10-Q 1 c97132e10vq.txt FORM 10-Q 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 June 30, 2005 COMMISSION FILE NUMBER 1-13561 ENTERTAINMENT PROPERTIES TRUST (Exact name of registrant as specified in its charter) MARYLAND 43-1790877 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 30 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes 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 July 29, 2005, there were 25,875,486 Common Shares of Beneficial Interest outstanding. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENTERTAINMENT PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30, 2005 DECEMBER 31, 2004 ------------- ----------------- ASSETS (Unaudited) Rental properties, net of accumulated depreciation of $99.2 million and $87.1 million at June 30, 2005 and December 31, 2004, respectively $ 1,215,796 $ 1,121,409 Property under development 21,134 23,144 Mortgage note and related accrued interest receivable 38,832 -- Investment in joint ventures 2,476 2,541 Cash and cash equivalents 7,214 11,255 Restricted cash 11,729 12,794 Intangible assets, net 10,489 10,900 Deferred financing costs, net 10,969 12,730 Other assets 22,079 18,675 ----------- ----------- Total assets $ 1,340,718 $ 1,213,448 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities $ 8,794 $ 10,070 Common dividends payable 15,764 14,097 Preferred dividends payable 2,916 1,366 Unearned rents 2,827 1,634 Long-term debt 644,894 592,892 ----------- ----------- Total liabilities 675,195 620,059 Commitments and contingencies -- -- Minority interests 5,666 6,049 Shareholders' equity: Common Shares, $.01 par value; 50,000,000 shares authorized; and 25,871,913 and 25,578,472 shares issued at June 30, 2005 and December 31, 2004, respectively 259 256 Preferred Shares, $.01 par value; 10,000,000 shares authorized: 2,300,000 Series A shares issued at June 30, 2005 and December 31, 2004 23 23 3,200,000 Series B shares issued at June 30, 2005 32 -- Additional paid-in-capital 703,445 618,715 Treasury shares at cost: 649,142 and 517,421 common shares at June 30, 2005 and December 31, 2004, respectively (14,350) (8,398) Loans to shareholders (3,525) (3,525) Non-vested shares (4,106) (2,338) Accumulated other comprehensive income 6,759 7,480 Distributions in excess of net income (28,680) (24,873) ----------- ----------- Shareholders' equity 659,857 587,340 ----------- ----------- Total liabilities and shareholders' equity $ 1,340,718 $ 1,213,448 =========== ===========
2 ENTERTAINMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2005 2004 2005 2004 -------- -------- -------- -------- Rental revenue $ 36,138 $ 31,426 $ 70,288 $ 58,964 Tenant reimbursements 3,091 2,583 6,070 4,766 Other income 1,073 23 1,887 95 Mortgage financing interest 472 -- 472 -- -------- -------- -------- -------- Total revenue 40,774 34,032 78,717 63,825 Property operating expense 3,749 3,067 7,613 5,891 Other operating expense 516 -- 1,163 -- General and administrative expense, excluding amortization of non-vested shares below 1,899 1,486 3,179 2,606 Costs associated with loan refinancing -- 1,134 -- 1,134 Interest expense, net 10,239 10,026 19,761 18,844 Depreciation and amortization 6,832 5,955 13,370 11,016 Amortization of non-vested shares 405 340 858 680 -------- -------- -------- -------- Income before income from joint ventures and minority interests 17,134 12,024 32,773 23,654 Equity in income from joint ventures 188 182 362 310 Minority interests -- (490) -- (919) -------- -------- -------- -------- Net income $ 17,322 $ 11,716 $ 33,135 $ 23,045 Preferred dividend requirements (2,916) (1,366) (5,522) (2,731) -------- -------- -------- -------- Net income available to common shareholders $ 14,406 $ 10,350 $ 27,613 $ 20,314 ======== ======== ======== ======== Net income per common share: Basic $ 0.58 $ 0.47 $ 1.11 $ 0.97 ======== ======== ======== ======== Diluted $ 0.57 $ 0.46 $ 1.09 $ 0.94 ======== ======== ======== ======== Shares used for computation (in thousands): Basic 24,984 22,211 24,949 20,969 Diluted 25,475 23,551 25,429 22,411 Dividends per common share $ 0.6250 $ 0.5625 $ 1.2500 $ 1.1250 ======== ======== ======== ========
3 ENTERTAINMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) (DOLLARS IN THOUSANDS)
COMMON STOCK PREFERRED STOCK ADDITIONAL ------------- --------------- PAID-IN TREASURY LOANS TO SHARES PAR SHARES PAR CAPITAL SHARES SHAREHOLDERS ------ ----- ------ ---- ---------- ---------- ------------ Balance at December 31, 2004 25,578 $ 256 2,300 $ 23 $ 618,715 $ (8,398) $ (3,525) Shares issued to Trustees 4 -- -- -- 161 -- -- Issuance of restricted share grants 63 1 -- -- 2,625 -- -- Amortization of restricted share grants -- -- -- -- -- -- -- Stock option expense -- -- -- -- 45 -- -- Foreign currency translation adjustment -- -- -- -- -- -- -- Net income -- -- -- -- -- -- -- Purchase of 17,350 common shares for treasury -- -- -- -- -- (759) -- Issuances of common shares in Dividend Reinvestment Plan 12 -- -- -- 462 -- -- Issuance of preferred shares, net of costs of $2.7 million -- -- 3,200 32 77,229 -- -- Stock option exercise, net 215 2 -- -- 4,208 (5,193) -- Dividends to common shareholders ($1.250 per share) -- -- -- -- -- -- -- Dividends to Series A preferred shareholders ($1.1875 per share) -- -- -- -- -- -- -- Dividends to Series B preferred shareholders ($0.8719 per share) -- -- -- -- -- -- -- ------ ----- ----- ---- --------- --------- --------- Balance at June 30, 2005 25,872 $ 259 5,500 $ 55 $ 703,445 $ (14,350) $ (3,525) ====== ===== ===== ==== ========= ========= =========
ACCUMULATED OTHER DISTRIBUTIONS NON-VESTED COMPREHENSIVE IN EXCESS OF SHARES INCOME NET INCOME TOTAL ---------- ------------- ------------- --------- Balance at December 31, 2004 $ (2,338) $ 7,480 $ (24,873) $ 587,340 Shares issued to Trustees -- -- -- 161 Issuance of restricted share grants (2,626) -- -- -- Amortization of restricted share grants 858 -- -- 858 Stock option expense -- -- -- 45 Foreign currency translation adjustment -- (721) -- (721) Net income -- -- 33,135 33,135 Purchase of 17,350 common shares for treasury -- -- -- (759) Issuances of common shares in Dividend Reinvestment Plan -- -- -- 462 Issuance of preferred shares, net of costs of $2.7 million -- -- -- 77,261 Stock option exercise, net -- -- -- (983) Dividends to common shareholders ($1.250 per share) -- -- (31,420) (31,420) Dividends to Series A preferred shareholders ($1.1875 per share) -- -- (2,732) (2,732) Dividends to Series B preferred shareholders ($0.8719 per share) -- -- (2,790) (2,790) --------- --------- --------- --------- Balance at June 30, 2005 $ (4,106) $ 6,759 $ (28,680) $ 659,857 ========= ========= ========= =========
