EPR-3.31.13 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-13561
 
EPR PROPERTIES
(Exact name of registrant as specified in its charter)
Maryland
 
43-1790877
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
909 Walnut Street, Suite 200
Kansas City, Missouri
 
64106
(Address of principal executive offices)
 
(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  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  ¨    No  ý

At April 29, 2013, there were 47,040,204 common shares outstanding.




CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of historical information, certain statements contained or incorporated by reference herein may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as those pertaining to our acquisition or disposition of properties, our capital resources, future expenditures for development projects, and our results of operations. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of actual events. There is no assurance the events or circumstances reflected in the forward-looking statements will occur. You can identify forward-looking statements by use of words such as “will be,” “intend,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “expects,” “pipeline,” “anticipates,” “estimates,” “offers,” “plans” “would,” or other similar expressions or other comparable terms or discussions of strategy, plans or intentions in this Quarterly Report on Form 10-Q. In addition, references to our budgeted amounts and guidance are forward-looking statements.
Factors that could materially and adversely affect us include, but are not limited to, the factors listed below:
General international, national, regional and local business and economic conditions;
Continuing volatility in the financial markets;
Adverse changes in our credit ratings;
The downgrade of the U.S. Government's credit rating and any future downgrade of the U.S. Government's credit rating;
Fluctuations in interest rates;
The duration or outcome of litigation, or other factors outside of the litigation, relating to our significant investment in a planned casino and resort development which may cause the development to be indefinitely delayed or cancelled;
Defaults in the performance of lease terms by our tenants;
Defaults by our customers and counterparties on their obligations owed to us;
A borrower's bankruptcy or default;
The obsolescence of older multiplex theatres owned by some of our tenants or by any overbuilding of megaplex theatres in their markets;
Our ability to renew maturing leases with theatre tenants on terms comparable to prior leases and/or our ability to lease any re-claimed space from some of our larger theatres at economically favorable terms;
Risks of operating in the entertainment industry;
Our ability to compete effectively;
A single tenant represents a substantial portion of our lease revenues;
A single tenant leases or is the mortgagor of a substantial portion of our investments related to metropolitan ski areas and a single tenant leases a significant number of our public charter school properties;
The ability of our public charter school tenants to comply with their charters and continue to receive funding from local, state and federal governments, the approval by applicable governing authorities of substitute operators to assume control of any failed public charter schools and our ability to negotiate the terms of new leases with such substitute tenants on acceptable terms, and our ability to complete collateral substitutions as applicable;
Risks associated with use of leverage to acquire properties;
Financing arrangements that require lump-sum payments;
Our ability to raise capital;
Covenants in our debt instruments that limit our ability to take certain actions;
Risks of acquiring and developing properties and real estate companies;
The lack of diversification of our investment portfolio;
Our continued qualification as a real estate investment trust for U.S. federal income tax purposes ("REIT");
The ability of our subsidiaries to satisfy their obligations;
Financing arrangements that expose us to funding or purchase risks;
We have a limited number of employees and the loss of personnel could harm operations;
Fluctuations in the value of real estate income and investments;
Risks relating to real estate ownership, leasing and development, for example local conditions such as an

i


oversupply of space or a reduction in demand for real estate in the area, competition from other available space, whether tenants and users such as customers of our tenants consider a property attractive, changes in real estate taxes and other expenses, changes in market rental rates, the timing and costs associated with property improvements and rentals, changes in taxation or zoning laws or other governmental regulation, whether we are able to pass some or all of any increased operating costs through to tenants, and how well we manage our properties;
Our ability to secure adequate insurance and risk of potential uninsured losses, including from natural disasters;
Risks involved in joint ventures;
Risks in leasing multi-tenant properties;
A failure to comply with the Americans with Disabilities Act or other laws;
Risks of environmental liability;
Our real estate investments are relatively illiquid;
We own assets in foreign countries;
Risks associated with owning, operating or financing properties for which the tenant's, mortgagor's or our operations may be impacted by weather conditions and climate change;
Risks associated with the ownership of vineyards and wineries;
Risks associated with security breaches and other disruptions;
Our ability to pay dividends in cash or at current rates;
Fluctuations in the market prices for our shares;
Certain limits on changes in control imposed under law and by our Declaration of Trust and Bylaws;
Policy changes obtained without the approval of our shareholders;
Equity issuances could dilute the value of our shares;
Future offerings of debt or equity securities, which may rank senior to our common shares;
Risks associated with changes in the Canadian exchange rate; and
Changes in laws and regulations, including tax laws and regulations.
Our forward-looking statements represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. For further discussion of these factors see Item 1A - "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission (“SEC”) on February 27, 2013.
For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference herein. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.



ii


TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
Financial Statements
 
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
 
Controls and Procedures
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
Legal Proceedings
 
Item 1A.
 
Risk Factors
 
Item 2.
 
Unregistered Sale of Equity Securities and Use of Proceeds
 
Item 3.
 
Defaults Upon Senior Securities
 
Item 4.
 
Mine Safety Disclosures
 
Item 5.
 
Other Information
 
Item 6.
 
Exhibits

iii


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EPR PROPERTIES
Consolidated Balance Sheets
(Dollars in thousands except share data)
 
March 31, 2013
 
December 31, 2012
 
(unaudited)
 
 
Assets
 
 
 
Rental properties, net of accumulated depreciation of $383,332 and $375,684 at March 31, 2013 and December 31, 2012, respectively
$
1,858,204

 
$
1,885,093

Rental properties held for sale, net
2,788

 
2,788

Land held for development
197,740

 
196,177

Property under development
38,369

 
29,376

Mortgage notes and related accrued interest receivable
468,557

 
455,752

Investment in a direct financing lease, net
235,302

 
234,089

Investment in joint ventures
12,287

 
11,971

Cash and cash equivalents
11,763

 
10,664

Restricted cash
32,614

 
23,991

Deferred financing costs, net
18,708

 
19,679

Accounts receivable, net
38,246

 
38,738

Other assets
37,214

 
38,412

Total assets
$
2,951,792

 
$
2,946,730

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$
47,798

 
$
65,481

Common dividends payable
37,161

 
35,165

Preferred dividends payable
5,952

 
6,021

Unearned rents and interest
19,984

 
11,333

Long-term debt
1,383,392

 
1,368,832

Total liabilities
1,494,287

 
1,486,832

Equity:
 
 
 
Common Shares, $.01 par value; 75,000,000 shares authorized; and 48,729,149 and 48,454,181 shares issued at March 31, 2013 and December 31, 2012, respectively
487

 
484

Preferred Shares, $.01 par value; 25,000,000 shares authorized:
 
 
 
5,400,000 Series C convertible shares issued at March 31, 2013 and December 31, 2012; liquidation preference of $135,000,000
54

 
54

3,450,000 Series E convertible shares issued at March 31, 2013 and December 31, 2012; liquidation preference of $86,250,000
35

 
35

5,000,000 Series F shares issued at March 31, 2013 and December 31, 2012; liquidation preference of $125,000,000
50

 
50

Additional paid-in-capital
1,775,166

 
1,769,227

Treasury shares at cost: 1,690,060 and 1,566,780 common shares at March 31, 2013 and December 31, 2012, respectively
(61,227
)
 
(55,308
)
Accumulated other comprehensive income
20,114

 
20,622

Distributions in excess of net income
(277,551
)
 
(275,643
)
EPR Properties shareholders’ equity
1,457,128

 
1,459,521

Noncontrolling interests
377

 
377

Equity
$
1,457,505

 
$
1,459,898

Total liabilities and equity
$
2,951,792

 
$
2,946,730

See accompanying notes to consolidated financial statements.

