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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 March 31, 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 Identification No.)
of incorporation or organization)
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 May 1, 2006, there were 26,452,620 Common Shares of Beneficial Interest
outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
MARCH 31, 2006 DECEMBER 31, 2005
-------------- -----------------
(Unaudited)
ASSETS
Rental properties, net of accumulated depreciation of $119.6 million and $112.7
million at March 31, 2006 and December 31, 2005, respectively $ 1,318,783 $ 1,283,988
Property under development 22,101 19,770
Mortgage notes and related accrued interest receivable 61,157 44,067
Investment in joint ventures 2,268 2,297
Cash and cash equivalents 5,788 6,546
Restricted cash 5,362 13,124
Intangible assets, net 10,159 10,461
Deferred financing costs, net 11,564 10,896
Other assets 28,662 23,016
-------------- -----------------
Total assets $ 1,465,844 $ 1,414,165
============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 8,167 $ 7,928
Common dividends payable 18,183 15,770
Preferred dividends payable 2,916 2,916
Unearned rents 1,110 1,304
Long-term debt 721,015 714,591
-------------- -----------------
Total liabilities 751,391 742,509
Commitments and contingencies - -
Minority interest 5,102 5,235
Shareholders' equity:
Common Shares, $.01 par value; 50,000,000 shares authorized; 27,118,994 and
25,881,647 shares issued at March 31, 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 March 31, 2006 and December
31, 2005; liquidation preference of $57,500,000 23 23
3,200,000 Series B shares issued at March 31, 2006 and December
31, 2005; liquidation preference of $80,000,000 32 32
Additional paid-in-capital 747,706 700,704
Treasury shares at cost: 670,450 and 649,142 common shares at March 31, 2006
and December 31, 2005, respectively (15,269) (14,350)
Loans to shareholders (3,525) (3,525)
Accumulated other comprehensive income 12,638 13,402
Distributions in excess of net income (32,525) (30,124)
-------------- -----------------
Shareholders' equity 709,351 666,421
-------------- -----------------
Total liabilities and shareholders' equity $ 1,465,844 $ 1,414,165
============== =================
2
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
2006 2005
----------------- -----------------
Rental revenue $ 39,130 $ 34,150
Tenant reimbursements 3,450 2,979
Other income 1,463 814
Mortgage financing interest 1,824 -
----------------- -----------------
Total revenue 45,867 37,943
Property operating expense 4,770 3,864
Other operating expense 1,038 647
General and administrative expense, including share-based
compensation of $625 and $483, respectively 2,481 1,733
Costs associated with loan refinancing 673 -
Interest expense, net 11,239 9,522
Depreciation and amortization 7,497 6,538
----------------- -----------------
Income before gain on sale of land and income from
joint ventures 18,169 15,639
Gain on sale of land 345 -
Equity in income from joint ventures 184 174
----------------- -----------------
Net income $ 18,698 $ 15,813
Preferred dividend requirements (2,916) (2,606)
Net income available to common shareholders $ 15,782 $ 13,207
================= =================
Net income per common share:
Basic $ 0.61 $ 0.53
================= =================
Diluted $ 0.61 $ 0.52
================= =================
Shares used for computation (in thousands):
Basic 25,690 24,975
Diluted 26,030 25,496
Dividends per common share $ 0.6875 $ 0.6250
================= =================
3
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
COMMON STOCK PREFERRED STOCK ADDITIONAL
------------ --------------- PAID-IN TREASURY LOANS TO
SHARES PAR SHARES PAR CAPITAL SHARES SHAREHOLDERS
------ ---- ------ --- ---------- ----------- ------------
Balance at December 31, 2005 25,882 $259 5,500 $55 $ 700,704 $ (14,350) $ (3,525)
Issuance of restricted share grants 83 1 - - (1) - -
Amortization of restricted share grants - - - - 559 - -
Share option expense - - - - 66 - -
Foreign currency translation adjustment - - - - - - -
Net income - - - - - - -
Purchase of 21,308 common shares for
treasury - - - - - (919) -
Issuances of common shares in Dividend
Reinvestment Plan 4 - - - 176 - -
Issuance of common shares, net of
costs of $1.1 million 1,150 11 - - 46,202 - -
Dividends to common shareholders
($0.6875 per share) - - - - - - -
