to fund any additional amounts, and has no guarantees
of any kind related to the Partnership's first mortgage construction loan.
Additionally, on March 10, 2006, a wholly-owned subsidiary of the Company
provided a secured mortgage loan of $8.0 million to SNH Development, Inc. The
secured property is the Crotched Mountain Ski Resort located in Bennington, New
Hampshire. The property serves the Boston and Southern New Hampshire markets and
has approximately 45 acres of skiing terrain that is serviced by nine lifts. The
carrying value of this mortgage note receivable at September 30, 2006 was $8.1
million, including related accrued interest receivable of $62 thousand. This
loan is guaranteed by Peak Resorts, Inc., which operates the property, and has a
maturity date of March 10, 2027. Monthly interest payments are made to the
Company and the unpaid principal balance initially bears interest at 9.25% per
annum. Annually, this interest rate increases based on a formula dependent in
part on increases in the Consumer Price Index (CPI).
9. AMENDMENT AND RESTATEMENT OF CREDIT FACILITY
On January 31, 2006, the Company amended and restated its secured revolving
variable rate credit facility to increase the size of the facility to $200
million from $150 million and reduce the interest rate charged on the facility
from rates ranging from LIBOR plus 175 to 250 basis points to LIBOR plus 130 to
175 basis points. The facility was also converted from a secured to an unsecured
facility. The unsecured revolving variable rate credit facility has a three year
term expiring in 2009 with a one year extension available at the Company's
option. As a result of this amendment and restatement, the Company expensed
certain unamortized financing costs, totaling approximately $673 thousand, in
the first quarter of 2006. On June 6, 2006 the size of the facility was
increased to $235 million from $200 million with no modification to the terms
and conditions of the credit agreement.
10. MORTGAGE NOTES PAYABLE
On February 10, 2006, the Company paid off approximately $109 million in
mortgage notes payable that had matured using funds from related debt service
escrow deposits, borrowings under the Company's amended and restated unsecured
revolving variable rate credit facility and approximately $44 million in
proceeds from the refinancing of two of the theatres
14
originally included as security for those mortgage notes payable. The new
mortgage loans bear interest at 5.84%, mature on March 6, 2016 and require
monthly principal and interest payments totaling $279 thousand with a final
principal payment at maturity totaling $33.9 million.
On May 22, 2006, two wholly-owned subsidiaries of the Company obtained
non-recourse mortgage loans totaling $31.0 million. These mortgages are secured
by theatre properties located in Hurst, Texas and Mesa, Arizona. The mortgage
loans bear interest at 6.3715%, mature on June 1, 2016 and require monthly
principal and interest payments totaling $207 thousand with final principal
payments at maturity totaling $24.4 million. The net proceeds from these loans
were used to pay down the Company's unsecured line of credit.
On September 12 and September 14, 2006, four wholly-owned subsidiaries of the
Company obtained non-recourse mortgage loans totaling $27.8 million. These
mortgages are secured by two theatre properties located in California and one
each in South Carolina and North Carolina. The mortgage loans bear interest at
6.099%, mature on October 1, 2016 and require monthly principal and interest
payments totaling $180 thousand with final principal payments at maturity
totaling $21.7 million. The net proceeds from these loans were used to pay down
the Company's unsecured line of credit.
On September 29, 2006, three wholly-owned subsidiaries of the Company obtained
non-recourse mortgage loans totaling $20.9 million. These mortgages are secured
by three theatre properties located in Georgia, California and Louisiana. The
mortgage loans bear interest at 6.02%, mature on October 6, 2016 and require
monthly principal and interest payments totaling $135 thousand with final
principal payments at maturity totaling $16.2 million. The net proceeds from
these loans were used to pay down the Company's unsecured line of credit.
11. COMMON SHARE OFFERING
On February 8, 2006, the Company issued 1,000,000 common shares at $41.25 per
share in a registered public offering. The underwriter of this offering
subsequently exercised an option to purchase an additional 150,000 common shares
at $41.25 per share which closed on February 15, 2006. Total net proceeds to the
Company after expenses were approximately $46.2 million.
12. EXECUTIVE RETIREMENT
Effective June 30, 2006, an executive of the Company retired. In exchange for a
consulting and non-compete agreement with a term of five years, the Company
agreed to allow the executive to continue to vest in his unvested share options
and restricted shares as of June 30, 2006, in accordance with the original
vesting schedules. In accordance with SFAS 123R, the fair values of such
unvested awards of $522 thousand and $852 thousand, respectively, were expensed
during the quarter ended June 30, 2006. Such amounts are included in general and
administrative expense in the accompanying consolidated statements of income for
the nine months ended September 30, 2006.