4 ENTERTAINMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2005 2004 2005 2004 -------- -------- -------- -------- Net income $ 17,322 $ 11,716 $ 33,135 $ 23,045 Other comprehensive income: Foreign currency translation adjustment 408 -- (721) -- -------- -------- -------- -------- Comprensive income $ 17,730 $ 11,716 $ 32,414 $ 23,045 ======== ======== ======== ========
5 ENTERTAINMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2005 2004 --------- --------- Operating activities: Net income $ 33,135 $ 23,045 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in net income -- 919 Equity in income from joint ventures (362) (310) Depreciation and amortization 13,370 11,016 Amortization of deferred financing costs 1,536 1,530 Costs associated with loan refinancing (non-cash portion) -- 729 Non-cash compensation expense to management and trustees 1,064 787 Increase in mortgage note accrued interest receivable (474) -- Increase in other assets (1,712) (817) Increase (decrease) in accounts payable and accrued liabilities (1,840) 3,007 Increase in unearned rents 1,193 1,705 --------- --------- Net cash provided by operating activities 45,910 41,611 --------- --------- Investing activities: Acquisition of rental properties (93,324) (178,478) Net proceeds from sale of real estate and furniture, fixtures and equipment 566 -- Additions to properties under development (15,470) (24,362) Distributions from joint ventures 427 401 Proceeds from sale of equity interest in joint venture -- 8,240 Investment in secured notes receivable (37,525) (5,000) --------- --------- Net cash used in investing activities (145,326) (199,199) --------- --------- Financing activities: Proceeds from long-term debt facilities 149,000 246,609 Principal payments on long-term debt (94,981) (176,082) Deferred financing fees paid (427) (5,064) Net proceeds from issuance of common shares 462 117,082 Net proceeds from issuance of preferred shares 77,261 -- Impact of stock option exercises, net (983) -- Purchase of common shares for treasury (759) -- Distributions paid to minority interests (383) (960) Dividends paid to shareholders (33,726) (24,073) --------- --------- Net cash provided by financing activities 95,464 157,512 Effect of exchange rate changes on cash (89) -- --------- --------- Net decrease in cash and cash equivalents (4,041) (76) Cash and cash equivalents at beginning of period 11,255 37,022 --------- --------- Cash and cash equivalents at end of period $ 7,214 $ 36,946 ========= ========= Supplemental schedule of non-cash activity: Contribution of rental property to joint venture $ -- $ 24,186 Debt assumed by joint venture $ -- $ 14,583 Transfer of property under development to rental property $ 17,241 $ -- Issuance of shares to management and trustees $ 2,626 $ 2,090 Issuance of shares in acquisition of rental properties $ -- $ 27,087 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 17,194 $ 18,326 Cash paid during the period for income taxes $ 245 $ 223
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 entertainment properties including megaplex theatres and entertainment retail centers. At June 30, 2005, the Company owned 62 megaplex theatre properties, including three joint venture properties, located in 24 states and Ontario, Canada. The Company's portfolio also includes seven entertainment retail centers located in Westminster, Colorado, New Rochelle, New York, Burbank, California and Ontario, Canada, other specialty properties and land parcels leased to restaurant and retail operators adjacent to several of its theatre properties. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with 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 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 six-month period ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. The consolidated balance sheet as of December 31, 2004 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, 2004. 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 at June 30, 2005 as a result of a series of sale leaseback transactions pertaining to a number of AMC megaplex theatres. A substantial portion of the Company's revenues (approximately 57%) result from 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 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure," which provides alternative methods of accounting for stock-based compensation and amends SFAS No. 123 "Accounting for Stock-Based Compensation." The Company adopted SFAS 148 as of January 1, 2003. Prior to 2003, the Company accounted for stock options issued under its share incentive plan under the recognition and measurement provisions of APB Opinion No. 25 "Accounting for Stock Issued to Employees," and related interpretations. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123 prospectively for all awards granted, modified, or settled after January 1, 2003. Awards under the Company's plan vest either immediately or up 7 to a period of 5 years. Stock option expense for options issued after January 1, 2003 is recognized on a straight-line basis over the vesting period. The expense related to stock options included in the determination of net income for the six months ended June 30, 2005 and 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards for each year (in thousands):
SIX MONTHS ENDED JUNE 30, 2005 2004 ---------- ---------- Net income available to common shareholders, as reported $ 27,613 $ 20,314 Add: Stock option compensation expense included in reported net income 45 14 Deduct: Total stock option compensation expense determined under fair value based method for all awards (83) (62) ---------- ---------- Pro forma net income $ 27,575 $ 20,266 ========== ========== Basic earnings per share: As reported $ 1.11 $ 0.97 Pro forma $ 1.11 $ 0.97 Diluted earnings per share: As reported $ 1.09 $ 0.94 Pro forma $ 1.08 $ 0.94