Dividends to Series A preferred
shareholders ($0.5938 per share) - - - - - - -
Dividends to Series B preferred
shareholders ($0.4844 per share) - - - - - - -
------ ---- ------ --- ---------- ----------- ------------
Balance at March 31, 2006 27,119 $271 5,500 $55 $ 747,706 $ (15,269) $ (3,525)
====== ==== ====== === ========== =========== ============
ACCUMULATED
OTHER DISTRIBUTIONS
COMPREHENSIVE IN EXCESS OF
INCOME NET INCOME TOTAL
------------- ------------- --------
Balance at December 31, 2005 $ 13,402 $ (30,124) $666,421
Issuance of restricted share grants - - -
Amortization of restricted share grants - - 559
Share option expense - - 66
Foreign currency translation adjustment (764) - (764)
Net income - 18,698 18,698
Purchase of 21,308 common shares for
treasury - - (919)
Issuances of common shares in Dividend
Reinvestment Plan - - 176
Issuance of common shares, net of
costs of $1.1 million - - 46,213
Dividends to common shareholders
($0.6875 per share) - (18,183) (18,183)
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)
------------- ------------- --------
Balance at March 31, 2006 $ 12,638 $ (32,525) $709,351
============= ============= ========
4
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
2006 2005
---------- -------------
Net income $ 18,698 $ 15,813
Other comprehensive income (loss):
Foreign currency translation adjustment (764) (1,129)
---------- -------------
Comprehensive income $ 17,934 $ 14,684
========== =============
5
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
2006 2005
--------------- -------------
Operating activities:
Net income $ 18,698 $ 15,813
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 (184) (174)
Depreciation and amortization 7,497 6,538
Amortization of deferred financing costs 768 736
Share-based compensation expense to management and trustees 625 483
Increase in mortgage note accrued interest receivable (1,809) -
Increase in other assets (1,087) (786)
Increase (decrease) in accounts payable and accrued liabilities 380 (1,009)
Increase (decrease) in unearned rents (194) 1,818
--------------- -------------
Net cash provided by operating activities 25,022 23,419
--------------- -------------
Investing activities:
Acquisition of rental properties and other assets (38,462) (71,721)
Net proceeds from sale of real estate 603 -
Additions to properties under development (7,097) (6,679)
Distributions from joint ventures 213 207
Investment in promissory note receivable (3,500) -
Investment in mortgage note receivable (15,332) -
--------------- -------------
Net cash used in investing activities (63,575) (78,193)
--------------- -------------
Financing activities:
Proceeds from long-term debt facilities 135,196 52,000
Principal payments on long-term debt (121,912) (61,425)
Deferred financing fees paid (2,114) (23)
Net proceeds from issuances of common shares 46,389 219
Net proceeds from issuance of preferred shares - 77,261
Purchase of common shares for treasury (919) (759)
Distributions paid to minority interest (133) (200)
Dividends paid to shareholders (18,686) (15,463)
--------------- -------------
Net cash provided by financing activities 37,821 51,610
Effect of exchange rate changes on cash (26) (65)
--------------- -------------
Net decrease in cash and cash equivalents (758) (3,229)
Cash and cash equivalents at beginning of period 6,546 11,255
--------------- -------------
Cash and cash equivalents at end of period $ 5,788 $ 8,026
=============== =============
Supplemental schedule of non-cash activity:
Transfer of property under development to rental property $ 4,774 $ 10,784
Issuance of shares to management and trustees $ 3,441 $ -
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 11,031 $ 9,564
Cash paid during the period for income taxes $ 224 $ 123
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. Operating results for the three-month
period ended March 31, 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.
CONCENTRATION OF RISK
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (58%)
of the megaplex theatre rental properties held by the Company (including joint
venture properties) at March 31, 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 59%) result from the
rental payments by AMC under the leases, or its parent, AMC Entertainment, Inc.
(AMCE), as the guarantor of AMC's obligations under the leases. AMCE has
publicly held debt and accordingly, their financial information is publicly
available.