13. COMMITMENTS AND CONTINGENCIES
As of September 30, 2006, the Company had five theatre development projects
under construction for which it has agreed to either finance the development
costs or purchase the theatre upon completion. The properties are being
developed by the prospective tenants. These theatres are expected to have a
total of 77 screens and their development costs (including land) are expected to
be approximately $75.6 million. Through September 30, 2006, the Company has
invested $32.1 million in these projects (including land), and has commitments
to fund approximately $43.5 million of additional improvements. Development
costs are advanced by the Company either in periodic draws or upon successful
completion of construction. If the Company determines that construction is not
being completed in accordance with the terms of the development agreement, the
Company can, depending on the financing arrangement, either discontinue funding
construction draws or refuse to purchase the completed theatre. The Company has
agreed to lease the theatres to the operators at pre-determined rates.
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in this quarterly report on Form
10-Q. The forward-looking statements included in this discussion and elsewhere
in this Form 10-Q involve risks and uncertainties, including anticipated
financial performance, business prospects, industry trends, shareholder returns,
performance of leases by tenants and other matters, which reflect management's
best judgment based on factors currently known. Actual results and experience
could differ materially from the anticipated results and other expectations
expressed in our forward-looking statements as a result of a number of factors,
including but not limited to those discussed in Item 1A, "Risk Factors" in our
annual report on Form 10-K for the year ended December 31, 2005.
OVERVIEW
Our primary business strategy is to purchase real estate (land, buildings and
other improvements) that we lease to operators of destination-based
entertainment and entertainment-related properties. As of September 30, 2006, we
had invested approximately $1.5 billion (before accumulated depreciation) in 72
megaplex theatre properties and various restaurant, retail and other properties
located in 26 states and Ontario, Canada. As of September 30, 2006, we had
invested approximately $28.8 million in development land and construction in
progress for real-estate development. Also, as of September 30, 2006, we had
invested approximately US $60.0 million (including accrued interest) in mortgage
financing for the development of a new entertainment retail center located in
downtown Toronto, Ontario, Canada, and $8.1 million (including accrued interest)
in mortgage financing for the Crotched Mountain Ski Resort located in
Bennington, New Hampshire.
Substantially all of our single-tenant properties are leased pursuant to
long-term, triple-net leases, under which the tenants typically pay all
operating expenses of a property, including, but not limited to, all real estate
taxes, assessments and other governmental charges, insurance, utilities, repairs
and maintenance. A majority of our revenues are derived from rents received or
accrued under long-term, triple-net leases. Tenants at our multi-tenant
properties are required to pay common area maintenance charges to reimburse us
for their pro rata portion of these costs.
We incur general and administrative expenses including compensation expense for
our executive officers and other employees, professional fees and various
expenses incurred in the process of identifying, evaluating, acquiring and
financing additional properties. We are self-administered and managed by our
trustees, executive officers and other employees. Our primary non-cash expense
is the depreciation of our properties. We depreciate buildings and improvements
on our properties over a five-year to 40-year period for tax purposes and
financial reporting purposes.
Our property acquisitions and development financing commitments are financed by
cash from operations, borrowings under our unsecured revolving variable rate
credit facility, long-term mortgage debt and the sale of equity securities. It
has been our strategy to structure leases and financings to ensure a positive
spread between our cost of capital and the rentals paid by our tenants. We have
primarily acquired or developed new properties that are pre-leased to a single
tenant or multi-tenant properties that have a high occupancy rate. We do not
typically develop or acquire properties on a speculative basis or that are not
significantly pre-leased. We have also entered into joint ventures formed to own
and lease single properties, and have provided mortgage note financing for a new
development in Canada and a ski resort in New Hampshire as described above. We
intend to continue entering into some or all of these types of arrangements in
the foreseeable future.
Our primary challenges have been locating suitable properties, negotiating
favorable lease and financing terms, and managing our portfolio as we have
continued to grow. Because of our emphasis on the entertainment sector of the
real estate industry and the knowledge and industry relationships of our
management, we have enjoyed favorable opportunities to acquire, finance and
lease properties. We believe those opportunities will continue during the
remainder of 2006.