SFAS No. 123 was revised in December 2004 by FASB. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123R will be effective for the Company beginning January 1, 2006. The adoption of SFAS No. 123R is not expected to have a material impact on the Company's financial statements. Restricted Shares For the six months ended June 30, 2005 and 2004, the Company issued 63,048 and 55,651, respectively, of restricted common shares as bonus and long-term incentive compensation to executives and other employees of the Company. For the six months ended June 30, 2004, the Company also issued 717 restricted common shares as retainers to trustees of the Company. No restricted common shares were issued to trustees of the Company for the six months ended June 30, 2005. Based upon the market price of the Company's common shares on the grant dates, approximately $2.6 and $2.1 million were recognized as non-vested shares issued for the six months ended June 30, 2005 and 2004, respectively. The holders of these restricted shares have voting rights and receive dividends from the date of grant. These shares vest ratably over a period of one to five years. The Company records the awards as unearned compensation when granted using the fair value of the stock at the grant date and stock compensation expense pertaining to these restricted shares is amortized on a straight line basis over the period of vesting. Total stock compensation expense related to the restricted shares recorded for the six months ended June 30, 2005 and 2004 amounted to $858 thousand and $680 thousand, respectively. At June 30, 2005 there were 140,133 non-vested restricted shares issued and outstanding. 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 June 30, 2005 and December 31, 2004 (in thousands):
JUNE 30, 2005 DECEMBER 31, 2004 ------------- ----------------- Buildings and improvements $ 1,011,784 $ 941,235 Furniture, fixtures & equipment 1,537 2,000 Land 301,630 265,276 ----------- ----------- 1,314,951 1,208,511 Accumulated depreciation (99,155) (87,102) ----------- ----------- Total $ 1,215,796 $ 1,121,409 =========== ===========
Depreciation expense on rental properties was $13.2 million and $10.9 million for the six months ended June 30, 2005 and 2004, respectively. 4. UNCONSOLIDATED REAL ESTATE JOINT VENTURES At June 30, 2005, the Company had a 20% investment interest in each of two unconsolidated real estate joint ventures, Atlantic-EPR I and Atlantic-EPR II. The Company accounts for its investment in these joint ventures under the equity method of accounting. The Company recognized income of $215 and $203 (in thousands) from its investment in the Atlantic-EPR I joint venture during the first six months of 2005 and 2004, respectively. The Company also received distributions from Atlantic-EPR I of $251 and $263 (in thousands) during the first six months of 2005 and 2004, respectively. Condensed financial information for Atlantic-EPR I is as follows as of and for the six months ended June 30, 2005 and 2004 (in thousands):
2005 2004 ------- ------ Rental properties, net $30,211 30,855 Cash 141 141 Long-term debt 16,621 16,906 Partners' equity 13,627 14,447 Rental revenue 2,068 2,030 Net income 1,018 963
The Atlantic-EPR II joint venture was formed on March 1, 2004. The Company recognized income of $147 and $107 (in thousands) from its investment in this joint venture during the first six months of 2005 and 2004, respectively. The Company also received distributions from Atlantic-EPR II of $176 and $138 (in thousands) during the first six months of 2005 and 2004, respectively. Condensed financial information for Atlantic-EPR II is as follows as of and for the six months ended June 30, 2005 and 2004 (in thousands):
2005 2004 ------- ------ Rental properties, net $23,572 24,032 Cash 5 98 Long-term debt 14,278 14,525 Partners' equity 9,218 9,428 Rental revenue 1,389 926 Net income 659 422
9 The joint venture agreements allow Atlantic to exchange up to a maximum of 10% of its ownership interest per year in Atlantic-EPR I, beginning in 2005, and in Atlantic-EPR II, beginning in 2007, for common shares of the Company or, at the discretion of the Company, the cash value of those shares as defined in the partnership agreement. 5. EARNINGS PER SHARE The following table summarizes the Company's common shares used for computation of basic and diluted earnings per share (in thousands):
THREE MONTHS ENDED JUNE 30, 2005 SIX MONTHS ENDED JUNE 30, 2005 ------------------------------------------ ------------------------------------------- INCOME SHARES PER SHARE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ ----------- ------------- ------ Basic earnings: Income available to common shareholders $14,406 24,984 $0.58 $27,613 24,949 $1.11 Effect of dilutive securities: Stock options -- 351 (0.01) -- 340 (0.01) Non-vested common share grants -- 140 -- -- 140 (0.01) ------- ------- ----- ------- ------- ----- Diluted earnings $14,406 25,475 $0.57 $27,613 25,429 $1.09 ======= ======= ===== ======= ======= =====
THREE MONTHS ENDED JUNE 30, 2004 SIX MONTHS ENDED JUNE 30, 2004 ------------------------------------------ ------------------------------------------ INCOME SHARES PER SHARE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ ----------- ------------- ------ Basic earnings: Income available to common shareholders $10,350 22,211 $0.47 $20,314 20,969 $0.97 Effect of dilutive securities: Stock options -- 352 (0.01) -- 454 (0.02) Contingent shares from conversion of minority interest 375 857 -- 750 857 -- Non-vested common share grants -- 131 -- -- 131 (0.01) ------- ------- ----- ------- ------- ----- Diluted earnings $10,725 23,551 $0.46 $21,064 22,411 $0.94 ======= ======= ===== ======= ======= =====