SHARE-BASED COMPENSATION
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 share incentive plan is determined using the
Black-Scholes model. Prior to 2006, the Company accounted for share options
granted under its 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 its 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
7
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, 2006 and 2005 was $66 thousand and $29
thousand, respectively. The expense related to share options included in the
determination of net income for the three months ended March 31, 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
three months ended March 31, 2005, total share option expense would have been
$48 thousand. This difference in expense had no effect on either reported basic
or reported diluted earnings per share for the three months ended March 31,
2005.
The fair value for all outstanding and unvested awards was estimated at the date
of grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 4.8% and 4.0% for the three months ended
March 31, 2006 and 2005, respectively, dividend yield of 5.8% and 6.0% for the
three months ended March 31, 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 three months ended March 31, 2006 and 2005, respectively; and an expected
life of the options of eight years.
Restricted Shares
Restricted share awards, which vest over time, are amortized to share-based
compensation expense on a straight line basis over the period of vesting. This
expense is included in general and administrative expense in the accompanying
consolidated statements of income.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period amounts to conform
to the current period presentation.
3. RENTAL PROPERTIES
The following table summarizes the carrying amounts of rental properties as of
March 31, 2006 and December 31, 2005 (in thousands):
MARCH 31, 2006 DECEMBER 31, 2005
-------------- -----------------
Buildings and improvements $ 1,102,675 $ 1,068,569
Furniture, fixtures & equipment 5,237 5,240
Land 330,497 322,865
-------------- -----------------
1,438,409 1,396,674
Accumulated depreciation (119,626) (112,686)
-------------- -----------------
Total $ 1,318,783 $ 1,283,988
============== =================
Depreciation expense on rental properties was $7.3 million and $6.5 million for
the three months ended March 31, 2006 and 2005, respectively.
4. UNCONSOLIDATED REAL ESTATE JOINT VENTURES
At March 31, 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.
8
The Company recognized income of $112 and $106 (in thousands) from its
investment in the Atlantic-EPR I joint venture during the first three months of
2006 and 2005, respectively. The Company also received distributions from
Atlantic-EPR I of $129 and $124 (in thousands) during the first three months of
2006 and 2005, respectively. Condensed financial information for Atlantic-EPR I
is as follows as of and for the three months ended March 31, 2006 and 2005 (in
thousands):
2006 2005
----------- ------
Rental properties, net $ 29,728 30,372
Cash 141 141
Long-term debt 16,387 16,691
Partners' equity 13,375 13,712
Rental revenue 1,044 1,024
Net income 525 506
The Company recognized income of $72 and $68 (in thousands) from its investment
in the Atlantic-EPR II joint venture during the first three months of 2006 and
2005, respectively. The Company also received distributions from Atlantic-EPR II
of $84 and $83 (in thousands) during the first three months of 2006 and 2005,
respectively. Condensed financial information for Atlantic-EPR II is as follows
as of and for the three months ended March 31, 2006 and 2005 (in thousands):
2006 2005
---------- ------
Rental properties, net $ 23,226 23,686
Cash 87 114
Long-term debt 14,080 14,339
Note payable to Entertainment Properties Trust 117 117
Partners' equity 8,937 9,152
Rental revenue 694 694
Net income 319 315
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.
9
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 March 31,
2006, there were 1,478,038 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 -- --
Granted 72,823 41.36 - 42.46 42.32
-------
Outstanding at
March 31, 2006 962,999 14.00 - 43.75 27.72
=======
The weighted average fair value of options granted was $5.03 and $3.70 during
the three months ended March 31, 2006 and 2005, respectively.