16
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 7 years
Impairment of Real Estate Values
We are required to make subjective assessments as to whether there are
impairments in the value of our rental properties. These estimates of impairment
may have a direct impact on our consolidated financial statements.
We apply the provisions of Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We
assess the carrying value of our rental properties whenever events or changes in
circumstances indicate that the carrying amount of a property may not be
recoverable. Certain factors that may occur and indicate that impairments may
exist include, but are not limited to: underperformance relative to projected
future operating results, tenant difficulties and significant adverse industry
or market economic trends. No such indicators existed during the first nine
months of 2006. If an indicator of possible impairment exists, a property is
evaluated for impairment by comparing the carrying amount of the property to the
estimated undiscounted future cash flows expected to be generated by the
property. If the carrying amount of a property exceeds its estimated future cash
flows on an undiscounted basis, an impairment charge is recognized in the amount
by which the carrying amount of the property exceeds the fair value of the
property. Management estimates fair value of our rental properties based on
projected discounted cash flows using a discount rate determined by management
to be commensurate with the risk inherent in the Company. Management did not
record any impairment charges in the first nine months of 2006.
Real Estate Acquisitions
17
Upon acquisitions of real estate properties, we make subjective estimates of the
fair value of acquired tangible assets (consisting of land, building, tenant
improvements, and furniture, fixtures and equipment) and identified intangible
assets and liabilities (consisting of above and below market leases, in-place
leases, tenant relationships and assumed financing that is determined to be
above or below market terms) in accordance with Statement of Financial
Accounting Standards (SFAS) No.141, Business Combinations. We utilize methods
similar to those used by independent appraisers in making these estimates. Based
on these estimates, we allocate the purchase price to the applicable assets and
liabilities. These estimates have a direct impact on our net income.
Allowance for Doubtful Accounts
Management makes quarterly estimates of the collectibility of its accounts
receivable related to base rents, tenant escalations and reimbursements and
other revenue or income. Management specifically analyzes tenant receivables,
historical bad debts, customer credit worthiness, current economic trends and
changes in customer payment terms when evaluating the adequacy of its allowance
for doubtful accounts. In addition, when tenants are in bankruptcy, management
makes estimates of the expected recovery of pre-petition administrative and
damage claims. These estimates have a direct impact on our net income.
RECENT DEVELOPMENTS
Following are our significant developments during the nine months ended
September 30, 2006:
On January 31, 2006, we amended and restated our secured revolving variable rate
credit facility to increase the size of the facility to $200 million from $150
million and reduce the interest rate charged on the facility from rates ranging
from LIBOR plus 175 to 250 basis points to LIBOR plus 130 to 175 basis points.
The facility was also converted from a secured to an unsecured facility. The
unsecured revolving variable rate credit facility has a three year term expiring
in 2009 with a one year extension available at our option. As a result of this
amendment and restatement, we expensed certain unamortized financing costs,
totaling approximately $673 thousand, in the first quarter of 2006. On June 6,
2006 the size of the facility was increased to $235 million from $200 million
with no modification to the terms and conditions of the credit agreement.
On February 8, 2006, we issued 1,000,000 common shares at $41.25 per share in a
registered public offering. The underwriter of this offering subsequently
exercised an option to purchase an additional 150,000 common shares at $41.25
per share which closed on February 15, 2006. Total net proceeds after expenses
were approximately $46.2 million.
On February 10, 2006, we paid off approximately $109 million in mortgage notes
payable that had matured using funds from related debt service escrow deposits,
borrowings under our amended and restated unsecured revolving variable rate
credit facility and approximately $44 million in proceeds from the refinancing
of two of the theatres originally included as security for those mortgage notes
payable. The new mortgage loans bear interest at 5.84%, mature on March 6, 2016
and require monthly principal and interest payments totaling $279 thousand with
a final principal payment at maturity totaling $33.9 million.
On March 3, 2006, we invested an additional $8.7 million Canadian (U.S. $7.7
million) in the secured mortgage construction loan to Metropolis Limited
Partnership (the Partnership) and the original mortgage note was amended and
restated. No principal or interest payments on the mortgage note receivable are
now due prior to May 31, 2008. In addition, the Option Date was changed to May
31, 2008 and the Partnership's extension right was reduced from 12 months to 6
months such that the outside Option Date remains November 30, 2008. The
additional $8.7 million Canadian bears interest at 15% and has a stated maturity
of February 9, 2011. Interest is payable monthly beginning in June 2008. We
received a loan origination fee at closing of $400,000 Canadian which is being
amortized as additional mortgage financing interest income over the term of the
loan. All other terms of the mortgage note remain unchanged. (For further
information, see Note 8 to the consolidated financial statements in this Form
10-Q).