6. PROPERTY ACQUISITIONS On June 28, 2005, the Company completed the acquisition of a megaplex theatre property in Indianapolis, Indiana. The ShowPlace 12 is operated by Kerasotes Showplace Theatres and was acquired for a total cost (including land and building) of approximately $6.0 million. This theatre is leased under a long-term triple-net lease. During the three months ended June 30, 2005, the Company also completed development of a megaplex theatre property in Conroe, Texas. The Grand Theatre 14 is operated by Southern Theatres and was completed for a total development cost (including land and building) of approximately $9.8 million. The land was purchased in 2004 by the Company for $1.8 million. This theatre is leased under a long-term triple-net lease. 10 7. INVESTMENT IN MORTGAGE NOTE On June 1, 2005, a wholly-owned subsidiary of the Company provided a secured mortgage construction loan of $47 million Canadian (US $ 37.5 million) to Metropolis Limited Partnership (the Partnership). The Partnership was formed for the purpose of developing a 13 level entertainment 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 by the end of 2007 at a total cost of approximately $241 million Canadian, including all capitalized costs, and will contain approximately 360,000 square feet of net rentable area (excluding signage). This mortgage note receivable bears interest at 15% and is senior to all other debt and equity in the Partnership at June 30, 2005. The Partnership has a written commitment from a bank to provide a first mortgage construction loan to the Partnership of up to $107 million. The bank construction financing will be senior to the Company's mortgage note. The Company's mortgage note has a stated maturity of five years from issuance. No principal or interest payments are due prior to the end of 30 months from the date of the note. A 25% principal payment is due 30 months from the date of the note along with all accrued interest to date (defined as the "Option Due Date Amount"). The Partnership also has an option at the end of 30 months (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 will be at the end of 42 months. The Partnership can also prepay the note (in full only, including all accrued interest) at any other time with prepayment penalties as defined in the agreement. It is anticipated that permanent financing will be obtained upon project completion at the end of 30 months (November 2007) to replace the then existing construction financing. On the maturity date or any other date that the Partnership elects to prepay the note in full to the Company, the Company has the option to purchase a 50% equity interest in the Partnership or alternative joint venture vehicle that is established. The purchase price stipulated in the option is based on estimated fair market value 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 June 30, 2005 was US $38.8 million, including related accrued interest receivable of US $477 thousand. 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. 8. MORTGAGE NOTE PAYABLE On May 19, 2005, a wholly-owned subsidiary of the Company obtained a $36.0 million non-recourse mortgage loan secured by one theatre and retail mix property in Burbank, California. The loan requires monthly principal and interest payments of approximately $206 thousand. The mortgage note is a ten-year fixed rate loan that bears interest at 5.56% and is due and payable on June 6, 2015. 9. PREFERRED SHARE OFFERING On January 19, 2005, the Company issued 3.2 million 7.75% Series B cumulative redeemable preferred shares ("Series B preferred shares") in a registered public offering for net proceeds of $77.5 million, before expenses. The Company pays cumulative dividends on the Series B preferred shares from (and including) the date of original issuance in the amount of $1.9375 per share each year, which is equivalent to 7.75% of the $25 liquidation preference per share. Dividends on the Series B preferred shares are payable quarterly in arrears, and began on April 15, 2005. The Company may not redeem the Series B preferred shares before January 19, 2010, except in limited circumstances to preserve the Company's REIT status. On or after January 19, 2010, the Company may, at its option, redeem the Series B preferred shares in whole at any time or in part from time to time, by paying $25 per share, plus any accrued and unpaid dividends up to and including the date of redemption. The Series B preferred shares generally have no stated maturity, will not be subject to any sinking fund or 11 mandatory redemption, and are not convertible into any of the Company's other securities. Owners of the Series B preferred shares generally have no voting rights, except under certain dividend defaults. A portion of the proceeds from this offering was used to repay $18.8 million in mortgage notes payable on their due date of February 1, 2005. 10. COMMITMENTS AND CONTINGENCIES As of June 30, 2005, the Company had six theatre development projects under construction for which it has agreed to either finance the development costs or purchase the theatre upon completion. The properties are being developed by the prospective tenants. These theatres are expected to have a total of 95 screens and their development costs (including land) are expected to be approximately $79.0 million. Through June 30, 2005, the Company has invested $23.3 million in these projects (including land), and has commitments to fund approximately $55.7 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. 12 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 this Item and in Item I "Business - Risk Factors", in our annual report on Form 10-K for the year ended December 31, 2004 and those discussed in "Risk Factors" in our prospectus filed under Rule 424(b) of the SEC on January 12, 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 June 30, 2005, we had invested approximately $1.3 billion (before accumulated depreciation) in 62 megaplex theatre properties and various restaurant, retail and other properties located in 24 states and Ontario, Canada. As of June 30, 2005, we had invested approximately $21.1 million in development land and construction in progress for real-estate development. Also, as of June 30, 2005, we had invested approximately US $38.8 million in mortgage note financing for the development of a new entertainment retail center located in downtown Toronto, Ontario, Canada. Substantially all of our single-tenant properties are leased pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of a property, including, but not limited to, all real estate taxes, assessments and other governmental charges, insurance, utilities, repairs and maintenance. A majority of our revenues are derived from rents received or accrued under long-term, triple-net leases. Tenants at our multi-tenant properties reimburse us to defray 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 and acquiring 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 secured 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 provided mortgage note financing as described above. We intend to continue entering into some or all of these types of arrangements in the foreseeable future. Our primary challenges have been locating suitable properties, negotiating favorable lease and financing terms, and managing our portfolio as we have continued to grow. Because of our emphasis on the entertainment 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 2005. 