The following table summarizes outstanding options at March 31, 2006:
EXERCISE OPTIONS WEIGHTED AVG. WEIGHTED AVG. AGGREGATE INTRINSIC
PRICE RANGE OUTSTANDING LIFE REMAINING EXERCISE PRICE VALUE (IN THOUSANDS)
----------------- ----------- -------------- -------------- --------------------
$ 14.00 - 19.99 230,811 4.5
20.00 - 29.99 387,065 6.6
30.00 - 39.99 147,664 8.1
40.00 - 43.75 197,459 9.6
------- ---
962,999 6.9 $ 27.72 $ 13,737
======= ===
The following table summarizes exercisable options at March 31, 2006:
EXERCISE OPTIONS WEIGHTED AVG. WEIGHTED AVG. AGGREGATE INTRINSIC
PRICE RANGE EXERCISABLE LIFE REMAINING EXERCISE PRICE VALUE (IN THOUSANDS)
------------------- ----------- --------------- -------------- --------------------
$ 14.00 - 19.99 197,483 4.4
20.00 - 29.99 198,403 6.5
30.00 - 39.99 81,512 8.1
40.00 - 43.75 1,291 8.8
------- ---
478,689 5.9 $ 22.45 $ 9,348
======= ===
10
RESTRICTED SHARES
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
March 31, 2006 169,554 39.50 2.00
=======
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. The Company records share-based compensation expense pertaining to these
restricted shares on a straight line basis over the period of vesting. This
expense is included in general and administrative expense in the accompanying
consolidated statements of income. Total share-based compensation expense
related to the restricted shares recorded for the three months ended March 31,
2006 and 2005 was $559 thousand and $454 thousand, respectively. At March 31,
2006, unamortized share-based compensation expense related to non-vested
restricted shares was $6.1 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 MARCH 31, 2006
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic earnings:
Income available to common shareholders $ 15,782 25,690 $ 0.61
Effect of dilutive securities:
Share options - 315 -
Non-vested common share grants
- 25 -
---------- ------ ---------
Diluted earnings $ 15,782 26,030 $ 0.61
=========== ====== =========
THREE MONTHS ENDED MARCH 31, 2005
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic earnings:
Income available to common shareholders $ 13,207 24,975 $ 0.53
Effect of dilutive securities:
Share options - 443 (0.01)
Non-vested common share grants - 78 -
----------- ------ ---------
Diluted earnings $ 13,207 25,496 $ 0.52
=========== ====== =========
11
7. PROPERTY ACQUISITIONS
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.
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 March 31,
2006. The Partnership has an agreement with a bank to provide a first mortgage
construction loan to the Partnership of up to $106 million. The bank
construction financing will be senior to the Company's mortgage note.
In the original loan agreement, no principal or interest payments were due 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 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 March 31, 2006
was US $53.1 million, including related accrued interest receivable of US $5.4
million. Cost overruns of the project, if any, are the responsibility of the
Partnership. The Company has no obligation to fund any additional amounts, and
has no other guarantees of any kind related to the project.
12
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 March 31, 2006 was $8.1
million, including related accrued interest receivable. 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.
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 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.
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. COMMITMENTS AND CONTINGENCIES
As of March 31, 2006, the Company had six theatre development projects under
construction for which it has agreed to either finance the development costs or
purchase the theatre upon completion. The properties are being developed by the
prospective tenants. These theatres are expected to have a total of 95 screens
and their development costs (including land) are expected to be approximately
$88.2 million. Through March 31, 2006, the Company has invested $33.3 million in
these projects (including land), and has commitments to fund approximately $54.9
million of additional improvements. Development costs are advanced by the
Company either in periodic draws or upon successful completion of construction.
If the Company determines that construction is not being completed in accordance
with the terms of the development agreement, the Company can discontinue funding
construction draws or refuse to purchase the completed theatre. The Company has
agreed to lease the theatres to the operators at pre-determined rates.
13
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 March 31, 2006, we had
invested approximately $1.4 billion (before accumulated depreciation) in 69
megaplex theatre properties and various restaurant, retail and other properties
located in 26 states and Ontario, Canada. As of March 31, 2006, we had invested
approximately $22.1 million in development land and construction in progress for
real-estate development. Also, as of March 31, 2006, we had invested
approximately US $53.1 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.
14
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.
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 three
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 three months of 2006.
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
15
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 three months ended March
31, 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 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).