1


EPR PROPERTIES
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands except per share data)
 
Three Months Ended March 31,
 
 
2013
 
2012
 
Rental revenue
$
60,787

 
$
57,258

 
Tenant reimbursements
4,744

 
4,822

 
Other income
24

 
25

 
Mortgage and other financing income
17,795

 
14,674

 
Total revenue
83,350

 
76,779

 
Property operating expense
7,005

 
6,374

 
Other expense
194

 
350

 
General and administrative expense
6,652

 
6,467

 
Gain on early extinguishment of debt
(4,539
)
 

 
Interest expense, net
19,989

 
18,141

 
Transaction costs
318

 
158

 
Impairment charges

 
3,998

 
Depreciation and amortization
13,438

 
11,740

 
Income before equity in income from joint ventures and discontinued operations
40,293

 
29,551

 
Equity in income from joint ventures
351

 
47

 
Income from continuing operations
$
40,644

 
$
29,598

 
Discontinued operations:
 
 
 
 
Income (loss) from discontinued operations
(3
)
 
355

 
Impairment charges

 
(8,845
)
 
Gain on sale or acquisition of real estate
565

 
282

 
Net income
41,206

 
21,390

 
Add: Net income attributable to noncontrolling interests

 
(18
)
 
Net income attributable to EPR Properties
41,206

 
21,372

 
Preferred dividend requirements
(5,952
)
 
(6,001
)
 
Net income available to common shareholders of EPR Properties
$
35,254

 
$
15,371

 
Per share data attributable to EPR Properties common shareholders:
 
 
 
 
Basic earnings per share data:
 
 
 
 
Income from continuing operations
$
0.74

 
$
0.51

 
Income (loss) from discontinued operations
0.01

 
(0.18
)
 
Net income available to common shareholders
$
0.75

 
$
0.33

 
Diluted earnings per share data:
 
 
 
 
Income from continuing operations
$
0.74

 
$
0.50

 
Income (loss) from discontinued operations
0.01

 
(0.17
)
 
Net income available to common shareholders
$
0.75

 
$
0.33

 
Shares used for computation (in thousands):
 
 
 
 
Basic
46,854

 
46,677

 
Diluted
47,047

 
46,945

 
See accompanying notes to consolidated financial statements.

2


EPR PROPERTIES
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
 
Three Months Ended March 31,
 
 
2013
 
2012
 
Net income
$
41,206

 
$
21,390

 
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation adjustment
(3,004
)
 
2,786

 
Change in unrealized gain (loss) on derivatives
2,496

 
(2,488
)
 
Comprehensive income
40,698

 
21,688

 
Comprehensive income attributable to the noncontrolling interests

 
(18
)
 
Comprehensive income attributable to EPR Properties
$
40,698

 
$
21,670

 
See accompanying notes to consolidated financial statements.

3





EPR PROPERTIES
Consolidated Statements of Changes in Equity
Three Months Ended March 31, 2013
(Unaudited)
(Dollars in thousands)
 
EPR Properties Shareholders’ Equity
 
 
 
 
 
Common Stock
 
Preferred Stock
 
Additional
paid-in capital
 
Treasury
shares
 
Accumulated
other
comprehensive
income
 
Distributions
in excess of
net income
 
Noncontrolling
Interests
 
Total
 
Shares
 
Par
 
Shares
 
Par
 
 
Balance at December 31, 2012
48,454,181

 
$
484

 
13,850,000

 
$
139

 
$
1,769,227

 
$
(55,308
)
 
$
20,622

 
$
(275,643
)
 
$
377

 
$
1,459,898

Issuance of nonvested shares, net
196,928

 
2

 

 

 
2,588

 
(3,425
)
 

 

 

 
(835
)
Amortization of nonvested shares

 

 

 

 
1,204

 

 

 

 

 
1,204

Share option expense

 

 

 

 
222

 

 

 

 

 
222

Foreign currency translation adjustment

 

 

 

 

 

 
(3,004
)
 

 

 
(3,004
)
Change in unrealized gain/loss on derivatives

 

 

 

 

 

 
2,496

 

 

 
2,496

Net income

 

 

 

 

 

 

 
41,206

 

 
41,206

Issuances of common shares
2,641

 

 

 

 
124

 

 

 

 

 
124

Stock option exercises, net
75,399

 
1

 

 

 
1,801

 
(2,494
)
 

 

 

 
(692
)
Dividends to common and preferred shareholders

 

 

 

 

 

 

 
(43,114
)
 

 
(43,114
)
Balance at March 31, 2013
48,729,149

 
$
487

 
13,850,000

 
$
139

 
$
1,775,166

 
$
(61,227
)
 
$
20,114

 
$
(277,551
)
 
$
377

 
$
1,457,505


See accompanying notes to consolidated financial statements.

4


EPR PROPERTIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 
Three Months Ended March 31,
 
2013
 
2012
Operating activities:
 
 
 
Net income
$
41,206

 
$
21,390

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on early extinguishment of debt
(4,539
)
 

Non-cash impairment charges

 
3,998

Loss (income) from discontinued operations
(562
)
 
8,208

Equity in income from joint ventures
(351
)
 
(47
)
Distributions from joint ventures
223

 
354

Depreciation and amortization
13,438

 
11,740

Amortization of deferred financing costs
999

 
1,085

Share-based compensation expense to management and Trustees
1,548

 
1,464

Decrease in restricted cash
2,946

 
1,450

Increase in mortgage notes and related accrued interest receivable
(36
)
 
(13
)
Increase in accounts receivable, net
(1,426
)
 
(232
)
Increase in direct financing lease receivable
(1,212
)
 
(1,256
)
Decrease (increase) in other assets
139

 
(2,523
)
Decrease in accounts payable and accrued liabilities
(10,451
)
 
(6,768
)
Increase (decrease) in unearned rents and interest
(3,072
)
 
2,628

Net operating cash provided by continuing operations
38,850

 
41,478

Net operating cash provided by discontinued operations
1,322

 
481

Net cash provided by operating activities
40,172

 
41,959

Investing activities:
 
 
 
Acquisition of rental properties and other assets
(8,174
)
 
(31,507
)
Investment in unconsolidated joint ventures
(433
)
 
(442
)
Investment in mortgage notes receivable
(12,769
)
 
(24,451
)
Additions to properties under development
(17,719
)
 
(13,672
)
Net cash used by investing activities of continuing operations
(39,095
)
 
(70,072
)
Net proceeds from sale of real estate from discontinued operations
24,146

 
282

Net cash used by investing activities
(14,949
)
 
(69,790
)
Financing activities:
 
 
 
Proceeds from long-term debt facilities
70,000

 
320,000

Principal payments on long-term debt
(48,950
)
 
(251,328
)
Deferred financing fees paid
(67
)
 
(1,852
)
Net proceeds from issuance of common shares
84

 
56

Impact of stock option exercises, net
(692
)
 
(480
)
Purchase of common shares for treasury
(3,245
)
 
(3,209
)
Dividends paid to shareholders
(41,146
)
 
(38,681
)
Net cash provided (used) by financing activities
(24,016
)
 
24,506

Effect of exchange rate changes on cash
(108
)
 
174

Net increase (decrease) in cash and cash equivalents
1,099

 
(3,151
)
Cash and cash equivalents at beginning of the period
10,664

 
14,625

Cash and cash equivalents at end of the period
$
11,763

 
$
11,474

Supplemental information continued on next page.
 
 
 

5


EPR PROPERTIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Continued from previous page.
 
Three Months Ended March 31,
 
2013
 
2012
Supplemental schedule of non-cash activity:
 
 
 
Transfer of property under development to rental property
$
7,151

 
$
1,038

Issuance of nonvested shares and restricted share units at fair value, including nonvested shares issued for payment of bonuses
$
9,373

 
$
6,694

Conversion of equity to mortgage note receivable related to Atlantic-EPR I
$

 
$
14,852

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the year for interest
$
29,352

 
$
21,845

Cash paid during the year for income taxes
$
221

 
$
197

See accompanying notes to consolidated financial statements.

6



EPR PROPERTIES
Notes to Consolidated Financial Statements (Unaudited)


1. Organization

Description of Business
EPR Properties (the Company) is a specialty real estate investment trust (REIT) organized on August 29, 1997 in Maryland. Effective November 12, 2012, the Company updated its name from Entertainment Properties Trust to EPR Properties. The Company develops, owns, leases and finances properties in select market segments primarily related to entertainment, education and recreation. The Company’s properties are located in the United States and Canada.

2. Summary of Significant Accounting Policies

Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. In addition, operating results for the three month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

The Company consolidates certain entities if it is deemed to be the primary beneficiary in a variable interest entity (VIE), as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic on Consolidation. The Topic on Consolidation requires the consolidation of VIEs in which an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. This topic requires an ongoing reassessment of and eliminates the quantitative approach previously required for determining whether a company is the primary beneficiary and requires enhanced disclosures on variable interest entities.  The equity method of accounting is applied to entities in which the Company is not the primary beneficiary as defined in the Consolidation Topic of the FASB ASC, or does not have effective control, but can exercise influence over the entity with respect to its operations and major decisions.

The Company reports its noncontrolling interests as required by the Consolidation Topic of the FASB ASC. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. The ownership interests in the subsidiary that are held by owners other than the parent are noncontrolling interests. Such noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company's equity. On the consolidated statements of income, revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Company and noncontrolling interests. Consolidated statements of changes in shareholders' equity are included for both quarterly and annual financial statements, including beginning balances, activity for the period and ending balances for equity, noncontrolling interests and total equity. The Company does not have any redeemable noncontrolling interests under the scope of the Distinguishing Liabilities from Equity guidance of the FASB ASC.