13 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 and accounting for real estate acquisitions. 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 term of the lease. Base rent escalation in most of our leases is dependent upon increases in the Consumer Price Index (CPI) and accordingly, management does not include any future base rent escalation amounts on these leases in current revenue. Most of our leases provide for percentage rents based upon the level of sales achieved by the tenant. These percentage rents are recognized once the required sales level is achieved. Real Estate Useful Lives We are required to make subjective assessments as to the useful lives of our properties for the purpose of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on our net income. Depreciation and amortization are provided on the straight-line method over the useful lives of the assets, as follows: Buildings 40 years Tenant improvements Base term of lease or useful life, whichever is shorter Furniture, fixtures and equipment 3 to 7 years
Impairment of Real Estate Values We are required to make subjective assessments as to whether there are impairments in the value of our rental properties. These estimates of impairment may have a direct impact on our consolidated financial statements. We apply the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We assess the carrying value of our rental properties whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable. Certain factors that may occur and indicate that impairments may exist include, but are not limited to: underperformance relative to projected future operating results, tenant difficulties and significant adverse industry or market economic trends. No such indicators existed during in the first six months of 2005. If an indicator of possible impairment exists, a property is evaluated for impairment by comparing the carrying amount of the property to the estimated undiscounted future cash flows expected to be generated by the property. If the carrying amount of a property exceeds its estimated future cash flows on an undiscounted basis, an impairment charge is recognized in the amount by which the carrying amount of the property exceeds the fair value of the property. Management estimates fair value of our rental properties based on projected discounted cash flows using a discount rate determined by management to be commensurate with the risk inherent in the Company. Management did not record any impairment charges in the first six months of 2005. 14 Real Estate Acquisitions Upon acquisitions of real estate properties, we make subjective estimates of the fair value of acquired tangible assets (consisting of land, building, tenant improvements, and furniture, fixtures and equipment) and identified intangible assets and liabilities (consisting of above and below market leases, in-place leases, tenant relationships and assumed financing that is determined to be above or below market terms) in accordance with Statement of Financial Accounting Standards (SFAS) No.141, Business Combinations. We utilize methods similar to those used by independent appraisers in making these estimates. Based on these estimates, we allocate the purchase price to the applicable assets and liabilities. These estimates have a direct impact on our net income. RECENT DEVELOPMENTS On May 19, 2005, a wholly-owned subsidiary of the Company obtained a $36.0 million non-recourse mortgage loan. This loan is secured by one theatre and retail mix property in Burbank, California and requires monthly principal and interest payments of approximately $206 thousand. The mortgage note is a ten-year fixed rate loan that bears interest at 5.56% and is due and payable on June 6, 2015. As further described in Note 7 to the consolidated financial statements in this Form 10-Q, 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 center in downtown Toronto, Ontario, Canada. It is anticipated that the development will be completed by the end of 2007 at a total cost of approximately $241 million Canadian, including all capitalized costs, and will contain approximately 360,000 square feet of net rentable area (excluding signage). The expected rentable area excluding signage is approximately 70% pre-leased as of June 30, 2005. This mortgage note receivable bears interest at 15% and is senior to all other debt of and equity in the Partnership at June 30, 2005. The Partnership has a written commitment from a bank to provide a first mortgage construction loan to the Partnership of up to $107 million. The bank construction financing will be senior to our mortgage note. The mortgage note has a stated maturity of five years from issuance. A 25% principal payment is due 30 months from the date of the note along with all accrued interest to date. As further described in Note 7 to the consolidated financial statements in this Form 10-Q, the note agreement provides certain pre-payment privileges to the Partnership and also provides us with an option, at certain times as defined, to purchase a 50% equity interest in the Partnership or alternative joint venture vehicle that is established. On June 28, 2005, we completed the acquisition of a megaplex theatre property in Indianapolis, Indiana. The ShowPlace 12 is operated by Kerasotes Showplace Theatres and was acquired for a total cost (including land and building) of approximately $6.0 million. This theatre is leased under a long-term triple-net lease. During the three months ended June 30, 2005, we also completed development of a megaplex theatre property in Conroe, Texas. The Grand Theatre 14 is operated by Southern Theatres and was completed for a total development cost (including land and building) of approximately $9.8 million. We purchased the land in 2004 for $1.8 million. This theatre is leased under a long-term triple-net lease. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004 Rental revenue was $36.1 million for the three months ended June 30, 2005 compared to $31.4 million for the three months ended June 30, 2004. The $4.7 million increase resulted primarily from the property acquisitions completed in 2004 and 2005 and base rent increases on existing properties. Percentage rents of $471 thousand and $494 thousand were recognized during the three months ended June 30, 2005 and 2004, respectively. Straight line rents of $533 thousand and $600 thousand were recognized during the three months ended June 30, 2005 and 2004, respectively. 15 Tenant reimbursements totaled $3.1 million for the three months ended June 30, 2005 compared to $2.6 million for the three months ended June 30, 2004. These tenant reimbursements arise from the operations of our retail centers in Greenville, SC, Westminster, CO, Southfield, MI, Suffolk, VA, Tampa, FL, New Rochelle, NY, Burbank, CA and Ontario, Canada. The $0.5 million increase is due primarily to increases in tenant reimbursement rates and the acquisition of the retail center in Burbank, CA on March 31, 2005. Other income was $1.1 million for the three months ended June 30, 2005 compared to $23 thousand for the three months ended March 31, 2004. The increase of $1.1 million relates to revenues from a family bowling center in Westminster, Colorado opened in November 2004 and operated through a wholly-owned taxable REIT subsidiary, and to development fees received of $500 thousand during the quarter. Mortgage financing interest for the three months ended June 30, 2005 was $472 thousand and related solely to interest income from the mortgage note we entered into in June of 2005 (described in Note 7 to the consolidated financial statements in this Form 10-Q and in "Recent Developments" above). No such revenue was recognized in the second quarter of 2004. Our property operating expense totaled $3.8 million for the three months ended June 30, 2005 compared to $3.1 million for the three months ended June 30, 2004. These property operating expenses arise from the operations of our retail centers in Greenville, SC, Westminster, CO, Southfield, MI, Suffolk, VA, Tampa, FL, New Rochelle, NY, Burbank, CA and Ontario, Canada. The $0.7 million increase is due primarily to increases in property taxes and maintenance at certain of these properties and the acquisition of the retail center in Burbank, CA on March 31, 2005. Other operating expense totaled $516 thousand for the three months ended June 30, 2005 and related solely to the operations of the family bowling center in Westminster, Colorado, that is operated through a wholly-owned taxable REIT subsidiary. No such costs were incurred in the second quarter of 2004. Our general and administrative expenses totaled $1.9 million for the three months ended June 30, 2005 compared to $1.5 million for the same period in 2004. The $0.4 million increase is due primarily to the following: - An increase in franchise taxes due to an increase in the size of our real estate portfolio. - Payroll and related expenses attributable to increases in base compensation, bonus awards, and payroll taxes related to the vesting of stock grants and the exercise of stock options, and the addition of employees. - An increase in legal and accounting fees related to both the increase in the size of our operations and to compliance with the Sarbanes-Oxley Act. Costs associated with loan refinancing for the three months ended June 30, 2004 were $1.1 million. These costs related to the termination of our iStar Credit Facility and consisted of a prepayment penalty of $405 thousand and the write-off of $729 thousand of remaining unamortized financing fees. No such costs were incurred for the three months ended June 30, 2005. Our net interest expense increased by $0.2 million to $10.2 million for the three months ended June 30, 2005 from $10.0 million for the three months ended June 30, 2004. The increase in net interest expense primarily resulted from increases in long-term debt used to finance real estate acquisitions and an increase in the interest rate associated with our borrowings under our secured revolving variable rate credit facility. Depreciation and amortization expense, including amortization of non-vested shares, totaled $7.2 million for the three months ended June 30, 2005 compared to $6.3 million for the same period in 2004. The $0.9 million increase resulted primarily from the property acquisitions completed in 2005 and 2004 and the addition of employees in 2004. 16 Income from joint ventures totaled $188 thousand for the three months ended June 30, 2005 compared to $182 thousand for the same period in 2004. The increase is due to a base rent increase and an increase in tenant reimbursements for the joint venture properties. For the three months ended June 30, 2005 there were no minority interests in net income as compared to $490 thousand for the three months ended June 30, 2004. The decrease is due primarily to the conversion of the preferred interest in EPT Gulf States, LLC as of September 20, 2004 to 857,145 common shares of the Company. Preferred dividend requirements for the three months ended June 30, 2005 were $2.9 million compared to $1.4 million for the same period in 2004. The $1.5 million increase is due to the issuance of 3.2 million Series B preferred shares in January of 2005 (described in Note 9 to the consolidated financial statements in this Form 10-Q). SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004 Rental revenue was $70.3 million for the six months ended June 30, 2005 compared to $59.0 million for the six months ended June 30, 2004. The $11.3 million increase resulted primarily from the property acquisitions completed in 2004 and 2005 and base rent increases on existing properties. Percentage rents of $1.0 million and $1.2 million were recognized during the six months ended June 30, 2005 and 2004, respectively. Straight line rents of $1.0 million were recognized for both the six months ended June 30, 2005 and 2004. Tenant reimbursements totaled $6.1 million for the six months ended June 30, 2005 compared to $4.8 million for the six months ended June 30, 2004. These tenant reimbursements arise