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
16
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
Rental revenue was $39.1 million for the three months ended March 31, 2006
compared to $34.2 million for the three months ended March 31, 2005. The $4.9
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 $469 thousand and $558 thousand were recognized
during the three months ended March 31, 2006 and 2005, respectively. Straight
line rents of $492 thousand and $512 thousand were recognized during the three
months ended March 31, 2006 and 2005, respectively. As of March 31, 2006 and
2005, the receivable for straight-line rents was $5.2 million and $2.0 million,
respectively.
Tenant reimbursements totaled $3.5 million for the three months ended March 31,
2006 compared to $3.0 million for the three months ended March 31, 2005. These
tenant reimbursements arise from the operations of our retail centers. The $0.5
million increase is due primarily to the acquisition of the retail center in
Burbank, California on March 31, 2005.
Other income was $1.5 million for the three months ended March 31, 2006 compared
to $0.8 million for the three months ended March 31, 2005. Of the increase of
$0.7 million, $0.3 million relates to revenues from a restaurant in Southfield,
Michigan opened in September 2005, which is operated through a wholly-owned
taxable REIT subsidiary. The remaining increase of $0.4 million relates to the
recognition of a gain 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
has agreed to reimburse us for the replacement of the roof less our deductible.
Mortgage financing interest for the three months ended March 31, 2006 was $1.8
million 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). No such revenue was
recognized in the first quarter of 2005.
Our property operating expense totaled $4.8 million for the three months ended
March 31, 2006 compared to $3.9 million for the three months ended March 31,
2005. These property operating expenses arise from the operations of our retail
centers. The $0.9 million increase is due primarily to the acquisition of the
retail center in Burbank, California on March 31, 2005, and increases in
property taxes and other property operating expenses at certain of these
properties.
Other operating expense totaled $1.0 million for the three months ended March
31, 2006 compared to $0.6 million for the three months ended March 31, 2005. The
increase of $0.4 million relates to expenses from a restaurant in Southfield,
Michigan opened in September 2005, which is operated through a wholly-owned
taxable REIT subsidiary.
Our general and administrative expense, including share-based compensation,
totaled $2.5 million for the three months ended March 31, 2006 compared to $1.7
million for the three months ended March 31, 2005. The $0.8 million increase is
due primarily to payroll and related expenses attributable to increases in base
compensation, additional employees, certain employee benefits, grants of
restricted shares to management and payroll taxes related to the vesting of
restricted shares.
17
Costs associated with loan refinancing for the three months ended March 31, 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 three months ended March 31, 2005.
Our net interest expense increased by $1.7 million to $11.2 million for the
three months ended March 31, 2006 from $9.5 million for the three months ended
March 31, 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 $7.5 million for the three months
ended March 31, 2006 compared to $6.5 million for the same period in 2005. The
$1.0 million increase resulted primarily from the property acquisitions
completed in 2006 and 2005.
The gain on sale of land of $345 thousand 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, 2005.
Preferred dividend requirements for the three months ended March 31, 2006 were
$2.9 million compared to $2.6 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 $5.8 million at March 31, 2006. In addition, we
had restricted cash of $5.4 million at March 31, 2006 required in connection
with debt service, payment of real estate taxes and capital improvements.
Mortgage Debt and Credit Facilities
As of March 31, 2006, we had total debt outstanding of $721.0 million. As of
March 31, 2006, $581.5 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 5.9%.
At March 31, 2006, we had $139.5 million in debt outstanding under our $200.0
million unsecured revolving variable rate credit facility, with interest at a
floating rate. The credit facility matures in January of 2009.
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 $25.0 million
for the three months ended March 31, 2006 and $23.4 million for the three months
ended March 31, 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,
18
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 six theatre projects under construction at March 31, 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 95 screens and their total development costs
(including land) will be approximately $88.2 million. Through March 31, 2006, we
have invested $33.3 million in these projects (including land), and have
commitments to fund an additional $54.9 million in improvements. We plan to fund
development primarily with funds generated by debt financing and/or equity
offerings. If we determine that construction is not being completed in
accordance with the terms of the development agreement, we can discontinue
funding construction draws or refuse to purchase the completed theatre.
As further described in Note 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 March 31, 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 $112 and $106 (in thousands) from
our investment in the Atlantic-EPR I joint venture during the three months ended
March 31, 2006 and 2005, respectively. We also recognized income of $72 and $68
(in thousands) from our investment in the Atlantic-EPR II joint venture during
the three months ended March 31, 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.