18
On March 10, 2006, we provided a secured mortgage loan of $8.0 million to SNH
Development, Inc. The secured property is the Crotched Mountain Ski Resort
located in Bennington, New Hampshire. The property serves the Boston and
Southern New Hampshire markets and has approximately 45 acres of skiing terrain
that is serviced by nine lifts. This loan is guaranteed by Peak Resorts, Inc.,
which operates the property, and has a maturity date of March 10, 2027. Monthly
interest payments are made by the borrower and the unpaid principal balance
initially bears interest at 9.25% per annum. Annually, this interest rate
increases based on a formula dependent in part on increases in CPI.
On March 30, 2006, we acquired two megaplex theatre properties in Garland, Texas
and Columbia, Maryland. The Firewheel 18 and Columbia 14 are both operated by
AMC and were acquired for a total cost of approximately $35.0 million. Of this
cost, we allocated $14.8 million to the building and $8.0 million to the land at
Firewheel 18. For Columbia 14, $12.2 million was allocated to the building. As
Columbia 14 is subject to a third-party ground lease, for which the tenant is
responsible, no amount was allocated to land. The theatres are leased under
long-term triple-net leases.
On May 22, 2006, we obtained two non-recourse mortgage loans totaling $31.0
million. These mortgages are each secured by one theatre property located in
Hurst, Texas and one theatre property in Mesa, Arizona. The mortgage loans bear
interest at 6.3715%, mature on June 1, 2016 and require monthly principal and
interest payments totaling $207 thousand with final principal payments at
maturity totaling $24.4 million.
During the three months ended June 30, 2006, we completed development of a
megaplex theatre property in Garner, North Carolina. The White Oak Village
Cinema 14 is operated by Consolidated Theatres and was completed for a total
development cost (including land and building) of approximately $8.2 million. We
purchased the land in 2005 for $1.3 million. This theatre is leased under a
long-term triple-net lease.
On May 5, 2006, we agreed to terminate a ground lease on our Hialeah, Florida
theatre, The Grand 18. In conjunction with this termination, the tenant paid us
$4.0 million and we released the tenant from its ground lease obligation, which
was a 20-year lease expiring in 2020. The building improvements, which were
owned by the tenant, reverted to us in conjunction with the ground lease
termination. This $4.0 million termination fee was recorded as rental income and
no value was assigned to the improvements. The property was subsequently leased
to an unrelated tenant.
On August 17, 2006, we completed the acquisition of a megaplex theatre property
in Huntsville, Alabama. The Valley Bend 18 is operated by Rave Motion Pictures
and was acquired for a total cost (including land and building) of approximately
$18.3 million. This theatre is leased under a long-term triple-net lease.
On September 1, 2006, we exercised our option to purchase 25 acres of
development land adjacent to our property in Suffolk, Virginia. The land was
acquired for a total cost of approximately $5.0 million. We intend to develop
this property into additional retail space.
On September 12 and September 14, 2006, we obtained four non-recourse mortgage
loans totaling $27.8 million. These mortgages are secured by two theatre
properties located in California and one each in South Carolina and North
Carolina. The mortgage loans bear interest at 6.099%, mature on October 1, 2016
and require monthly principal and interest payments totaling $180 thousand with
final principal payments at maturity totaling $21.7 million.
On September 18, 2006, our restaurant in Southfield Michigan, which we
previously operated through a wholly-owned taxable REIT subsidiary, was closed
and the space was subsequently leased to an unrelated restaurant tenant.
On September 29, 2006, we obtained three non-recourse mortgage loans totaling
$20.9 million. These mortgages are secured by three theatre properties located
in Georgia, California and Louisiana. The mortgage loans bear interest at 6.02%,
mature on October 6, 2016 and require monthly principal and interest payments
totaling $135 thousand with final principal payments at maturity totaling $16.2
million.
