Item 7. 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 Annual Report on Form 10-K. The forward-looking statements included in this discussion and elsewhere in this Annual Report on Form 10-K involve risks and uncertainties, including anticipated financial performance, business prospects, industry trends, shareholder returns, performance of leases by tenants, performance on loans to customers and other matters, which reflect management’s best judgment based on factors currently known. See “Cautionary Statement Concerning Forward-Looking Statements.” Actual results and experience could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in this Item and in Item 1A - “Risk Factors.”
Overview
Business
Our principal business objective is to enhance shareholder value by achieving predictable and increasing Funds From Operations As Adjusted ("FFOAA") and dividends per share. Our strategy is to focus on long-term investments in the Experiential sector which benefit from our depth of knowledge and relationships, and which we believe offer sustained performance throughout most economic cycles. See Item 1 - "Business" for further discussion regarding our strategic rationale for our focus on Experiential properties.
Our investment portfolio includes ownership of and long-term mortgages on Experiential and Education properties. Substantially all of our owned single-tenant properties are leased pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of the property. Tenants at our owned multi-tenant properties are typically required to pay common area maintenance charges to reimburse us for their pro-rata portion of these costs. We also own certain experiential lodging assets structured using traditional REIT lodging structures as discussed in Item 1 - "Business."
It has been our strategy to structure leases and financings to ensure a positive spread between our cost of capital and the rentals or interest 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 have also entered into certain joint ventures and we have provided mortgage note financing. We intend to continue entering into some or all of these types of arrangements in the foreseeable future.
Prior to the COVID-19 pandemic, our primary challenges had been locating suitable properties, negotiating favorable lease or financing terms (on new or existing properties), and managing our portfolio as we have continued to grow. We believe our management’s knowledge and industry relationships have facilitated opportunities for us to acquire, finance and lease properties. The current economic situation created by the pandemic has impeded our growth in the near term while our focus has been addressing challenges brought on by the pandemic, including monitoring customer status and working with customers to help ensure long-term stability as well as assisting them in reopening plans. See more discussion on the impact of the pandemic on our business below. We expect to return to growth as our customers' businesses continue to recover and, in turn, our cashflows stabilize. Our business is subject to a number of risks and uncertainties, including those described in Item 1A - “Risk Factors” of this report.
As of December 31, 2020, our total assets were approximately $6.7 billion (after accumulated depreciation of approximately $1.1 billion) with properties located in 44 states and Ontario, Canada. Our total investments (a non-GAAP financial measure) were approximately $6.5 billion at December 31, 2020. See "Non-GAAP Financial Measures" for the calculation of total investments and reconciliation of total investments to "Total assets" in the consolidated balance sheet at December 31, 2020 and 2019. We group our investments into two reportable segments, Experiential and Education. As of December 31, 2020, our Experiential investments comprised $5.9 billion, or 91%, and our Education investments comprised $0.6 billion, or 9%, of our total investments.
As of December 31, 2020, our Experiential segment consisted of the following property types (owned or financed):
•178 theatre properties;
•55 eat & play properties (including seven theatres located in entertainment districts);
•18 attraction properties;
•13 ski properties;
•six experiential lodging properties;
•one gaming property;
•three cultural properties; and
•seven fitness & wellness properties.
As of December 31, 2020, our owned Experiential real estate portfolio consisted of approximately 19.3 million square feet, was 93.8% leased and included $57.6 million in property under development and $20.2 million in undeveloped land inventory.
As of December 31, 2020, our Education segment consisted of the following property types (owned or financed):
•65 early childhood education center properties; and
•10 private school properties.
As of December 31, 2020, our owned Education real estate portfolio consisted of approximately 1.4 million square feet, was 100% leased and included $3.0 million in undeveloped land inventory.
The combined owned portfolio consisted of 20.7 million square feet and was 94.2% leased.
COVID-19 Update
We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The outbreak of the COVID-19 pandemic severely impacted global economic activity during 2020 and caused significant volatility and negative pressure in financial markets, which is expected to continue into 2021. The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict, as information is rapidly evolving. As a result, the COVID-19 pandemic severely impacted experiential real estate properties, given that such properties involve congregate social activity and discretionary consumer spending. Substantially all of our non-theatre locations and many of our theatre locations have re-opened as of December 31, 2020. However, certain theatre locations remain closed due to local restrictions or operator decision to close as a result of the impact of the COVID-19 pandemic, specifically the decision by many major studios to delay the release of blockbuster movies in hopes that larger audiences will be available as additional markets open. The continuing impact of the COVID-19 pandemic on our business will depend on several factors, including, but not limited to, the scope, severity and duration of the pandemic, the actions taken to contain the outbreak or mitigate its impact, the development and distribution of vaccines and the efficacy of those vaccines, the public’s confidence in the health and safety measures implemented by our tenants and borrowers, and the direct and indirect economic effects of the outbreak and containment measures, all of which are uncertain and cannot be predicted. During 2020, the COVID-19 pandemic negatively affected our business, and could continue to have material, adverse effects on our financial condition, results of operations and cash flows.