from the operations of our retail centers in Greenville, SC, Westminster, CO, Southfield, MI, Suffolk, VA, Tampa, FL, New Rochelle, NY, Burbank, CA and Ontario, Canada. The $1.3 million increase is due primarily to increases in tenant reimbursements, and the acquisitions of the retail centers in Burbank, CA on March 31, 2005 and Ontario, Canada on March 1, 2004. Other income was $1.9 million for the six months ended June 30, 2005 compared to $95 thousand for the six months ended June 30, 2004. The increase of $1.8 million relates to revenues from a family bowling center in Westminster, Colorado opened in November 2004 and operated through a wholly-owned taxable REIT subsidiary, and to development fees received of $500 thousand during the quarter. Mortgage financing interest for the six months ended June 30, 2005 was $472 thousand and related solely to interest income from the mortgage note we entered into in June of 2005 (described in Note 7 to the consolidated financial statements in this Form 10-Q and in "Recent Developments" above). No such revenue was recognized during the first six months of 2004. Our property operating expense totaled $7.6 million for the six months ended June 30, 2005 compared to $5.9 million for the six months ended June 30, 2004. These property operating expenses arise from the operations of our retail centers in Greenville, SC, Westminster, CO, Southfield, MI, Suffolk, VA, Tampa, FL, New Rochelle, NY, Burbank, CA and Ontario, Canada. The $1.7 million increase is due primarily to increases in property taxes and maintenance at certain of these properties, and the acquisitions of the retail centers in Burbank, CA on March 31, 2005 and Ontario, Canada on March 1, 2004. Other operating expense totaled $1.2 million for the six months ended June 30, 2005 and related solely to the operations of the family bowling center in Westminster, Colorado, that is operated through a wholly-owned taxable REIT subsidiary. No such costs were incurred during the first six months of 2004. Our general and administrative expenses totaled $3.2 million for the six months ended June 30, 2005 compared to $2.6 million for the same period in 2004. The $0.6 million increase is due primarily to the following: - An increase in franchise taxes due to an increase in the size of our real estate portfolio. 17 - Payroll and related expenses attributable to increases in base compensation, bonus awards, and payroll taxes related to the vesting of stock grants and the exercise of stock options, and the addition of employees. - An increase in legal and accounting fees related to both the increase in the size of our operations and to compliance with the Sarbanes-Oxley Act. Costs associated with loan refinancing for the six months ended June 30, 2004 were $1.1 million. These costs related to the termination of our iStar Credit Facility and consisted of a prepayment penalty of $405 thousand and the write-off of $729 thousand of remaining unamortized financing fees. No such costs were incurred for the six months ended June 30, 2005. Our net interest expense increased by $1.0 million to $19.8 million for the six months ended June 30, 2005 from $18.8 million for the six months ended June 30, 2004. The increase in net interest expense primarily resulted from increases in long-term debt used to finance real estate acquisitions and an increase in the interest rate associated with our borrowings under our secured revolving variable rate credit facility. Depreciation and amortization expense, including amortization of non-vested shares, totaled $14.2 million for the six months ended June 30, 2005 compared to $11.7 million for the same period in 2004. The $2.5 million increase resulted primarily from the property acquisitions completed in 2005 and 2004 and the addition of employees in 2004. Income from joint ventures totaled $362 thousand for the six months ended June 30, 2005 compared to $310 thousand for the same period in 2004. The increase is primarily due to the addition of the Atlantic-EPR II joint venture as of March 1, 2004. For the six months ended June 30, 2005 there were no minority interests in net income as compared to $919 thousand for the six months ended June 30, 2004. The decrease is due primarily to the conversion of the preferred interest in EPT Gulf States, LLC as of September 20, 2004 to 857,145 common shares of the Company. Preferred dividend requirements for the six months ended June 30, 2005 were $5.5 million compared to $2.7 million for the same period in 2004. The $2.8 million increase is due to the issuance of 3.2 million Series B preferred shares in January of 2005 (described in Note 9 to the consolidated financial statements in this Form 10-Q). LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $7.2 million at June 30, 2005. In addition, we had restricted cash of $11.7 million at June 30, 2005 required in connection with debt service, payment of real estate taxes and capital improvements. Mortgage Debt and Credit Facilities As of June 30, 2005, we had total debt outstanding of $644.9 million. All of our debt is mortgage debt secured by a substantial portion of our rental properties. As of June 30, 2005, $573.9 million of debt outstanding was fixed rate debt with a weighted average interest rate of approximately 6.4%. At June 30, 2005, we had $71.0 million in debt outstanding under our $150.0 million secured revolving variable rate credit facility that bears interest at a floating rate and is secured by sixteen theatre properties, two theatre and retail mix properties and one retail mix property. The credit facility matures in March of 2007. Our principal investing activity is the purchase and development of rental property, which is generally financed with mortgage debt and the proceeds from equity offerings. 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. 