The consolidated balance sheet as of December 31, 2012 has been derived from the audited consolidated balance sheet at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Comission (SEC) on February 27, 2013.




7


Operating Segments
For financial reporting purposes, the Company groups its investments into four reportable operating segments: entertainment, education, recreation and other. See Note 16 for financial information related to these operating segments.

Rental Properties
Rental properties are carried at cost less accumulated depreciation. Costs incurred for the acquisition and development of the properties are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which generally are estimated to be 40 years for buildings and 3 to 25 years for furniture, fixtures and equipment. Tenant improvements, including allowances, are depreciated over the shorter of the base term of the lease or the estimated useful life. Expenditures for ordinary maintenance and repairs are charged to operations in the period incurred. Significant renovations and improvements which improve or extend the useful life of the asset are capitalized and depreciated over their estimated useful life.

Management reviews a property for impairment whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. The review of recoverability is based on an estimate of undiscounted future cash flows expected to result from its use and eventual disposition. If impairment exists due to the inability to recover the carrying value of the property, an impairment loss is recorded to the extent that the carrying value of the property exceeds its estimated fair value.

The Company evaluates the held-for-sale classification of its real estate as of the end of each quarter. Assets that are classified as held for sale are recorded at the lower of their carrying amount or fair value less costs to sell. Assets are generally classified as held for sale once management has initiated an active program to market them for sale and has received a firm purchase commitment that is expected to close within one year. The results of operations of these real estate properties are reflected as discontinued operations in all periods reported. On occasion, the Company will receive unsolicited offers from third parties to buy individual Company properties. Under these circumstances, the Company will classify the properties as held for sale when a sales contract is executed with no contingencies and the prospective buyer has funds at risk to ensure performance.

Allowance for Doubtful Accounts
The Company makes quarterly estimates of the collectability of its accounts receivable related to base rents, tenant escalations (straight-line rents), reimbursements and other revenue or income. The Company specifically analyzes trends in accounts receivable, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of its allowance for doubtful accounts. When evaluating customer creditworthiness, management reviews the periodic financial statements for significant tenants and specifically evaluates the strength and material changes in net operating income, coverage ratios, leverage and other factors to assess the tenant's credit quality. In addition, when customers are in bankruptcy, the Company makes estimates of the expected recovery of pre-petition administrative and damage claims. These estimates have a direct impact on the Company's net income.

Revenue Recognition
Rents that are fixed and determinable are recognized on a straight-line basis over the minimum terms of the leases. Base rent escalation on leases that are dependent upon increases in the Consumer Price Index (CPI) is recognized when known. In addition, most of the Company's tenants are subject to additional rents if gross revenues of the properties exceed certain thresholds defined in the lease agreements (percentage rents). Percentage rents as well as participating interest for those mortgage agreements that contain similar such clauses are recognized at the time when specific triggering events occur as provided by the lease or mortgage agreements. Rental revenue included percentage rents of $0.4 million and $0.5 million for the three months ended March 31, 2013 and 2012, respectively. Lease termination fees are recognized when the related leases are canceled and the Company has no obligation to provide services to such former tenants. No termination fees were recognized during the three months ended March 31, 2013 and 2012.

Direct financing lease income is recognized on the effective interest method to produce a level yield on funds not yet recovered. Estimated unguaranteed residual values at the date of lease inception represent management's initial estimates of fair value of the leased assets at the expiration of the lease, not to exceed original cost. Significant assumptions used in estimating residual values include estimated net cash flows over the remaining lease term and expected future real

8


estate values. The Company evaluates on an annual basis (or more frequently if necessary) the collectability of its direct financing lease receivable and unguaranteed residual value to determine whether they are impaired. A direct financing lease receivable is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a direct financing lease receivable is considered to be impaired, the amount of loss is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the direct financing lease receivable's effective interest rate or to the fair value of the underlying collateral, less costs to sell, if such receivable is collateralized.

Mortgage Notes and Other Notes Receivable
Mortgage notes and other notes receivable, including related accrued interest receivable, consist of loans originated by the Company and the related accrued and unpaid interest income as of the balance sheet date. Mortgage notes and other notes receivable are initially recorded at the amount advanced to the borrower and the Company defers certain loan origination and commitment fees, net of certain origination costs, and amortizes them over the term of the related loan. Interest income on performing loans is accrued as earned. The Company evaluates the collectability of both interest and principal of each of its loans to determine whether it is impaired. A loan is considered to be impaired when, based on current information and events, the Company determines that it is probable that it will be unable to collect all amounts due according to the existing contractual terms. An insignificant delay or shortfall in amounts of payments does not necessarily result in the loan being identified as impaired. When a loan is considered to be impaired, the amount of loss, if any, is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the loan’s effective interest rate or to the fair value of the Company’s interest in the underlying collateral, less costs to sell, if the loan is collateral dependent. For impaired loans, interest income is recognized on a cash basis, unless the Company determines based on the loan to estimated fair value ratio the loan should be on the cost recovery method, and any cash payments received would then be reflected as a reduction of principal. Interest income recognition is recommenced if and when the impaired loan becomes contractually current and performance is demonstrated to be resumed.

Concentrations of Risk
American Multi-Cinema, Inc. (AMC) was the lessee of a substantial portion (31%) of the megaplex theatre rental properties held by the Company (including joint venture properties) at March 31, 2013 as a result of a series of sale leaseback transactions pertaining to AMC megaplex theatres. A substantial portion of the Company’s total revenues (approximately $21.6 million or 26% and $25.7 million or 33%, for the three months ended March 31, 2013 and 2012, respectively) result from the revenue from AMC under the leases, or from its parent, AMC Entertainment, Inc. (AMCE), as the guarantor of AMC’s obligations under the leases. On August 30, 2012, Dalian Wanda Group Co., Ltd. (Wanda) announced that it completed its acquisition of AMC Entertainment Holdings, Inc., the parent of AMCE (AMCE Holdings), in a transaction valued at $2.7 billion. Upon completion of the acquisition, AMCE Holdings became a wholly-owned subsidiary of Wanda and transitioned their year-end to a calendar year-end as of December 31, 2012. AMCE publicly reported total assets of $4.3 billion and $3.6 billion and total stockholders' equity of $774.1 million and $154.3 million at December 31, 2012 and March 29, 2012, respectively. Additionally, AMCE publicly reported total liabilities of $3.5 billion at both December 31, 2012 and March 29, 2012. AMCE publicly reported net earnings of $57.3 million for the transition period beginning on March 30, 2012 and ending December 31, 2012, a net loss of $82.0 million for the fifty-two weeks ended March 29, 2012 and a net loss of $122.9 million for the fifty-two weeks ended March 31, 2011. AMCE has publicly held debt and the foregoing financial information was reported in its consolidated financial information which is publicly available.

For the three months ended March 31, 2013 and 2012, approximately $10.7 million or 12.8%, and $10.9 million or 14%, respectively, of total revenue was derived from the Company's four entertainment retail centers in Ontario, Canada. The Company's wholly owned subsidiaries that hold the four Canadian entertainment retail centers and third-party debt represent approximately $144.7 million or 10%, and $147.3 million or 10%, of the Company's net assets as of March 31, 2013 and December 31, 2012, respectively.
 
Share-Based Compensation
Share-based compensation to employees of the Company is granted pursuant to the Company's Annual Incentive Program and Long-Term Incentive Plan. Share-based compensation to non-employee Trustees of the Company is

9


granted pursuant to the Company's Trustee compensation program and shares are issued under the 2007 Equity Incentive Plan.

Share based compensation expense consists of share option expense, amortization of nonvested share grants, and amortization of share units issued to non-employee Trustees for payment of their annual retainers. Share based compensation is included in general and administrative expense in the accompanying consolidated statements of income, and totaled $1.5 million for both the three months ended March 31, 2013 and 2012.

Share Options
Share options are granted to employees pursuant to the Long-Term Incentive Plan and to non-employee Trustees for their service to the Company. The fair value of share options granted is estimated at the date of grant using the Black-Scholes option pricing model. Share options granted to employees vest over a period of four years and share option expense for these options is recognized on a straight-line basis over the vesting period. Share options granted to non-employee Trustees vest immediately but may not be exercised for a period of one year from the grant date. Share option expense for non-employee Trustees is recognized on a straight-line basis over the year of service by the non-employee Trustees. Total expense recognized related to share options was $222 thousand and $256 thousand for the three months ended March 31, 2013 and 2012, respectively.