Our Consolidated Financial Statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and reported amounts of revenue and expenses during the reporting periods presented. We considered the impact of the COVID-19 pandemic on the assumptions and estimates used in determining our financial condition and results of operations for the year ended December 31, 2020. The following were adverse impacts to our financial statements and business during the year ended December 31, 2020:
•We wrote-off receivables from tenants and straight-line rent receivables totaling $65.1 million directly to rental revenue upon determination that the collectibility of these receivables or future lease payments from
these tenants were no longer probable. Additionally, we determined that future rental revenue related to these tenants, including American-Multi Cinema, Inc. ("AMC") and Regal Cinemas ("Regal"), a subsidiary of Cineworld Group, will be recognized on a cash basis. The straight-line rent receivable represented $38.0 million of this write-off and was comprised of $26.5 million of straight-line rent receivable and $11.5 million of sub-lessor ground lease straight-line rent receivable.
•We reduced rental revenue by $13.6 million due to rent abatements.
•We deferred approximately $76.0 million of amounts due from tenants and $3.4 million due from borrowers that were booked as receivables. Additionally, we have amounts due from tenants that were not booked as receivables as the full amounts were not deemed probable of collection as a result of the COVID-19 pandemic. The amounts not booked as receivables remain obligations of the tenants and will be recognized as revenue when received. The repayment terms for all of these deferments vary by tenant or borrower.
•We recognized $85.7 million in impairment charges during the year ended December 31, 2020, which was comprised of $70.7 million of impairments of real estate investments, and $15.0 million of impairments of operating lease right-of-use assets. We also recognized impairment charges on joint ventures of $3.2 million related to our equity investments in three theatre projects located in China.
•We increased our expected credit losses by $30.7 million from our implementation estimate of $2.2 million. This increase was primarily due to credit loss expense related to fully reserving the outstanding principal balance of $12.6 million and unfunded commitment to fund $12.9 million, totaling $25.5 million, related to notes receivable from one borrower, as a result of recent changes in the borrower's financial status due to the impact of the COVID-19 pandemic. The remaining increase was due to economic uncertainty and the rapidly changing environment surrounding the pandemic.
•We recognized a full valuation allowance of $18.0 million during third quarter 2020 on our net deferred tax assets related to our taxable REIT subsidiary ("TRS") and Canadian tax paying entity as a result of the uncertainty of realization caused by the impact of the COVID-19 pandemic. At December 31, 2020, we have a valuation allowance totaling $24.9 million on our net deferred tax assets.
•On March 20, 2020, we borrowed $750.0 million under our unsecured revolving credit facility as a precautionary measure to increase our cash position and preserve financial flexibility given the global uncertainty caused by the COVID-19 pandemic. On December 30, 2020, we paid down our revolving credit facility by $160.0 million, following the sale of six private schools and four early childhood education centers. Subsequent to year-end, we paid down an additional $500.0 million on our revolving credit facility.
•We amended our Consolidated Credit Agreement, which governs our unsecured revolving credit facility and our unsecured term loan facility, and our Note Purchase Agreement, which governs our private placement notes. The amendments modified certain provisions and waived our obligation to comply with certain covenants under these debt agreements during the Covenant Relief Period in light of the uncertainty related to impacts of the COVID-19 pandemic on us and our tenants and borrowers. We pay higher interest costs during the Covenant Relief Period. The amendments to the Consolidated Credit Agreement and Note Purchase Agreement also impose additional restrictions on us during the Covenant Relief Period, including limitations on making investments, incurring indebtedness, making capital expenditures, paying dividends and making other distributions, repurchasing our shares, voluntarily prepaying certain indebtedness, encumbering certain assets and maintaining a minimum liquidity amount, in each case subject to certain exceptions. See below and Note 8 to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional details.
•In connection with the loan amendments discussed above, certain of our key subsidiaries guaranteed our obligations based on our unsecured debt ratings. If our unsecured debt rating is further downgraded by Moody's, we will be required to pledge the equity interest in certain of these subsidiary guarantors to secure our obligations under our unsecured credit facilities and private placement notes. See Note 8 to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional details.