19
During the three months ended September 30, 2006, we completed development of a
megaplex theatre property in Winston Salem, North Carolina. The Grand 18 is
operated by Southern Theatres and was completed for a total development cost
(including land and building) of approximately $15.8 million. The land was
purchased in 2005 by the Company for $3.6 million. This theatre is leased under
a long-term triple-net lease.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2005
Rental revenue was $41.1 million for the three months ended September 30, 2006
compared to $36.9 million for the three months ended September 30, 2005. The
$4.2 million increase resulted primarily from the property acquisitions and
developments completed in 2005 and 2006 and base rent increases on existing
properties. Percentage rents of $0.5 million and $0.4 million were recognized
during the three months ended September 30, 2006 and 2005, respectively.
Straight line rents of $0.7 million and $0.6 million were recognized during the
three months ended September 30, 2006 and 2005, respectively. As of September
30, 2006 and December 31, 2005, the receivable for straight-line rents was $6.6
million and $4.7 million, respectively.
Tenant reimbursements totaled $3.9 million for the three months ended September
30, 2006 compared to $2.8 million for the three months ended September 30, 2005.
These tenant reimbursements arise from the operations of our retail centers. The
$1.1 million increase is due primarily to increases in tenant reimbursement
rates.
Other income was $0.7 million for the three months ended September 30, 2006
compared to $0.6 million for the three months ended September 30, 2005. The
increase of $0.1 million relates primarily to revenues from a restaurant in
Southfield, Michigan opened in September 2005, and previously operated through a
wholly-owned taxable REIT subsidiary. As discussed in the Recent Developments
section in this Form 10-Q, the restaurant in Southfield Michigan was closed
during the third quarter of 2006 and the space was leased to an unrelated
restaurant tenant.
Mortgage financing interest for the three months ended September 30, 2006 was
$2.6 million compared to $1.5 million for the three months ended September 30,
2005 and related to interest income from mortgage note financing we provided for
an entertainment retail center in Canada and a ski resort in Bennington, New
Hampshire in June of 2005 and March of 2006, respectively (described in Note 8
to the consolidated financial statements in this Form 10-Q and in "Recent
Developments" above).
Our property operating expense totaled $4.9 million for the three months ended
September 30, 2006 compared to $3.8 million for the three months ended September
30, 2005. These property operating expenses arise from the operations of our
retail centers. The $1.1 million increase is due primarily to increases in
property taxes and other property operating expenses at certain of these
properties.
Other operating expense totaled $0.9 million for the three months ended
September 30, 2006 compared to $0.8 million for the three months ended September
30, 2005. The increase of $0.1 million relates primarily to expenses from a
restaurant in Southfield, Michigan opened in September 2005, and previously
operated through a wholly-owned taxable REIT subsidiary. As discussed in the
Recent Developments section in this Form 10-Q, 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 $2.3 million for the three months
ended September 30, 2006 compared to $1.5 million for the three months ended
September 30, 2005. The increase of $0.8 million is due primarily to payroll and
related expenses attributable to increases in base and incentive compensation,
additional employees and certain employee benefits, as well as increases in
franchise taxes and professional fees.
20
Our net interest expense increased by $1.2 million to $12.2 million for the
three months ended September 30, 2006 from $11.0 million for the three months
ended September 30, 2005. The increase in net interest expense primarily
resulted from increases in long-term debt used to finance real estate
acquisitions and increases in the interest rates associated with our borrowings
under the unsecured revolving variable rate credit facility.
Depreciation and amortization expense totaled $7.9 million for the three months
ended September 30, 2006 compared to $7.0 million for the same period in 2005.
The $0.9 million increase resulted primarily from the property acquisitions
completed in 2005 and 2006.
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2005
Rental revenue was $124.7 million for the nine months ended September 30, 2006
compared to $107.2 million for the nine months ended September 30, 2005. The
$17.5 million increase resulted primarily from the property acquisitions and
developments completed in 2005 and 2006, base rent increases on existing
properties and the recognition of a lease termination fee of $4 million from our
theatre in Hialeah, Florida. No termination fees were recognized during the nine
months ended September 30, 2005. Percentage rents of $1.3 million and $1.4
million were recognized during the nine months ended September 30, 2006 and
2005, respectively. Straight line rents of $1.8 million and $1.6 million were
recognized during the nine months ended September 30, 2006 and 2005,
respectively. As of September 30, 2006 and December 31, 2005, the receivable for
straight-line rents was $6.6 million and $4.7 million, respectively.
Tenant reimbursements totaled $10.8 million for the nine months ended September
30, 2006 compared to $8.9 million for the nine months ended September 30, 2005.