18 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 $45.9 million for the six months ended June 30, 2005 and $41.6 million for the six months ended June 30, 2004. We anticipate that our cash on hand, cash from operations, and funds available under our secured 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 six theatre projects under construction at June 30, 2005. The properties are being developed by and have been pre-leased to the prospective tenants under long-term triple-net leases. The cost of development is paid by us either in periodic draws or upon successful completion of construction. The related timing and amount of rental payments to be received by us from tenants under the leases correspond to the timing and amount of funding by us of the cost of development. These theatres will have a total of 95 screens and their total development costs (including land) will be approximately $79.0 million. Through June 30, 2005, we have invested $23.3 million in these projects (including land), and have commitments to fund an additional $55.7 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 9 to the consolidated financial statements in this Form 10-Q, we completed an offering of Series B preferred shares in January 2005, generating net proceeds (before expenses) of $77.5 million. We used proceeds from this offering to payoff $18.8 million in mortgage debt which matured on February 1, 2005. Off Balance Sheet Arrangements At June 30, 2005, we had a 20% investment interest in two unconsolidated real estate joint ventures, Atlantic-EPR I and Atlantic-EPR II, which are accounted for under the equity method of accounting. We do not anticipate any material impact on our liquidity as a result of any commitments that may arise involving those joint ventures. We recognized income of $215 thousand and $203 thousand from our investment in the Atlantic-EPR I joint venture during the first six months of 2005 and 2004, respectively. We also recognized income of $147 thousand and $107 thousand from our investment in the Atlantic-EPR II joint venture during the first six months of 2005 and 2004, respectively. 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 and six month periods ended June 30, 2005 and June 30, 2004 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2005 2004 2005 2004 ------- ------- ------- ------- Net income available to common shareholders $14,406 $10,350 $27,613 $20,314 Add: Real estate depreciation and amortization 6,751 5,906 13,212 10,919 Add: Allocated share of joint venture depreciation 61 62 120 105 ------- ------- ------- ------- Basic Funds From Operations 21,218 16,318 40,945 31,338 Add: Minority interest in net income -- 375 -- 750 ------- ------- ------- ------- Diluted Funds From Operations $21,218 $16,693 $40,945 $32,088 ======= ======= ======= ======= FFO per common share: Basic $ 0.85 $ 0.73 $ 1.64 $ 1.49 Diluted 0.83 0.71 1.61 1.43 Shares used for computation (in thousands): Basic 24,984 22,211 24,949 20,969 Diluted 25,475 23,551 25,429 22,411 Other financial information: Straight-lined rental revenue $ 533 $ 600 $ 1,045 $ 969
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS FASB Statement No. 123, Accounting for Stock-Based Compensation, was revised in December 2004 by FASB Statement No. 123R. FASB Statement No. 123R, Share Based Payment, also supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. FASB Statement No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. For EPR, FASB Statement No. 123R will be effective January 1, 2006. The adoption of FASB Statement No. 123R is not expected to have a material impact on our financial statements. 20 INFLATION Investments by EPR are financed with a combination of equity and secured mortgage indebtedness. During inflationary periods, which are generally accompanied by rising interest rates, our ability to grow may be adversely affected because the yield on new investments may increase at a slower rate than new borrowing costs. All of our megaplex theatre leases provide for base and participating rent features. To the extent inflation causes tenant revenues at our properties to increase over baseline amounts, we would participate in those revenue increases through our right to receive annual percentage rent. Our leases also generally provide for escalation in base rents in the event of increases in the Consumer Price Index, with a limit of 2% per annum, or fixed periodic increases. Our theatre leases are triple-net leases requiring the tenants to pay substantially all expenses associated with the operation of the properties, thereby minimizing our exposure to increases in costs and operating expenses resulting from inflation. A portion of our retail and restaurant leases are non-triple-net leases. These retail leases represent less than 15% of our total real estate square footage. To the extent any of those leases contain fixed expense reimbursement provisions or limitations, we may be subject to increases in costs resulting from inflation that are not fully passed through to tenants. FORWARD LOOKING INFORMATION CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION WITH THE EXCEPTION OF HISTORICAL INFORMATION, THIS 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 "RISK FACTORS" IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004 AND OUR PROSPECTUS FILED UNDER RULE 424(B) OF THE SEC ON JANUARY12, 2005. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS. 21 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 $150 million secured 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 A review and evaluation was performed by our management, including our 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 June 30, 2005, the end of the period covered by this report. 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 have been no significant changes in our internal controls subsequent to the date of their evaluation. There were no material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by us in our internal control over financial reporting. Effective January 1, 2005, we implemented a new automated lease administration system. As part of the implementation, we modified our internal control over financial reporting to align our internal controls with the new technology. This new technology improves the efficiency of our operations and further strengthens our internal control over financial reporting. 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 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 22 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: July 29, 2005 By /s/ David M. Brain David M. Brain, President - Chief Executive Officer and Trustee Dated: July 29, 2005 By /s/ Fred L. Kennon Fred L. Kennon, Vice President - Chief Financial Officer 23