On March 24, 2020, our Board of Trustees (the "Board") announced approval of a $150 million share repurchase program in response to the extraordinary dislocation in our common share price. The share repurchase program was set to expire on December 31, 2020; however, the program was suspended upon the effective date of the loan amendments on June 29, 2020, discussed above. During the year ended December 31, 2020, we repurchased 4,066,716 common shares under the share repurchase program for approximately $106.0 million. The repurchases
were made under a Rule 10b5-1 trading plan. There can be no assurances as to our ability to reinstitute the share repurchase program in future periods or the timing thereof.
The monthly cash dividends to common shareholders were suspended following the common share dividend paid on May 15, 2020 to shareholders of record as of April 30, 2020. The suspension of the monthly cash dividend to common shareholders will continue through the Covenant Relief Period, except as may be necessary to maintain REIT status and to not owe income tax. There can be no assurances as to our ability to reinstitute cash dividend payments to common shareholders or the timing thereof.
Collections of rent and interest were impacted during the year by the COVID-19 pandemic and approximately 92% of our non-theatre and 58% of our theatre locations were open for business as of December 31, 2020. During the year ended December 31, 2020, tenants and borrowers paid approximately 46% of fourth quarter, 43% of third quarter and 29% of second quarter 2020 pre-COVID contractual cash revenue. Pre-COVID contractual cash revenue is an operational measure and represents aggregate cash payments for which we were entitled under existing contracts prior to the COVID-19 pandemic, excluding percentage rent (rents received over base amounts) and cash payments for subsequently disposed properties, net. The Company has reached resolution with customers representing approximately 95% of its pre-COVID contractual revenue. While deferments for this and future periods delay rent or mortgage payments, these deferments generally do not release customers from the obligation to pay the deferred amounts in the future. Deferred rent amounts are reflected in our financial statements as accounts receivable if collection is determined to be probable or will be recognized when received as variable lease payments if collection is determined to not be probable, while deferred mortgage payments are reflected as mortgage notes and related accrued interest receivable, less any allowance for credit loss. Certain agreements with tenants where remaining lease terms are extended, or other changes are made that do not qualify for the treatment in the Financial Accounting Standards Board (FASB) Staff Q&A on Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic, are treated as lease modifications. In these circumstances upon an executed lease modification, if the tenant is not being recognized on a cash basis, the contractual rent reflected in accounts receivable and the straight-line rent receivable will be amortized over the remaining term of the lease against rental revenue. In limited cases, tenants may be entitled to the abatement of rent during governmentally imposed prohibitions on business operations which is recognized in the period to which it relates, or we may provide rent concessions to tenants. In cases where we provide concessions to tenants to which they are not otherwise entitled, those amounts are recognized in the period in which the concession is granted unless the changes are accounted for as lease modifications.
In March 2020, our employees transitioned to a fully remote work force to protect the safety and well-being of our personnel. Our prior investments in technology, business continuity planning and cyber-security protocols have enabled us to continue working with limited operational impacts.
Operating Results
Our total revenue from continuing operations, net (loss) income available to common shareholders per diluted share and FFOAA per diluted share (a non-GAAP financial measure) are detailed below for the years ended December 31, 2020 and 2019 (in millions, except per share information):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
Total revenue from continuing operations
|
$
|
414.7
|
|
|
$
|
652.0
|
|
|
(36)
|
%
|
|
Net (loss) income available to common shareholders per diluted share
|
(2.05)
|
|
|
2.32
|
|
|
(188)
|
%
|
|
FFOAA per diluted share
|
1.43
|
|
|
5.44
|
|
|
(74)
|
%
|
The major factors impacting our results for the year ended December 31, 2020, as compared to the year ended December 31, 2019 were as follows:
•The effects of the COVID-19 pandemic as described above;
•The effect of investment spending that occurred in 2020 and 2019;
•The effect of property dispositions and mortgage note payoffs that occurred in 2020 and 2019;
•The decrease in other income and other expenses primarily from the operations of the Kartrite Resort and Indoor Waterpark in Sullivan County, New York and the impacts of the COVID-19 pandemic on this property;
•The decrease in termination fees included in gain on sale related to the sale of Education properties;
•The decrease in general and administrative expense;
•The decrease in costs associated with loan refinancing or payoff;
•The decrease in transaction costs; and
•The decrease in common shares outstanding.
For further detail on items impacting our operating results, see section below titled "Results of Operations". FFOAA is a non-GAAP financial measure. For the definitions and further details on the calculations of FFOAA and certain other non-GAAP financial measures, see section below titled "Non-GAAP Financial Measures."