Nonvested Shares Issued to Employees
The Company grants nonvested shares to employees pursuant to both the Annual Incentive Program and the Long-Term Incentive Plan. The Company amortizes the expense related to the nonvested shares awarded to employees under the Long-Term Incentive Plan and the premium awarded under the nonvested share alternative of the Annual Incentive Program on a straight-line basis over the future vesting period (three to four years). Total expense recognized related to all nonvested shares was $1.2 million and $1.1 million for the three months ended March 31, 2013 and 2012, respectively.

Restricted Share Units Issued to Non-Employee Trustees
The Company issues restricted share units to non-employee Trustees for payment of their annual retainers. The fair value of the share units granted was based on the share price at the date of grant. The share units vest upon the earlier of the day preceding the next annual meeting of shareholders or a change of control. The settlement date for the shares is selected by the non-employee Trustee, and ranges from one year from the grant date to upon termination of service. This expense is amortized by the Company on a straight-line basis over the year of service by the non-employee Trustees. Total expense recognized related to shares issued to non-employee Trustees was $122 thousand, and $126 thousand for the three months ended March 31, 2013 and 2012, respectively.

Derivative Instruments
The Company has acquired certain derivative instruments to reduce exposure to fluctuations in foreign currency exchange rates and variable interest rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. These derivatives consist of foreign currency forward contracts, cross currency swaps and interest rate swaps.

The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

10



The Company has made an accounting policy election under FASB ASU 2011-04 (Amendments to ASC 820) to use the exception in ASC 820-10-35-18D (commonly referred to as the “portfolio exception”) with respect to measuring counterparty credit risk for derivative instruments, consistent with the guidance in ASC 820-10-35-18G. The Company further documents that it meets the criteria for the exception in ASC 820-10-35-18E.

Reclassifications
Certain reclassifications have been made to the prior period amounts to conform to the current period presentation primarily for asset groups that qualify for presentation as discontinued operations.

3. Rental Properties
The following table summarizes the carrying amounts of rental properties as of March 31, 2013 and December 31, 2012 (in thousands):
 
March 31, 2013
 
December 31, 2012
Buildings and improvements
$
1,724,248

 
$
1,734,300

Furniture, fixtures & equipment
29,839

 
34,028

Land
487,449

 
492,449

 
2,241,536

 
2,260,777

Accumulated depreciation
(383,332
)
 
(375,684
)
Total
$
1,858,204

 
$
1,885,093

Depreciation expense on rental properties was $12.6 million and $11.0 million for the three months ended March 31, 2013 and 2012, respectively.

4. Investments and Dispositions

The Company's investment spending during the three months ended March 31, 2013 totaled approximately $38.7 million, and included investments in each of its four operating segments.

Entertainment investment spending during the three months ended March 31, 2013 totaled $14.7 million, and related primarily to investments in build-to-suit construction of six megaplex theatres and one family entertainment center that are subject to long-term triple net leases or long-term mortgage agreements.

Education investment spending during the three months ended March 31, 2013 totaled $15.1 million, and related to investments in build-to-suit construction of five public charter schools and an acquisition of an early childhood education center located in Peoria, Arizona that are subject to long-term triple net leases or long-term mortgage agreements.

Recreation investment spending during the three months ended March 31, 2013 totaled $7.4 million, and related to fundings under the Company's mortgage notes for improvements at existing ski and water-park properties. In addition, the Company's recreation investment spending related to build-to-suit construction of three TopGolf golf entertainment facilities, as well as funding improvements at the Company's ski property located in Maryland.

Other investment spending during the three months ended March 31, 2013 totaled $1.5 million and related to the land held for development in Sullivan County, New York.

On March 18, 2013, the Company sold a winery and a portion of related vineyards located in Sonoma County, California for proceeds of $24.1 million and recognized a gain of $0.6 million during the three months ended March 31, 2013.

Additionally, during the three months ended March 31, 2013, the Company extended its mortgage loan agreement with Peak Resorts, Inc. from April 1, 2013 to April 1, 2016. The loan is secured by 696 acres of development land at Mt. Snow.

11


5. Accounts Receivable, Net
The following table summarizes the carrying amounts of accounts receivable, net as of March 31, 2013 and December 31, 2012 (in thousands):
 
March 31,
2013
 
December 31,
2012
Receivable from tenants
$
9,274

 
$
9,379

Receivable from non-tenants
484

 
1,527

Receivable from Canada Revenue Agency
996

 
793

Straight-line rent receivable
31,796

 
30,891

Allowance for doubtful accounts
(4,304
)
 
(3,852
)
Total
$
38,246

 
$
38,738

 
6. Investment in a Direct Financing Lease

The Company’s investment in a direct financing lease relates to the Company’s master lease of 26 public charter school properties as of March 31, 2013 and December 31, 2012, with affiliates of Imagine Schools, Inc. (Imagine). Investment in a direct financing lease, net represents estimated unguaranteed residual values of leased assets and net unpaid rentals, less related deferred income. The following table summarizes the carrying amounts of investment in a direct financing lease, net as of March 31, 2013 and December 31, 2012 (in thousands):

 
 
March 31, 2013
 
December 31, 2012
Total minimum lease payments receivable
$
642,798

 
$
648,632

Estimated unguaranteed residual value of leased assets
211,944

 
211,944

Less deferred income (1)
(619,440
)
 
(626,487
)
Investment in a direct financing lease, net
$
235,302

 
$
234,089

 
 
 
 
(1) Deferred income is net of $1.7 million of initial direct costs at March 31, 2013 and December 31, 2012, respectively.

Additionally, the Company has determined that no allowance for losses was necessary at March 31, 2013 and December 31, 2012.

The Company’s direct financing lease has expiration dates ranging from approximately 19 to 22 years. Future minimum rentals receivable on this direct financing lease at March 31, 2013 are as follows (in thousands): 
 
Amount
Year:
 
2013
$
17,742

2014
24,283

2015
25,011

2016
25,762

2017
26,535

Thereafter
523,465

Total
$
642,798



12


7. Unconsolidated Real Estate Joint Ventures

At March 31, 2013, the Company had a 44.4% and 30.7% investment interest in two unconsolidated real estate joint ventures, Atlantic-EPR I and Atlantic-EPR II, respectively. The Company accounts for its investment in these joint ventures under the equity method of accounting.

The Company recognized income of $183 thousand and $49 thousand during the three months ended March 31, 2013 and 2012, respectively, from its equity investments in the Atlantic-EPR I and Atlantic-EPR II joint ventures. The Company also received distributions from Atlantic-EPR I and Atlantic-EPR II of $223 thousand and $354 thousand on its equity investment during the three months ended March 31, 2013 and 2012, respectively. Condensed consolidated financial information for Atlantic-EPR I and Atlantic-EPR II is as follows as of and for the three months ended March 31, 2013 and 2012 (in thousands):
 
2013
 
2012
Rental properties, net
$
45,219

 
$
46,324

Cash
281

 
1,397

Mortgage note payable (1)
11,720

 
12,126

Mortgage note payable to EPR Properties (2)
19,244

 
14,852

Partners’ equity
18,594

 
19,127

Rental revenue
1,448

 
1,400

Net income
520

 
348

(1) Atlantic-EPR II mortgage note payable is due September 1, 2013
(2) Atlantic-EPR I mortgage note payable to EPR Properties is due January 31, 2018
 
The partnership agreements for Atlantic-EPR I and Atlantic-EPR II allow the Company’s partner, Atlantic of Hamburg, Germany (Atlantic), to exchange up to a maximum of 10% of its ownership interest per year in each of the joint ventures for common shares of the Company or, at the Company's discretion, the cash value of those shares as defined in each of the partnership agreements. During 2012, the Company paid Atlantic cash of $1.3 million and $490 thousand in exchange for additional ownership of 6.0% and 3.8% for Atlantic-EPR I and Atlantic-EPR II, respectively. During 2013, the Company has paid Atlantic cash of $463 thousand and $158 thousand in exchange for additional ownership of 2.3% and 1.1% for Atlantic-EPR I and Atlantic-EPR II, respectively. These exchanges did not impact total partners’ equity in either Atlantic-EPR I or Atlantic-EPR II.

In addition, as of March 31, 2013 and December 31, 2012, the Company had invested $4.9 million and $4.7 million, respectively, in unconsolidated joint ventures for three theatre projects located in China. The Company recognized income of $168 thousand and a loss of $2 thousand from its investment in these joint ventures for the three months ended March 31, 2013 and 2012, respectively.