19
FUNDS FROM OPERATIONS (FFO)
The National Association of Real Estate Investment Trusts (NAREIT) developed FFO
as a relative non-GAAP financial measure of performance and liquidity of an
equity REIT in order to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. FFO is a widely used
measure of the operating performance of real estate companies and is provided
here as a supplemental measure to Generally Accepted Accounting Principles
(GAAP) net income available to common shareholders and earnings per share. FFO,
as defined under the revised NAREIT definition and presented by us, is net
income, computed in accordance with GAAP, excluding gains and losses from sales
of depreciable operating properties, plus real estate related depreciation and
amortization, and after adjustments for unconsolidated partnerships, joint
ventures and other affiliates. Adjustments for unconsolidated partnerships,
joint ventures and other affiliates are calculated to reflect FFO on the same
basis. FFO is a non-GAAP financial measure. FFO does not represent cash flows
from operations as defined by GAAP and is not indicative that cash flows are
adequate to fund all cash needs and is not to be considered an alternative to
net income or any other GAAP measure as a measurement of the results of our
operations or our cash flows or liquidity as defined by GAAP.
The following tables summarize our FFO for the three month periods ended March
31 2006 and 2005 (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
2006 2005
----------- --------------
Net income available to common shareholders $ 15,782 $ 13,207
Add: Real estate depreciation and amortization 7,295 6,460
Add: Allocated share of joint venture depreciation 61 59
----------- --------------
FFO available to common shareholders 23,138 19,726
=========== ==============
FFO per common share:
Basic $ 0.90 0.79
Diluted 0.89 0.77
Shares used for computation (in thousands):
Basic 25,690 24,975
Diluted 26,030 25,496
Other financial information:
Straight-lined rental revenue $ 492 $ 512
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 first quarter 2006 financial statements.
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.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, primarily relating to potential losses due to
changes in interest rates. We seek to mitigate the effects of fluctuations in
interest rates by matching the term of new investments with new long-term fixed
rate borrowings whenever possible. We also have a $200 million unsecured
revolving line of credit that bears interest at a floating rate that we use to
acquire properties and finance our development commitments.
We are subject to risks associated with debt financing, including the risk that
existing indebtedness may not be refinanced or that the terms of such
refinancing may not be as favorable as the terms of current indebtedness. The
majority of our borrowings are subject to mortgages or contractual agreements
which limit the amount of indebtedness we may incur. Accordingly, if we are
unable to raise additional equity or borrow money due to these limitations, our
ability to acquire additional properties may be limited.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We have established disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to the officers who certify our financial reports and to other
members of senior management and the Board of Trustees. A review and evaluation
was performed by our management, including the Company's Chief Executive Officer
(the "CEO") and Chief Financial Officer (the "CFO"), of the effectiveness of the
design and operation of our disclosure controls and procedures as of March 31,
2006. Based on that review and evaluation, the CEO and CFO have concluded that
our current disclosure controls and procedures, as designed and implemented,
were effective. There were no significant deficiencies or material weaknesses
identified in the course of such review and evaluation and, therefore, no
corrective measures were taken by us.
CHANGE IN INTERNAL CONTROL OVER FNANCIAL REPORTING
Effective January 1, 2006, we implemented a new general ledger system. As part
of the implementation, we modified our internal control over financial reporting
to align our internal controls with the new technology. This new technology
improves the efficiency of our operations and further strengthens our internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 . LEGAL PROCEEDINGS
Other than routine litigation and administrative proceedings arising in the
ordinary course of business, we are not presently involved in any litigation
nor, to our knowledge, is any litigation threatened against us or our
properties, which is reasonably likely to have a material adverse effect on our
liquidity or results of operations.
ITEM 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
21
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: May 2, 2006 By /s/ David M. Brain
-----------------------------------
David M. Brain, President -
Chief Executive Officer and Trustee
Dated: May 2, 2006 By /s/ Fred L. Kennon
-----------------------------------
Fred L. Kennon, Vice President -
Chief Financial Officer
22