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) 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 and the reported amounts of revenues and expenses during the reporting periods. The most significant assumptions and estimates relate to the valuation of real estate, accounting for real estate acquisitions, assessing the collectibility of receivables and the credit loss related to mortgage and other notes receivable. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.
Impairment of Real Estate Values
We are required to make subjective assessments as to whether there are impairments in the value of our real estate investments. These estimates of impairment may have a direct impact on our consolidated financial statements. We assess the carrying value of our real estate investments whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable. Certain factors may indicate that impairments exist which include, but are not limited to, under-performance relative to projected future operating results, change in the time period we expect to hold the property, tenant difficulties and significant adverse industry or market economic trends. If an indicator of possible impairment exists, the property is evaluated for impairment by comparing the carrying amount of the property to the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its estimated fair value. Estimating future cash flows is highly subjective and such estimates could differ materially from actual results.
Real Estate Acquisitions
Upon acquisition of real estate properties, we evaluate the acquisition to determine if it is a business combination or an asset acquisition.
If the acquisition is determined to be an asset acquisition, we record the purchase price and other related costs incurred to the acquired tangible assets and identified intangible assets and liabilities on a relative fair value basis. Typically, relative fair values are based on recent independent appraisals or methods similar to those used by independent appraisers, as well as management judgment. In addition, acquisition-related costs incurred for asset acquisitions are capitalized.
If the acquisition is determined to be a business combination, we record the fair value of acquired tangible assets and identified intangible assets and liabilities as well as any non-controlling interest. Typically, fair values are based on recent independent appraisals or methods similar to those used by independent appraisers, as well as management judgment. In addition, acquisition-related costs incurred for business combinations are expensed as incurred. Costs
related to such transactions, as well as costs associated with terminated transactions, are included in the accompanying consolidated statements of (loss) income and comprehensive (loss) income as transaction costs.
Collectibility of Lease Receivables
Our accounts receivable balance is comprised primarily of rents and operating cost recoveries due from tenants as well as accrued rental rate increases to be received over the life of the existing leases. We regularly evaluate the collectibility of our receivables on a lease by lease basis. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of our tenants, historical trends of the tenant, current economic conditions and changes in customer payment terms. We suspend revenue recognition when the collectibility of amounts due are no longer probable and record a direct write-off of the receivable to revenue. Prior to 2019, we reduced our accounts receivable by an allowance for doubtful accounts and recorded bad debt expense included in property operating expenses when loss was probable.
Collectibility of Mortgage and Notes Receivables
Our mortgage and notes receivables consist of loans originated by us and the related accrued and unpaid interest income. We regularly evaluate the collectibility of our receivables by reviewing past due balances and considering such factors as the credit quality of our borrowers, historical trends of the borrower, our historical loss experience, current portfolio, market and economic conditions and changes in borrower payment terms. We estimate our current expected credit losses on a loan-by-loan basis using a forward-looking commercial real estate forecasting tool. We record credit loss expense and reduce our mortgage note and note receivables balances by the allowance for credit losses on a quarterly basis in accordance with ASC 326. In the event we have a past due mortgage note or note receivable and we determine it is collateral dependent, we measure expected credit losses based on the fair value of the collateral. If foreclosure is deemed probable, and we expect to sell rather than operate the collateral, we adjust the fair value of the collateral for the estimated costs to sell. Prior to 2020, we evaluated the collectibility of our mortgage and notes receivables to determine whether the loan was impaired and if it was probable that we would be unable to collect all amounts due according to the contractual terms.