8. Long-Term Debt

On March 4, 2013, the Company entered into a Discounted Payoff and Settlement Agreement (the Agreement) regarding one of its loan agreements secured by a theatre property located in Omaha, Nebraska. Pursuant to the Agreement, the Company made a cash payment of $9.7 million that included a forfeited restricted cash account with a balance of $1.2 million in full satisfaction of the loan. Accordingly, the Company recorded a gain on early extinguishment of debt of $4.5 million during the three months ended March 31, 2013.

On March 5, 2013, the Company added to its unsecured term loan facility, increasing the size of the facility from $240.0 million to $255.0 million. The loan matures on January 5, 2017 and bears interest based on a grid related to the Company's senior unsecured credit ratings, which at closing was LIBOR plus 175 basis points. The net proceeds from this increased term loan facility were primarily utilized to pay down the Company's unsecured revolving credit facility. At March 31, 2013, the Company had $59.0 million debt outstanding under its $400.0 million unsecured revolving credit facility.


13


9. Variable Interest Entities

The Company’s variable interest in VIEs currently are in the form of equity ownership and loans provided by the Company to a VIE or other partner. The Company examines specific criteria and uses its judgment when determining if the Company is the primary beneficiary of a VIE. Factors considered in determining whether the Company is the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, and level of economic disproportionality between the Company and the other partner(s).

Consolidated VIEs
As of March 31, 2013, the Company has invested in one 50% joint venture which is a VIE. This joint venture did not have any significant assets and liabilities at March 31, 2013 and was established to explore certain investment opportunities.

Unconsolidated VIE
At March 31, 2013, the Company’s recorded investment in SVVI, a VIE that is unconsolidated, was $180.6 million. The Company’s maximum exposure to loss associated with SVVI is limited to the Company’s outstanding mortgage note and related accrued interest receivable of $180.6 million.

While this entity is a VIE, the Company has determined that the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance is not held by the Company. Additionally, the Company does not have the right to receive benefits (beyond its interest payments per the note agreement) and does not have the obligation to absorb losses of SVVI, as its equity at risk is limited to the amount invested in the note.

10. Derivative Instruments

Risk Management Objective of Using Derivatives
The Company is exposed to the effect of changes in foreign currency exchange rates and interest rates on its LIBOR based borrowings. The Company limits this risk by following established risk management policies and procedures including the use of derivatives. The Company’s objective in using derivatives is to add stability to reported earnings and to manage its exposure to foreign exchange and interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps, cross currency swaps and foreign currency forwards.

Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements on its LIBOR based borrowings. To accomplish this objective, the Company currently uses interest rate swaps as its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
 
On January 5, 2012, the Company entered into three interest rate swap agreements to fix the interest rate on a $240.0 million unsecured term loan facility that closed on the same day. These agreements have a combined outstanding notional amount of $240.0 million, a termination date of January 5, 2016 and a fixed rate of 2.66%.

The effective portion of changes in the fair value of interest rate derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (AOCI) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2013 and 2012, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. No hedge ineffectiveness on cash flow hedges was recognized during the three months ended March 31, 2013 and 2012.


14


Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of March 31, 2013, the Company estimates that during the twelve months ending March 31, 2014, $1.6 million will be reclassified from AOCI to interest expense.

Cash Flow Hedges of Foreign Exchange Risk
The Company is exposed to foreign currency exchange risk against its functional currency, the U.S. dollar, on its four Canadian properties. The Company uses cross currency swaps and foreign currency forwards to mitigate its exposure to fluctuations in the CAD to U.S. dollar exchange rate on its Canadian properties. These foreign currency derivatives should hedge a significant portion of the Company's expected CAD denominated cash flow of the Canadian properties through February 2014 as their impact on the Company's cash flow when settled should move in the opposite direction of the exchange rates utilized to translate revenues and expenses of these properties.

At March 31, 2013, the Company’s cross-currency swaps had a fixed original notional value of $76.0 million CAD and $71.5 million U.S. The net effect of these swaps is to lock in an exchange rate of $1.05 CAD per U.S. dollar on approximately $13.0 million of annual CAD denominated cash flows on the properties through February 2014.

The Company entered into foreign currency forward agreements to further hedge the currency fluctuations related to the cash flows of these properties. The agreements settled or settle at the end of each month from January to December 2013. These agreements lock in an exchange rate of $0.98 CAD to $0.99 CAD per U.S. dollar on approximately $500 thousand of monthly CAD denominated cash flows.

The effective portion of changes in the fair value of foreign currency derivatives designated and that qualify as cash flow hedges of foreign exchange risk is recorded in AOCI and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivative, as well as amounts excluded from the assessment of hedge effectiveness, is recognized directly in earnings. No hedge ineffectiveness on foreign currency derivatives has been recognized for the three months ended March 31, 2013 and 2012. As of March 31, 2013, the Company estimates that during the twelve months ending March 31, 2014, $0.3 million will be reclassified from AOCI to other expense.

Net Investment Hedges
As discussed above, the Company is exposed to fluctuations in foreign exchange rates on its four Canadian properties. As such, the Company uses currency forward agreements to hedge its exposure to changes in foreign exchange rates. Currency forward agreements involve fixing the CAD to U.S. dollar exchange rate for delivery of a specified amount of foreign currency on a specified date. The currency forward agreements are typically cash settled in US dollars for their fair value at or close to their settlement date. In order to hedge the net investment in four of the Canadian properties, the Company entered into a forward contract with a fixed notional value of $100.0 million CAD and $96.1 million U.S. with a February 2014 settlement which coincides with the maturity of the Company’s underlying mortgage on these four properties. The exchange rate of this forward contract is approximately $1.04 CAD per U.S. dollar. This forward contract should hedge a significant portion of the Company’s CAD denominated net investment in these four centers through February 2014 as the impact on AOCI from marking the derivative to market should move in the opposite direction of the translation adjustment on the net assets of these four Canadian properties.

For foreign currency derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in AOCI as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. No hedge ineffectiveness on net investment hedges has been recognized for three months ended March 31, 2013 and 2012. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.
 
See Note 11 for disclosure relating to the fair value of the Company’s derivative instruments. Below is a summary of the effect of derivative instruments on the consolidated statements of changes in equity and income for the three months ended March 31, 2013 and 2012.
 

15


Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and
Income for the Three Months Ended March 31, 2013 and 2012
(Dollars in thousands)
 
Three Months Ended March 31,
 
Description
2013
 
2012
 
Interest Rate Swaps
 
 
 
 
Amount of Loss Recognized in AOCI on Derivative (Effective Portion)
$
(206
)
 
$
(1,366
)
 
Amount of Expense Reclassified from AOCI into Earnings (Effective Portion) (1)
(423
)
 
(372
)
 
Cross Currency Swaps
 
 
 
 
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
291

 
(521
)
 
Amount of Expense Reclassified from AOCI into Earnings (Effective Portion) (2)
(102
)
 
(167
)
 
Currency Forward Agreements
 
 
 
 
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
1,935

 
(1,140
)
 
Amount of Income Reclassified from AOCI into Earnings (Effective Portion) (2)
49

 

 
Total
 
 
 
 
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
$
2,020

 
$
(3,027
)
 
Amount of Expense Reclassified from AOCI into Earnings (Effective Portion)
(476
)
 
(539
)
 
 
(1)
Included in "Interest expense, net" in the accompanying consolidated statements of income for the three months ended March 31, 2013 and 2012.
(2)
Included in “Other expense” in the accompanying consolidated statements of income for the three months ended March 31, 2013 and 2012.

Credit-risk-related Contingent Features
The Company has agreements with each of its interest rate derivative counterparties that contain a provision where if the Company defaults on any of its obligations for borrowed money or credit in an amount exceeding $25.0 million and such default is not waived or cured within a specified period of time, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its interest rate derivative obligations.

As of March 31, 2013, the fair value of the Company’s derivatives in a liability position related to these agreements was $5.5 million. If the Company breached any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the agreements at their termination value of $5.6 million.

11. Fair Value Disclosures

The Company has certain financial instruments that are required to be measured under the FASB’s Fair Value Measurements and Disclosures guidance. The Company currently does not have any non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis.