These tenant reimbursements arise from the operations of our retail centers. The
$1.9 million increase is due to a $0.8 million increase from our retail center
in Burbank, California which was acquired on March 31, 2005 and the remainder of
the increase is due to increases in tenant reimbursement rates.
Other income was $3.0 million for the nine months ended September 30, 2006
compared to $2.5 million for the nine months ended September 30, 2005. The
increase of $0.5 million relates primarily to a restaurant in Southfield,
Michigan opened in September 2005, and previously operated through a
wholly-owned taxable REIT subsidiary. As discussed in the Recent Developments
section in this Form 10-Q, the restaurant in Southfield Michigan was closed
during the third quarter of 2006 and the space was leased to an unrelated
restaurant tenant.
Mortgage financing interest for the nine months ended September 30, 2006 was
$6.8 million compared to $2.0 million for the nine months ended September 30,
2005 and related to interest income from mortgage note financing we provided for
an entertainment retail center in Canada and a ski resort in Bennington, New
Hampshire in June of 2005 and March of 2006, respectively (described in Note 8
to the consolidated financial statements in this Form 10-Q and in "Recent
Developments" above).
Our property operating expense totaled $14.5 million for the nine months ended
September 30, 2006 compared to $11.4 million for the nine months ended September
30, 2005. These property operating expenses arise from the operations of our
retail centers. The $3.1 million increase is due to increases in property taxes
and other property operating expenses at certain of these properties. The
property operating expenses at our Burbank, California retail center, which was
acquired on March 31, 2005, increased by $0.9 million of which $0.3 million was
incurred in the second quarter of 2006 in conjunction with the early termination
of a property management agreement covering this center.
Other operating expense totaled $2.9 million for the nine months ended September
30, 2006 compared to $2.0 million for the nine months ended September 30, 2005.
The increase of $0.9 million primarily relates to expenses from a restaurant in
Southfield, Michigan opened in September 2005, and previously operated through a
wholly-owned taxable REIT subsidiary. As discussed in the Recent Developments
section in this Form 10-Q, the restaurant in Southfield Michigan was closed
during the third quarter of 2006 and the space was leased to an unrelated
restaurant tenant.
21
Our general and administrative expense totaled $10.0 million for the nine months
ended September 30, 2006 compared to $5.6 million for the nine months ended
September 30, 2005. This increase primarily resulted from share-based
compensation expense, which we account for in accordance with SFAS 123R, Share
Based Payment. During the three months ended June 30, 2006, we changed how we
account for restricted stock bonus awards issued pursuant to our Annual
Incentive Plan. As further described in Note 2 to the consolidated financial
statements in this Form 10-Q, during the nine months ended September 30, 2006,
we expensed $1.7 million of unvested restricted stock awards that related to
bonus awards from prior years. This adjustment was made because the employees
who received the awards could have elected to receive cash instead of restricted
shares at the time in which they elected to receive their bonuses in restricted
shares. Additionally, as further described in Note 12 to the consolidated
financial statements in this Form 10-Q, during the nine months ended September
30, 2006, we recognized an expense of $1.4 million related to the retirement of
one of our executives. This amount represented the fair value of the executive's
unvested share options and restricted shares at his retirement date of June 30,
2006. The remainder of the increase is due primarily to payroll and related
expenses attributable to increases in base and incentive compensation,
additional employees, certain employee benefits, grants of restricted shares to
management and payroll taxes related to the vesting of restricted shares.
Costs associated with loan refinancing for the nine months ended September 30,
2006 were $673 thousand. These costs related to the amendment and restatement of
our revolving variable rate credit facility and consisted of the write-off of
$673 thousand of certain unamortized financing costs. No such costs were
incurred during the nine months ended September 30, 2005.
Our net interest expense increased by $4.4 million to $35.2 million for the nine
months ended September 30, 2006 from $30.8 million for the nine months ended
September 30, 2005. The increase in net interest expense primarily resulted from
increases in long-term debt used to finance real estate acquisitions and
increases in the interest rates associated with our borrowings under the
unsecured revolving variable rate credit facility.
Depreciation and amortization expense totaled $23.2 million for the nine months
ended September 30, 2006 compared to $20.4 million for the same period in 2005.
The $2.8 million increase resulted primarily from the property acquisitions
completed in 2005 and 2006.
The gain on sale of land of $0.3 million for the nine months ended September 30,
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 nine months ended September 30, 2005.