Recent Developments
Investment Spending
Our investment spending during the years ended December 31, 2020 and 2019 totaled $85.1 million and $794.7 million, respectively, and is detailed below (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
For the Year Ended December 31, 2020
|
|
Investment Type
|
Total Investment Spending
|
New Development
|
Re-development
|
Asset Acquisition
|
Mortgage Notes or Notes Receivable
|
Investment in Joint Ventures
|
|
Experiential:
|
|
|
|
|
|
|
|
Theatres
|
$
|
33,162
|
|
$
|
5,760
|
|
$
|
5,183
|
|
$
|
22,219
|
|
$
|
—
|
|
$
|
—
|
|
|
Eat & Play
|
19,679
|
|
18,852
|
|
827
|
|
—
|
|
—
|
|
—
|
|
|
Attractions
|
669
|
|
—
|
|
669
|
|
—
|
|
—
|
|
—
|
|
|
Ski
|
2,088
|
|
—
|
|
—
|
|
—
|
|
2,088
|
|
—
|
|
|
Experiential Lodging
|
17,114
|
|
13,775
|
|
1,649
|
|
—
|
|
—
|
|
1,690
|
|
|
|
|
|
|
|
|
|
|
Cultural
|
6,293
|
|
—
|
|
159
|
|
—
|
|
6,134
|
|
—
|
|
|
Fitness & Wellness
|
6,049
|
|
—
|
|
—
|
|
—
|
|
6,049
|
|
—
|
|
|
Total Experiential
|
85,054
|
|
38,387
|
|
8,487
|
|
22,219
|
|
14,271
|
|
1,690
|
|
|
|
|
|
|
|
|
|
|
Education:
|
|
|
|
|
|
|
|
Early Childhood Education Centers
|
3
|
|
—
|
|
—
|
|
—
|
|
3
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Education
|
3
|
|
—
|
|
—
|
|
—
|
|
3
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Investment Spending
|
$
|
85,057
|
|
$
|
38,387
|
|
$
|
8,487
|
|
$
|
22,219
|
|
$
|
14,274
|
|
$
|
1,690
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
Investment Type
|
Total Investment Spending
|
New Development
|
Re-development
|
Asset Acquisition
|
Mortgage Notes or Notes Receivable
|
Investment in Joint Ventures
|
|
Experiential:
|
|
|
|
|
|
|
|
Theatres
|
$
|
459,393
|
|
$
|
4,500
|
|
$
|
28,429
|
|
$
|
426,464
|
|
$
|
—
|
|
$
|
—
|
|
|
Eat & Play
|
76,739
|
|
51,209
|
|
6,901
|
|
1,429
|
|
17,200
|
|
—
|
|
|
Attractions
|
102
|
|
—
|
|
—
|
|
—
|
|
102
|
|
—
|
|
|
Ski
|
37,288
|
|
—
|
|
288
|
|
—
|
|
37,000
|
|
—
|
|
|
Experiential Lodging
|
125,170
|
|
53,130
|
|
935
|
|
—
|
|
70,000
|
|
1,105
|
|
|
Gaming
|
608
|
|
608
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Cultural
|
30,661
|
|
198
|
|
—
|
|
23,963
|
|
6,500
|
|
—
|
|
|
Fitness & Wellness
|
5,950
|
|
—
|
|
—
|
|
—
|
|
5,950
|
|
—
|
|
|
Total Experiential
|
735,911
|
|
109,645
|
|
36,553
|
|
451,856
|
|
136,752
|
|
1,105
|
|
|
|
|
|
|
|
|
|
|
Education:
|
|
|
|
|
|
|
|
Private Schools
|
18,798
|
|
2,300
|
|
1,474
|
|
5,871
|
|
9,153
|
|
—
|
|
|
Early Childhood Education Centers
|
4,914
|
|
4,914
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Public Charter Schools
|
35,068
|
|
29,953
|
|
—
|
|
—
|
|
5,115
|
|
—
|
|
|
Total Education
|
58,780
|
|
37,167
|
|
1,474
|
|
5,871
|
|
14,268
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Investment Spending
|
$
|
794,691
|
|
$
|
146,812
|
|
$
|
38,027
|
|
$
|
457,727
|
|
$
|
151,020
|
|
$
|
1,105
|
|
The above amounts include $9 thousand and $35 thousand in capitalized payroll, $1.2 million and $5.3 million in capitalized interest and $0.3 million and $0.4 million in capitalized other general and administrative direct project costs for the years ended December 31, 2020 and 2019, respectively. Excluded from the table above is $11.3 million and $15.2 million of maintenance capital expenditures and other spending for the years ended December 31, 2020 and 2019, respectively.
We limited our investment spending during the year ended December 31, 2020 to enhance our liquidity position in light of the negative impact of the COVID-19 pandemic. We will continue to limit our investment spending during the Covenant Relief Period under the amendments to the agreements governing our bank credit facilities and private placement notes as discussed above.
Dispositions
On December 29, 2020, pursuant to a tenant purchase option, we completed the sale of six private schools and four early childhood education centers for net proceeds of approximately $201.2 million and recognized a gain on sale of approximately $39.7 million. Additionally, during the year ended December 31, 2020, we completed the sale of three early education properties, four experiential properties and two land parcels for net proceeds totaling $26.6 million and recognized a combined gain on sale of $10.4 million.