As a basis for considering market participant assumptions in fair value measurements, the FASB’s Fair Value Measurements and Disclosures guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs utilize quoted prices

16


(unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Derivative Financial Instruments

The Company uses interest rate swaps, foreign currency forwards and cross currency swaps to manage its interest rate and foreign currency risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the FASB's fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives also utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of March 31, 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives and therefore, has classified its derivatives as Level 2 within the fair value reporting hierarchy.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 aggregated by the level in the fair value hierarchy within which those measurements are classified and by derivative type.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2013 and December 31, 2012
(Dollars in thousands)
Description
Quoted Prices in
Active Markets
for Identical
Assets (Level I)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Balance at
end of period
March 31, 2013:
 
 
 
 
 
 
 
Cross Currency Swaps*
$

 
$
(316
)
 
$

 
$
(316
)
Currency Forward Agreements*
$

 
$
(1,566
)
 
$

 
$
(1,566
)
Interest Rate Swap Agreements*
$

 
$
(3,632
)
 
$

 
$
(3,632
)
December 31, 2012:
 
 
 
 
 
 
 
Cross Currency Swaps*
$

 
$
(709
)
 
$

 
$
(709
)
Currency Forward Agreements*
$

 
$
(3,453
)
 
$

 
$
(3,453
)
Interest Rate Swap Agreements*
$

 
$
(3,848
)
 
$

 
$
(3,848
)
*Included in "Accounts payable and accrued liabilities" in the accompanying consolidated balance sheet.

17




Non-recurring fair value measurements
There were no assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2013.

Fair Value of Financial Instruments
Management compares the carrying value and the estimated fair value of the Company’s financial instruments. The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments at March 31, 2013 and December 31, 2012:

Mortgage notes receivable and related accrued interest receivable:
The fair value of the Company’s mortgage notes and related accrued interest receivable is estimated by discounting the future cash flows of each instrument using current market rates. At March 31, 2013, the Company had a carrying value of $468.6 million in fixed rate mortgage notes receivable outstanding, including related accrued interest, with a weighted average interest rate of approximately 8.98%. The fixed rate mortgage notes bear interest at rates of 7.00% to 11.31%. Discounting the future cash flows for fixed rate mortgage notes receivable using rates of 9.00% to 11.31%, management estimates the fair value of the fixed rate mortgage notes receivable to be approximately $445.6 million with an estimated weighted average market rate of 10.07% at March 31, 2013.

At December 31, 2012, the Company had a carrying value of $455.8 millionin fixed rate mortgage notes receivable outstanding, including related accrued interest, with a weighted average interest rate of approximately 8.96%. The fixed rate mortgage notes bear interest at rates of 7.00% to 11.31%. Discounting the future cash flows for fixed rate mortgage notes receivable using rates of 9.00% to 11.31%, management estimates the fair value of the fixed rate mortgage notes receivable to be $431.2 million with an estimated weighted average market rate of 10.07% at December 31, 2012.

Investment in a direct financing lease, net:
The fair value of the Company’s investment in a direct financing lease is estimated by discounting the future cash flows of the instrument using current market rates. At March 31, 2013 and December 31, 2012, the Company had an investment in a direct financing lease with a carrying value of $235.3 million and $234.1 million, respectively, and a weighted average effective interest rate of 12.02% for both periods. The investment in direct financing lease bears interest at effective interest rates of 11.93% to 12.38%. The carrying value of the investment in a direct financing lease approximates the fair market value at March 31, 2013 and December 31, 2012.

Derivative instruments:
Derivative instruments are carried at their fair market value.

Debt instruments:
The fair value of the Company's debt is estimated by discounting the future cash flows of each instrument using current market rates. At March 31, 2013, the Company had a carrying value of $324.6 million in variable rate debt outstanding with a weighted average interest rate of approximately 1.87%. The carrying value of the variable rate debt outstanding approximates the fair market value at March 31, 2013.

At December 31, 2012, the Company had a carrying value of $289.6 million in variable rate debt outstanding with an average weighted interest rate of approximately 1.88%. The carrying value of the variable rate debt outstanding approximates the fair market value at December 31, 2012.

At March 31, 2013 and December 31, 2012, $240.0 million of variable rate debt outstanding under the Company's unsecured term loan facility had been effectively converted to a fixed rate through January 5, 2016 by interest rate swap agreements.

At March 31, 2013, the Company had a carrying value of $1.06 billion in fixed rate long-term debt outstanding with a weighted average interest rate of approximately 6.36%. Discounting the future cash flows for fixed rate

18


debt using rates of 2.89% to 4.39%, management estimates the fair value of the fixed rate debt to be approximately $1.18 billion with an estimated weighted average market rate of 3.83% at March 31, 2013.

At December 31, 2012, the Company had a carrying value of $1.08 billion in fixed rate long-term debt outstanding with an average weighted interest rate of approximately 6.35%. Discounting the future cash flows for fixed rate debt using rates of 3.41% to 5.17%, management estimates the fair value of the fixed rate debt to be approximately $1.17 billion with an estimated weighted average market rate of 4.46% at December 31, 2012.

12. Earnings Per Share

The following table summarizes the Company’s computation of basic and diluted earnings per share (EPS) for the three months ended March 31, 2013 and 2012 (amounts in thousands except per share information):
 
Three Months Ended March 31, 2013
 
 
Income
(numerator)
 
Shares
(denominator)
 
Per Share
Amount
 
Basic EPS:
 
 
 
 
 
 
Income from continuing operations
$
40,644

 
 
 
 
 
Less: preferred dividend requirements
(5,952
)
 
 
 
 
 
Income from continuing operations available to common shareholders
$
34,692

 
46,854

 
$
0.74

 
Income from discontinued operations available to common shareholders
$
562

 
46,854

 
$
0.01

 
Net income available to common shareholders
$
35,254

 
46,854

 
$
0.75

 
Diluted EPS:
 
 
 
 
 
 
Income from continuing operations available to common shareholders
$
34,692

 
46,854

 
 
 
Effect of dilutive securities:
 
 
 
 
 
 
Share options

 
193

 
 
 
Income from continuing operations available to common shareholders
$
34,692

 
47,047

 
$
0.74

 
Income from discontinued operations available to common shareholders
$
562

 
47,047

 
$
0.01

 
Net income available to common shareholders
$
35,254

 
47,047

 
$
0.75

 




19


 
Three Months Ended March 31, 2012
 
 
Income
(numerator)
 
Shares
(denominator)
 
Per Share
Amount
 
Basic EPS:
 
 
 
 
 
 
Income from continuing operations
$
29,598

 
 
 
 
 
Less: preferred dividend requirements
(6,001
)
 
 
 
 
 
Noncontrolling interest adjustments
(18
)
 
 
 
 
 
Income from continuing operations available to common shareholders
$
23,579

 
46,677

 
$
0.51

 
Loss from discontinued operations available to common shareholders
$
(8,208
)
 
46,677

 
$
(0.18
)
 
Net income available to common shareholders
$
15,371

 
46,677

 
$
0.33

 
Diluted EPS:
 
 
 
 
 
 
Income from continuing operations available to common shareholders
$
23,579

 
46,677

 
 
 
Effect of dilutive securities:
 
 
 
 
 
 
Share options

 
268

 
 
 
Income from continuing operations available to common shareholders
$
23,579

 
46,945

 
$
0.50

 
Loss from discontinued operations available to common shareholders
$
(8,208
)
 
46,945

 
$
(0.17
)
 
Net income available to common shareholders
$
15,371

 
46,945

 
$
0.33

 

The additional 1.9 million common shares that would result from the conversion of the Company’s 5.75% Series C cumulative convertible preferred shares and the additional 1.6 million common shares that would result from the conversion of the Company’s 9.0% Series E cumulative convertible preferred shares and the corresponding add-back of the preferred dividends declared on those shares are not included in the calculation of diluted earnings per share for the three months ended March 31, 2013 and 2012 because the effect is anti-dilutive.

The dilutive effect of potential common shares from the exercise of share options is included in diluted earnings per share for the three months ended March 31, 2013 and 2012. However, options to purchase 358 thousand and 342 thousand shares of common shares at per share prices ranging from $45.20 to $65.50 and $44.98 to $65.50, were outstanding at the end of the three months ended March 31, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

13. Equity Incentive Plan

All grants of common shares and options to purchase common shares are issued under the Company's 2007 Equity Incentive Plan and an aggregate of 1,950,000 common shares, options to purchase common shares and restricted share units, subject to adjustment in the event of certain capital events, may be granted. At March 31, 2013, there were 267,658 shares available for grant under the 2007 Equity Incentive Plan.