Preferred dividend requirements for the nine months ended September 30, 2006
were $8.7 million compared to $8.4 million for the same period in 2005. The $0.3
million increase is due to the issuance of 3.2 million Series B preferred shares
in January of 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $7.7 million at September 30, 2006. In addition,
we had restricted cash of $6.1 million at September 30, 2006 required in
connection with debt service, payment of real estate taxes and capital
improvements.
Mortgage Debt and Credit Facilities
As of September 30, 2006, we had total debt outstanding of $766.5 million. As of
September 30, 2006, $658.6 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 September 30, 2006, we had $107.9 million in debt outstanding under our
$235.0 million unsecured revolving variable rate credit facility, with interest
at a floating rate. The credit facility matures in January of 2009.
22
Our principal investing activity is the purchase and development of rental
property, which has generally been financed with mortgage debt and the proceeds
from equity offerings. Our unsecured revolving variable rate credit facility is
also used to finance the acquisition or development of properties. Continued
growth of our rental property portfolio will depend in part on our continued
ability to access funds through additional borrowings and equity security
offerings.
Liquidity Requirements
Short-term liquidity requirements consist primarily of normal recurring
corporate operating expenses, debt service requirements and distributions to
shareholders. We meet these requirements primarily through cash provided by
operating activities. Cash provided by operating activities was $78.9 million
for the nine months ended September 30, 2006 and $69.8 million for the nine
months ended September 30, 2005. We anticipate that our cash on hand, cash from
operations, and funds available under our unsecured revolving variable rate
credit facility will provide adequate liquidity to fund our operations, make
interest and principal payments on our debt, and allow distributions to our
shareholders and avoidance of corporate level federal income or excise tax in
accordance with Internal Revenue Code requirements for qualification as a REIT.
We had five theatre projects under construction at September 30, 2006. The
properties are being developed by and have been pre-leased to the prospective
tenants under long-term triple-net leases. The cost of development is paid by us
either in periodic draws or upon successful completion of construction. The
related timing and amount of rental payments to be received by us from tenants
under the leases correspond to the timing and amount of funding by us of the
cost of development. These theatres will have a total of 77 screens and their
total development costs (including land) will be approximately $75.6 million.
Through September 30, 2006, we have invested $32.1 million in these projects
(including land), and have commitments to fund an additional $43.5 million in
improvements. We plan to fund development primarily with funds generated by debt
financing and/or equity offerings. If we determine that construction is not
being completed in accordance with the terms of the development agreement, we
can, depending on the financing arrangement, either discontinue funding
construction draws or refuse to purchase the completed theatre.
As further described in Note 11 to the consolidated financial statements in this
Form 10-Q, we completed an offering of common shares in February 2006,
generating net proceeds (after expenses) of $46.2 million. We used proceeds from
this offering to reduce borrowings under the Company's unsecured revolving
variable rate credit facility and for other corporate purposes.
Off Balance Sheet Arrangements
At September 30, 2006, 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 $346 and $325 (in
thousands) from our investment in the Atlantic-EPR I joint venture during the
nine months ended September 30, 2006 and 2005, respectively. We also recognized
income of $220 and $221 (in thousands) from our investment in the Atlantic-EPR
II joint venture during the nine months ended September 30, 2006 and 2005,
respectively. Condensed financial information for the Atlantic-EPR I and
Atlantic-EPR II joint ventures is included in Note 4 to the consolidated
financial statements included as part of this Form 10-Q.
The joint venture agreement for Atlantic-EPR I allows our partner, Atlantic of
Hamburg, Germany (Atlantic), to exchange up to a maximum of 10% of its ownership
interest per year in Atlantic-EPR I for our common shares or, at our discretion,
the cash value of those shares as defined in the joint venture agreement. This
same provision exists in the Atlantic-EPR II joint venture agreement, except
that Atlantic's right to such exchange does not commence until 2007.
23
FUNDS FROM OPERATIONS (FFO)
The National Association of Real Estate Investment Trusts (NAREIT) developed FFO
as a relative non-GAAP financial measure of performance and liquidity of an
equity REIT in order to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. FFO is a widely used
measure of the operating performance of real estate companies and is provided
here as a supplemental measure to Generally Accepted Accounting Principles
(GAAP) net income available to common shareholders and earnings per share. FFO,
as defined under the revised NAREIT definition and presented by us, is net
income 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.