AMC Restructuring
On July 31, 2020, we entered into a Forbearance Agreement (the “Forbearance Agreement”), a Master Lease Agreement (the “Master Lease”) and seven amended lease agreements (the “Transitional Leases” and collectively with the Master Lease, the “Leases”) with American Multi-Cinema, Inc. and certain affiliates (“AMC”) relating to 53 properties leased by us to AMC (the “Leased Properties”) on the date the agreement was executed. We entered into the Master Lease with AMC relating to 46 theatres (“Master Lease Properties”) and amended the Transitional Leases relating to seven theatres (“Transitional Properties”), each of which was effective July 1, 2020. Subsequent to the effective date, we terminated the Transitional Leases during the second and third quarter of 2020.
We agreed to reduce total annual fixed rent on the 46 Master Lease Properties by approximately 18%, or $19.4 million to approximately $87.8 million (including approximately $6.8 million of ground rent and the repayment of deferral amounts for the months of April, May and June 2020 which we had agreed to defer and amortize as part of fixed rent over the first 14 years of the Master Lease term). Additionally, the Master Lease has fixed escalators of 7.5% every five years on fixed rent excluding the portion attributable to deferred rent.
Each lease for the seven Transitional Properties was amended by the parties. We agreed to reduce the aggregate annual fixed rent on the Transitional Properties by approximately $6.2 million to approximately $8.1 million (including approximately $1.2 million of ground rent and the repayment of deferral amounts for the months of April, May and June 2020 which we had agreed to defer and amortize as part of fixed rent over the remaining terms of the new leases). The total amount deferred under each Transitional Lease prior to us terminating these agreements is still due by AMC and is scheduled to be paid over what would have been the remaining terms of the related property leases.
Pursuant to the Leases and the Forbearance Agreement, during the period of July 1, 2020 through December 31, 2020, AMC agreed to pay percentage rent (15% of gross receipts) in lieu of fixed rent for the Leased Properties prior to any lease terminations. The difference between the percentage rent paid and fixed rent due under the Master Lease represents an additional deferred amount that, beginning in February 2021, will be added to fixed cash rent and amortized over the first 14 years of the Master Lease and beginning January 2021 will be rent due related to the Transitional Leases amortized over the prior lease terms. During the year ended December 31, 2020, we recognized $1.7 million in percentage rent from AMC which related to the period they were open beginning in late August. The payment expected for December will be recognized in the first quarter of 2021 when the payment is received due to recognizing AMC's revenue on a cash basis.
The Master Lease Properties have been divided into four tranches, with the initial term of each tranche expiring annually from June 30, 2034 to June 30, 2037. The Transitional Leases have expiration dates occurring between November 2026 and March 2029. Prior to December 31, 2020, we terminated all Transitional Leases with AMC.
We believe that the AMC restructuring significantly improves our long-term position with respect to AMC, while providing AMC with deferrals it needs during the pandemic and better performing theatres in the future. Specifically:
•The Master Lease was designed with the intention that the parties will respect the master lease characterization at all times, which we believe will enhance our position in the event of a reorganization proceeding regarding AMC;
•The lease terms on properties included in the Master Lease were increased by an average of nine years; and
•We have reduced our exposure to AMC through the termination of each of the seven Transitional Lease and plan to re-brand or sell these properties with one property sold in December of 2020.
Impairment Charges
As a result of the COVID-19 pandemic, we experienced vacancies at some of our properties and at others we negotiated lease modifications that included rent reductions. As part of this process, we reassessed the expected holding periods and expected future cash flows of such properties and determined that the estimated cash flows were not sufficient to recover the carrying values of nine properties. Accordingly, we recognized impairment charges of $85.7 million, which were comprised of $70.7 million of impairments of real estate investments at nine properties and $15.0 million of impairments of operating lease right-of-use assets at two of these properties. See Note 4 to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information related to these impairment charges.
During the year ended December 31, 2020, we recognized other-than-temporary impairment charges of $3.2 million on our equity investments in three theatre projects located in China. See Note 7 to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information related to these impairment charges.
Severance Expense
On December 31, 2020, our Senior Vice President - Asset Management, Michael L. Hirons, retired. His retirement was a "Qualifying Termination" under our Employee Severance and Retirement Vesting Plan. For the year ended December 31, 2020, severance expense totaled $2.9 million and included cash payments totaling $1.6 million, and accelerated vesting of nonvested shares and performance shares totaling $1.3 million.
Attraction Tenant Update
During the year ended December 31, 2020, we entered into an amended and restated loan and security agreement with one of our notes receivable borrowers in response to the impacts of the COVID-19 pandemic on the borrower. The restated note receivable consisted of the previous note balance of $6.5 million and provides the borrower with a term loan for up to $13.0 million and a $6.0 million revolving line of credit. The restated note receivable has a maturity date of June 30, 2032 and the line of credit matures on December 31, 2022. Interest is deferred through June 30, 2022, at which time monthly principal and interest payments will be due over 10 years and will be recognized as income on a cash basis. Although the borrower is not in default, nor has the borrower declared bankruptcy, we determined these modifications resulted in a troubled debt restructuring at December 31, 2020 due to the impacts of the COVID-19 pandemic on the borrower's financial condition. We recognized credit loss expense for the outstanding principal balance of $12.6 million and the $12.9 million unfunded commitment on the term loan and line of credit as of December 31, 2020.