Share Options
Share options granted under the 2007 Equity Incentive Plan have exercise prices equal to the fair market value of a common share at the date of grant. The options may be granted for any reasonable term, not to exceed 10 years, and for employees typically become exercisable at a rate of 25% per year over a four-year period. For non-employee Trustees, share options are vested upon issuance, however, the share options may not be exercised for a one year period subsequent to the grant date. The Company generally issues new common shares upon option exercise. A summary of the Company’s share option activity and related information is as follows:

20


 
 
Number of
shares
 
Option price
per share
 
Weighted avg.
exercise price
Outstanding at December 31, 2012
881,338

 
$
18.18

 

 
$
65.50

 
$
38.51

Exercised
(75,399
)
 
18.18

 

 
47.20

 
23.89

Granted
107,757

 
46.86

 

 
47.21

 
47.15

Forfeited
(2,658
)
 
36.56

 

 
46.69

 
43.65

Outstanding at March 31, 2013
911,038

 
$
18.18

 

 
$
65.50

 
$
40.72

The weighted average fair value of options granted was $12.05 and $11.98 during the three months ended March 31, 2013 and 2012, respectively. The intrinsic value of stock options exercised was $1.9 million and $1.3 million, during the three months ended March 31, 2013 and 2012, respectively. Additionally, the Company repurchased 50,583 shares into treasury shares in conjunction with the stock options exercised during the three months ended March 31, 2013 with a total value of $2.5 million. At March 31, 2013, stock-option expense to be recognized in future periods was $2.3 million.

The expense related to share options included in the determination of net income for the three months ended March 31, 2013 and 2012 was $222 thousand and $256 thousand, respectively. The following assumptions were used in applying the Black-Scholes option pricing model at the grant dates: risk-free interest rate of 1.0% and 1.1% to 1.2% for the three months ended March 31, 2013 and 2012, respectively, dividend yield of 6.5% for the three months ended March 31, 2013 and 6.4% to 6.6% for the three months ended March 31, 2012, volatility factors in the expected market price of the Company’s common shares of 50.7% for the three months ended March 31, 2013 and 50.6% to 51.8% for the three months ended March 31, 2012, 0.23% and 0.25% expected forfeiture rate for the three months ended March 31, 2013 and 2012, respectively, and an expected life of approximately six years for both the three months ended March 31, 2013 and 2012. The Company uses historical data to estimate the expected life of the option and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Additionally, expected volatility is computed based on the average historical volatility of the Company’s publicly traded shares.
The following table summarizes outstanding options at March 31, 2013:
Exercise price range
Options
outstanding
 
Weighted avg.
life remaining
 
Weighted avg.
exercise price
 
Aggregate intrinsic
value  (in thousands)
$ 18.18 - 19.99
206,505

 
5.9
 
 
 
 
 20.00 - 29.99
3,333

 
0.1
 
 
 
 
 30.00 - 39.99
75,305

 
2.9
 
 
 
 
 40.00 - 49.99
512,542

 
6.4
 
 
 
 
 50.00 - 59.99
10,000

 
5.1
 
 
 
 
 60.00 - 65.50
103,353

 
3.8
 
 
 
 
 
911,038

 
5.7
 
$
40.72

 
$
11,591

The following table summarizes exercisable options at March 31, 2013:
Exercise price range
Options
outstanding
 
Weighted avg.
life  remaining
 
Weighted avg.
exercise price
 
Aggregate  intrinsic
value (in thousands)
$ 18.18 - 19.99
194,005

 
5.8
 
 
 
 
 20.00 - 29.99
3,333

 
0.1
 
 
 
 
 30.00 - 39.99
66,784

 
2.4
 
 
 
 
 40.00 - 49.99
291,204

 
4.3
 
 
 
 
 50.00 - 59.99
10,000

 
5.1
 
 
 
 
 60.00 - 65.50
103,353

 
3.8
 
 
 
 
 
668,679

 
4.5
 
$
39.28

 
$
9,812




21


Nonvested Shares
A summary of the Company’s nonvested share activity and related information is as follows:
 
Number  of
shares
 
Weighted avg.
grant  date
fair value
 
Weighted avg.
life remaining
Outstanding at December 31, 2012
322,808

 
$
42.52

 
 
Granted
198,833

 
47.15

 
 
Vested
(145,570
)
 
39.88

 
 
Forfeited
(4,207
)
 
45.39

 
 
Outstanding at March 31, 2013
371,864

 
$
46.00

 
1.74
The holders of nonvested shares have voting rights and receive dividends from the date of grant. These shares vest ratably over a period of three to four years. The fair value of the nonvested shares that vested was $6.7 million and $7.5 million for the three months ended March 31, 2013 and 2012, respectively. At March 31, 2013, unamortized share-based compensation expense related to nonvested shares was $11.9 million.

Restricted Share Units
A summary of the Company’s restricted share unit activity and related information is as follows:
 
Number  of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Weighted
Average
Life
Remaining
Outstanding at December 31, 2012
10,925

 
$
44.62

 
 
Granted

 

 
 
Vested

 

 
 
Outstanding at March 31, 2013
10,925

 
$
44.62

 
0.10

The holders of restricted share units receive dividend equivalents from the date of grant. The share units vest upon the earlier of the day preceding the next annual meeting of shareholders or a change of control. The settlement date for the shares is selected by the non-employee Trustee, and ranges from one year from the grant date to upon termination of service. At March 31, 2013, unamortized share-based compensation expense related to restricted share units was $41 thousand.


22


14. Discontinued Operations

Included in discontinued operations for the three months ended March 31, 2013 are the operations of the Pope Valley winery, which was held for sale as of March 31, 2013, as well as the operations of a winery and a portion of related vineyards located in Sonoma County, California that was sold on March 18, 2013 for a gain of $0.6 million. Included in discontinued operations for the three months ended March 31, 2012 are the operations of the prior mentioned properties as well as a gain on sale or acquisition of real estate of $0.3 million that relates the to the settlement of escrow reserves established with the sale of Toronto Dundas Square as well as the operations of the Carneros custom crush facility and the Buena Vista winery and vineyards, which were both sold during 2012.

The operating results relating to discontinued operations are as follows (in thousands):
 
Three Months Ended March 31,
 
 
2013
 
2012
 
Rental revenue
$
347

 
$
1,025

 
Mortgage and other financing income

 
67

 
Total revenue
347

 
1,092

 
Property operating expense
21

 
(195
)
 
Other expense
22

 
226

 
Interest expense, net

 
(11
)
 
Impairment charges

 
8,845

 
Depreciation and amortization
307

 
717

 
Loss before gain on sale or acquisition of real estate
(3
)
 
(8,490
)
 
Gain on sale or acquisition of real estate
565

 
282

 
Net income (loss)
$
562

 
$
(8,208
)
 

15 . Other Commitments and Contingencies

As of March 31, 2013, the Company had fourteen entertainment development projects under construction or under redevelopment for which it has commitments to fund approximately $65.3 million, four education development project under construction for which it has commitments to fund approximately $17.7 million and two recreation development projects under construction for which it has commitments to fund approximately $13.3 million. Development costs are advanced by the Company in periodic draws. If the Company determines that construction is not being completed in accordance with the terms of the development agreement, it can discontinue funding construction draws. The Company has agreed to lease the properties to the operators at pre-determined rates upon completion of construction.

The Company has certain commitments related to its mortgage note investments that it may be required to fund in the future. The Company is generally obligated to fund these commitments at the request of the borrower or upon the occurrence of events outside of its direct control. As of March 31, 2013, the Company had 11 mortgage notes receivable with commitments totaling approximately $38.3 million. If commitments are funded in the future, interest will be charged at rates consistent with the existing investments.

The Company has provided guarantees of the payment of certain economic development revenue bonds totaling $34.8 million related to four theatres in Louisiana for which the Company earns a fee at annual rates of 1.75% to 4.00% over the 30-year terms of the related bonds. The Company has recorded $11.2 million as a deferred asset included in other assets and $11.2 million included in other liabilities in the accompanying consolidated balance sheet as of March 31, 2013 related to these guarantees. No amounts have been accrued as a loss contingency related to these guarantees because payment by the Company is not probable.