The following tables summarize our FFO for the three and nine month periods
ended September 30, 2006 and 2005 (in thousands):
THREE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2006 2005 2006 2005
------- ------- ------- -------
Net income available to common shareholders $17,457 $14,898 $51,118 $42,511
Add: Real estate depreciation and amortization 7,687 6,844 22,584 20,057
Add: Allocated share of joint venture depreciation 61 61 182 181
------- ------- ------- -------
FFO available to common shareholders 25,205 21,803 73,884 62,749
======= ======= ======= =======
FFO per common share:
Basic $ 0.96 0.87 $ 2.83 $ 2.51
Diluted 0.94 0.85 2.79 2.46
Shares used for computation (in thousands):
Basic 26,298 25,086 26,093 24,995
Diluted 26,769 25,585 26,511 25,482
Other financial information:
Straight-lined rental revenue $ 671 $ 602 $ 1,824 $ 1,647
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
EITF 04-5, Determining Whether a General Partner, or the General Partners as a
Group, Controls a Limited Partnership or Similar Entity when the Limited
Partners Have Certain Rights, became effective in June 2005 for general partners
of all new limited partnerships formed and for existing limited partnerships for
which the partnership agreements are modified. For general partners in all other
limited partnerships, this guidance is effective no later than the beginning of
the first reporting period in fiscal years beginning after December 31, 2005. We
adopted EITF 04-5 in 2005. The implementation of EITF 04-5 did not have any
effect on our financial statements.
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
enterprise's 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
24
taken in a tax return. FIN 48 will be effective for us on January 1, 2007. The
adoption of FIN 48 is not expected to have any material impact on our financial
statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108
requires registrants to evaluate errors that occurred in prior periods using two
different methods. The errors to be evaluated are errors that were previously
determined to be immaterial. If the error is determined to be material using
either of the two methods prescribed by SAB 108, the Company is allowed to
adjust for the cumulative effect of errors previously determined to be
immaterial as of the beginning of the current fiscal year, with an offsetting
adjustment to the opening balance of retained earnings in the year of adoption.
SAB 108 also requires 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 do not require
previously filed reports with the SEC to be amended. SAB 108 will be effective
for the year ending December 31, 2006. We are still evaluating the impact of SAB
108.
FORWARD LOOKING INFORMATION
Cautionary statement regarding forward-looking information
With the exception of historical information, this quarterly report on Form 10-Q
contains forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995 and identified by such words as "will be,"
"intend," "continue," "believe," "may," "expect," "hope," "anticipate," "goal,"
"forecast," or other comparable terms. Our actual financial condition, results
of operations or business may vary materially from those contemplated by such
forward-looking statements and involve various risks and uncertainties,
including but not limited to those discussed under Item 1A, "Risk Factors" in
our annual report on Form 10-K for the year ended December 31, 2005. Investors
are cautioned not to place undue reliance on any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, primarily relating to potential losses due to
changes in interest rates. 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 line of credit under which outstanding borrowings bear interest at a
floating rate. The line of credit is use to acquire properties and finance our
development commitments.
We are subject to risks associated with debt financing, including the risk that
existing indebtedness may not be refinanced or that the terms of such
refinancing may not be as favorable as the terms of current indebtedness. The
majority of our borrowings are subject to mortgages or contractual agreements
which limit the amount of indebtedness we may incur. Accordingly, if we are
unable to raise additional equity or borrow money due to these limitations, our
ability to acquire additional properties may be limited.
ITEM 4. CONTROLS AND PROCEDURES
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.
25
In addition, there were no changes in our internal control over financial
reporting during our third fiscal quarter of 2006 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1 . LEGAL PROCEEDINGS
Other than routine litigation and administrative proceedings arising in the
ordinary course of business, we are not presently involved in any litigation
nor, to our knowledge, is any litigation threatened against us or our properties
which is reasonably likely to have a material adverse effect on our liquidity or
results of operations.
ITEM 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, 2005.
ITEM 2 . UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 . DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 . SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 . OTHER INFORMATION
None.
ITEM 6 . EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act
32 Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley
Act.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTERTAINMENT PROPERTIES TRUST
Dated: November 1, 2006 By /s/ David M. Brain
-------------------------------------
David M. Brain, President - Chief
Executive Officer and Trustee
Dated: November 1, 2006 By /s/ Mark A. Peterson
-------------------------------------
Mark A. Peterson, Vice President -
Chief Financial Officer
26