Amended Consolidated Credit Agreement and Note Purchase Agreement
During the year ended December 31, 2020, we amended our Consolidated Credit Agreement, which governs our unsecured revolving credit facility and our unsecured term loan facility, and our Note Purchase Agreement, which governs our private placement notes. The amendments modified certain provisions and waived our obligation to comply with certain covenants under these debt agreements through December 31, 2020, or when the Company provides notice that it elects to terminate the Covenant Relief Period, both subject to certain conditions. See discussion below in Liquidity and Capital Resources and Note 8 to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information related to these amendments.
Results of Operations
Year ended December 31, 2020 compared to year ended December 31, 2019
Analysis of Revenue
The following table summarizes our total revenue (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
|
|
2020
|
|
2019
|
|
|
|
Minimum rent (1)
|
|
$
|
372,546
|
|
|
$
|
544,279
|
|
|
$
|
(171,733)
|
|
|
Percentage rent (2)
|
|
8,554
|
|
|
14,962
|
|
|
(6,408)
|
|
|
Straight-line rent (3)
|
|
(24,550)
|
|
|
10,557
|
|
|
(35,107)
|
|
|
Tenant reimbursements (4)
|
|
15,111
|
|
|
22,864
|
|
|
(7,753)
|
|
|
Other rental revenue
|
|
515
|
|
|
360
|
|
|
155
|
|
|
Total Rental Revenue
|
|
$
|
372,176
|
|
|
$
|
593,022
|
|
|
$
|
(220,846)
|
|
|
|
|
|
|
|
|
|
|
Other income (5)
|
|
9,139
|
|
|
25,920
|
|
|
(16,781)
|
|
|
Mortgage and other financing income
|
|
33,346
|
|
|
33,027
|
|
|
319
|
|
|
Total revenue
|
|
$
|
414,661
|
|
|
$
|
651,969
|
|
|
$
|
(237,308)
|
|
(1) For the year ended December 31, 2020 compared to the year ended December 31, 2019, the decrease in minimum rent resulted primarily from the impact of the COVID-19 pandemic, with approximately $176.0 million related to tenants with rent recognized on a cash basis or as restructured, as well as for properties with deferred rent not recognized because collection was determined not probable or there were rent abatements. In addition, there was a decrease in rental revenue of $7.0 million from property dispositions not classified in discontinued operations. This was partially offset by an increase in minimum rent of $5.5 million related to property acquisitions and developments completed in 2020 and 2019 and $5.8 million in increases on existing properties. Minimum rent for the year ended December 31, 2020 includes $5.2 million in variable rent from tenants that paid a portion of minimum rent based on a percentage of gross revenue.
During the year ended December 31, 2020, we renewed 15 lease agreements on approximately 0.9 million square feet. These extension agreements (which exclude restructured agreements with AMC as discussed in "Recent Developments") were negotiated with our tenants in conjunction with rent deferrals as a result of the impact of the COVID-19 pandemic. The extension periods for these agreements will begin in future periods, between 2021 and 2031. Upon the commencement of the extension periods, we expect a weighted average increase of approximately 8% in rental rates. We paid no leasing commissions with respect to these lease renewals.
(2) The decrease in percentage rent (amounts above base rent) related primarily to lower percentage rent recognized during the year ended December 31, 2020 from five theatre properties, one ski property, five attraction properties, one eat and play tenant and one early education tenant. These decreases were partially offset by increases in percentage rent from one private school tenant.
(3) For the year ended December 31, 2020 compared to the year ended December 31, 2019, the decrease in straight-line rent resulted primarily from write-offs totaling $38.0 million during the year ended December 31, 2020, which was comprised of $26.5 million of straight-line accounts receivable and $11.5 million of sub-lessor ground lease straight-line accounts receivable, due to the COVID-19 pandemic. This was partially offset by an increase in straight-line rent related to property acquisitions and developments completed in 2020 and 2019.
(4) The decrease in tenant reimbursements during the year ended December 31, 2020 was primarily due to COVID-19 contractual abatements (which in certain cases included tenant reimbursements), tenant deferrals that were not recognized because collection was not probable and vacancies. Additionally, during the year ended December 31, 2020, we had $4.7 million less in the gross-up of tenant reimbursed expenses for property taxes at various properties as certain tenants at these properties are now paying these costs directly.