On June 7, 2011, affiliates of Louis Cappelli, Concord Associates, L.P., Concord Resort, LLC and Concord Kiamesha LLC (the "Cappelli Group"), filed a complaint with the Supreme Court of the State of New York, County of Sullivan, against two subsidiaries of the Company seeking (i) a declaratory judgment on certain of one of the subsidiary's obligations under a previously disclosed settlement agreement involving these entities, (ii) an order that the Company subsidiary execute the golf course lease and the “Racino Parcel” lease subject to the settlement agreement, and (iii) an

23


extension of the restrictive covenant against ownership or operation of a casino on the Concord resort property under the settlement agreement, which covenant was set to expire on December 31, 2011. The Company subsidiaries filed counterclaims seeking related relief. The Cappelli Group subsequently obtained leave to discontinue its claims, but the counterclaims remain pending. On October 20, 2011, the Cappelli Group filed a complaint with the Supreme Court of the State of New York, County of Westchester against the Company and certain of its subsidiaries alleging breach of contract and breach of the duty of good faith and fair dealing with respect to a casino development agreement relating to a planned casino and resort development in Sullivan County, New York. Plaintiffs are seeking specific performance with respect to such agreement and money damages of $800.0 million, plus interest and attorneys' fees. On March 7, 2012, Concord Associates, L.P. and six other companies affiliated with Mr. Cappelli and Concord Associates, L.P. filed a new complaint against the Company and certain of its subsidiaries, as well as Empire Resorts, Inc. and its subsidiary Monticiello Raceway Management, Inc. (the “Empire Resorts Parties”), in the United States District Court for the Southern District of New York. On June 25, 2012, an amended complaint was served against the same parties as well as Kien Huat Realty III Limited and Genting New York, LLC (the “Genting Parties”). The amended complaint alleges unlawful restraint of trade, conspiracy to monopolize and unlawful monopolization against the Company, the Empire Resorts Parties and the Genting Parties as well as tortious interference against the Empire Resorts Parties and the Genting Parties, in relation to a proposed development transaction on the same Sullivan County, New York resort property. Plaintiffs seek damages of $1.5 billion, plus interest and attorneys' fees. The Company has not determined that losses related to these matters are probable. The Company intends to vigorously defend the claims asserted against the Company and certain of its subsidiaries by the Cappelli Group, for which the Company believes it has meritorious defenses, but there can be no assurances as to its outcome.


24


16. Segment Information

The Company groups investments into four reportable operating segments: entertainment, education, recreation and other. The financial information summarized below is presented by reportable operating segment, consistent with how the Company regularly reviews and manages its business:
Balance Sheet Data:
 
 
As of March 31, 2013
 
 
Entertainment
Education
Recreation
Other
Corporate/Unallocated
Consolidated
Total Assets
 
$
1,814,656

$
392,265

$
444,316

$
228,453

$
72,102

$
2,951,792

 
 
 
 
 
 
 
 
 
 
As of December 31, 2012
 
 
Entertainment
Education
Recreation
Other
Corporate/Unallocated
Consolidated
Total Assets
 
$
1,818,712

$
376,048

$
427,977

$
252,444

$
71,549

$
2,946,730


Operating Data:
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2013
 
 
Entertainment
Education
Recreation
Other
Corporate/Unallocated
Consolidated
Rental revenue
 
$
54,983

$
3,157

$
1,909

$
738

$

$
60,787

Tenant reimbursements
 
4,744





4,744

Other income
 
23



1


24

Mortgage and other financing income
 
2,204

7,957

7,555

79


17,795

Total revenue
 
61,954

11,114

9,464

818


83,350

 
 
 
 
 
 
 
 
Property operating expense
 
7,135



(130
)

7,005

Other expense
 



141

53

194

Total investment expenses
 
7,135



11

53

7,199

Net operating income (loss) - before unallocated items
 
54,819

11,114

9,464

807

(53
)
76,151

 
 
 
 
 
 
 
 
Reconciliation to Consolidated Statements of Income:
 
 
 
 
General and administrative expense
 
 
 
 
(6,652
)
Gain on early extinguishment of debt
 
 
 
4,539

Interest expense, net
 
 
 
 
 
 
(19,989
)
Transaction costs
 
 
 
 
 
 
(318
)
Depreciation and amortization
 
 
 
(13,438
)
Equity in income from joint ventures
 
 
 
 
351

Discontinued operations:
 
 
 
 
Loss from discontinued operations
 
 
 
 
(3
)
Gain on sale or acquisition of real estate
 
 
 
 
565

Net income
 
 
 
 
 
 
41,206

Preferred dividend requirements
 
 
(5,952
)
Net income available to common shareholders of EPR Properties
$
35,254



25


 
 
Three Months Ended March 31, 2012
 
 
Entertainment
Education
Recreation
Other
Corporate/Unallocated
Consolidated
Rental revenue
 
$
54,561

$
1,420

$
519

$
758

$

$
57,258

Tenant reimbursements
 
4,822





4,822

Other income
 
24



1


25

Mortgage and other financing income
 
447

7,295

6,906

26


14,674

Total revenue
 
59,854

8,715

7,425

785


76,779

 
 
 
 
 
 
 
 
Property operating expense
 
6,005



369


6,374

Other expense
 



183

167

350

Total investment expenses
 
6,005



552

167

6,724

Net operating income (loss) - before unallocated items
 
53,849

8,715

7,425

233

(167
)
70,055

 
 
 
 
 
 
 
 
Reconciliation to Consolidated Statements of Income:
 
 
 
 
General and administrative expense
 
 
 
 
(6,467
)
Interest expense, net
 
 
 
 
 
 
(18,141
)
Transaction costs
 
 
 
 
 
 
(158
)
Impairment charges
 
 
 
 
 
 
(3,998
)
Depreciation and amortization
 
 
 
 
(11,740
)
Equity in income from joint ventures
 
 
 
47

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations
 
 
 
 
355

Impairment charges
 
 
 
 
(8,845
)
Gain on sale or acquisition of real estate
 
 
 
 
282

Net income
 
 
 
 
 
 
21,390

Noncontrolling interests
 
 
 
 
 
 
(18
)
Preferred dividend requirements
 
 
(6,001
)
Net income available to common shareholders of EPR Properties
$
15,371



26


17. Condensed Consolidating Financial Statements

A portion of the Company's subsidiaries have guaranteed the Company’s indebtedness under the Company's unsecured senior notes, unsecured revolving credit facility and unsecured term loan facility. The guarantees are joint and several, full and unconditional and subject to customary release provisions. The following summarizes the Company’s condensed consolidating information as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012 (in thousands):
Condensed Consolidating Balance Sheet
As of March 31, 2013
 
EPR Properties 
(Issuer)
 
Wholly  Owned
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Consolidated
Elimination
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Rental properties, net
$

 
$
1,119,885

 
$
738,319

 
$

 
$
1,858,204

Rental properties held for sale, net

 

 
2,788

 

 
2,788

Land held for development

 

 
197,740

 

 
197,740

Property under development

 
34,541

 
3,828

 

 
38,369

Mortgage notes and related accrued interest receivable

 
425,568

 
42,989

 

 
468,557

Investment in a direct financing lease, net

 
235,302

 

 

 
235,302

Investment in joint ventures
7,398

 

 
4,889

 

 
12,287

Cash and cash equivalents
4,319

 
208

 
7,236

 

 
11,763

Restricted cash

 
19,703

 
12,911

 

 
32,614

Deferred financing costs, net
13,186

 
4,342

 
1,180

 

 
18,708

Accounts receivable, net
77

 
17,873

 
20,296

 

 
38,246

Intercompany notes receivable
104,575

 

 
4,240

 
(108,815
)
 

Investments in subsidiaries
2,229,391

 

 

 
(2,229,391
)
 

Other assets
20,724

 
3,722

 
12,768

 

 
37,214

Total assets
$
2,379,670

 
$
1,861,144

 
$
1,049,184

 
$
(2,338,206
)
 
$
2,951,792

Liabilities and Equity
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
24,429

 
$
14,476

 
$
8,893

 
$

 
$
47,798

Dividends payable
43,113

 

 

 

 
43,113

Unearned rents and interest

 
19,210

 
774

 

 
19,984

Intercompany notes payable

 

 
108,815

 
(108,815
)
 

Long-term debt
855,000

 
59,000

 
469,392

 

 
1,383,392

Total liabilities
922,542

 
92,686

 
587,874

 
(108,815
)
 
1,494,287

EPR Properties shareholders’ equity
1,457,128

 
1,768,458

 
460,933

 
(2,229,391
)
 
1,457,128

Noncontrolling interests

 

 
377

 

 
377

Total equity
1,457,128

 
1,768,458

 
461,310

 
(2,229,391
)
 
1,457,505

Total liabilities and equity
$
2,379,670

 
$
1,861,144

 
$
1,049,184

 
$
(2,338,206
)
 
$
2,951,792

 

27


Condensed Consolidating Balance Sheet
As of December 31, 2012

 
EPR
Properties 
(Issuer)
 
Wholly  Owned
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Consolidated
Elimination
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Rental properties, net
$

 
$
1,113,658

 
$
771,435

 
$

 
$
1,885,093

Rental properties held for sale, net

 

 
2,788

 

 
2,788

Land held for development

 

 
196,177

 

 
196,177