(5) The decrease in other income for the year ended December 31, 2020 related primarily to a decrease in operating income as a result of COVID-19 closures at the Kartrite Resort and a theatre property.
Analysis of Expenses and Other Line Items
The following table summarizes our expenses and other line items (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Property operating expense (1)
|
|
$
|
58,587
|
|
|
$
|
60,739
|
|
|
$
|
(2,152)
|
|
|
|
Other expense (2)
|
|
16,474
|
|
|
29,667
|
|
|
(13,193)
|
|
|
|
General and administrative expense (3)
|
|
42,596
|
|
|
46,371
|
|
|
(3,775)
|
|
|
|
Severance expense
|
|
2,868
|
|
|
2,364
|
|
|
504
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs associated with loan refinancing or payoff (4)
|
|
1,632
|
|
|
38,269
|
|
|
(36,637)
|
|
|
|
Interest expense, net (5)
|
|
157,675
|
|
|
142,002
|
|
|
15,673
|
|
|
|
Transaction costs (6)
|
|
5,436
|
|
|
23,789
|
|
|
(18,353)
|
|
|
|
Credit loss expense (7)
|
|
30,695
|
|
|
—
|
|
|
30,695
|
|
|
|
Impairment charges (8)
|
|
85,657
|
|
|
2,206
|
|
|
83,451
|
|
|
|
Depreciation and amortization (9)
|
|
170,333
|
|
|
158,834
|
|
|
11,499
|
|
|
|
Equity in loss from joint ventures (10)
|
|
(4,552)
|
|
|
(381)
|
|
|
(4,171)
|
|
|
|
Impairment charges on joint ventures (11)
|
|
(3,247)
|
|
|
—
|
|
|
(3,247)
|
|
|
|
Gain on sale of real estate (12)
|
|
50,119
|
|
|
4,174
|
|
|
45,945
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit (13)
|
|
(16,756)
|
|
|
3,035
|
|
|
(19,791)
|
|
|
|
Income from discontinued operations before other items (14)
|
|
—
|
|
|
37,241
|
|
|
(37,241)
|
|
|
|
Impairment on public charter school portfolio sale (15)
|
|
—
|
|
|
(21,433)
|
|
|
21,433
|
|
|
|
Gain on sale of real estate from discontinued operations (16)
|
|
—
|
|
|
31,879
|
|
|
(31,879)
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividend requirements
|
|
(24,136)
|
|
|
(24,136)
|
|
|
—
|
|
|
(1) Our property operating expenses arise from the operations of our entertainment districts and other specialty properties as well as operating ground lease expense and the gross-up of tenant reimbursed expenses. The decrease in property operating expenses resulted from bad debt expense booked in 2019, as well as a decrease in the gross-up of tenant reimbursed expenses for property taxes at various properties as certain tenants at these properties are now paying these costs directly. These decreases were partially offset by an increase in costs due to higher vacancies.
(2) The decrease in other expense for the year ended December 31, 2020 related to a decrease in operating expenses as a result of COVID-19 closures at the Kartrite Resort and a theatre property.
(3) The decrease in general and administrative expense for the year ended December 31, 2020 was primarily due to a decrease in payroll and benefits costs, as well as travel expenses, partially offset by increases in professional fees.
(4) Costs associated with loan refinancing or payoff for the year ended December 31, 2020 related to fees paid to third parties in connection with amendments to our Consolidated Credit Agreement and Note Purchase Agreement. Costs associated with loan refinancing or payoff for the year ended December 31, 2019 related to the tender and redemption of the 5.75% Senior Notes due 2022.
(5) The increase in our net interest expense for the year ended December 31, 2020 compared to the year ended December 31, 2019 resulted primarily from an increase in average borrowings as well as a decrease in interest cost capitalized on development projects. This was partially offset by a decrease in our weighted average interest rate on outstanding debt and an increase in interest income from short-term investments related to cash on hand.
(6) The decrease in transaction costs for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to pre-opening costs related to the Kartrite Resort, which opened in May 2019, as well as less costs related to the transfer of our CLA properties to Crème.
(7) Credit loss expense for the year ended December 31, 2020 was recognized in conjunction with our implementation of the new current expected credit losses standard (Topic 326). In addition, credit loss expense for the year ended December 31, 2020 included $25.5 million of credit loss expense that was recognized to reserve the outstanding principal balance of notes receivable from one borrower and an unfunded commitment to fund an additional $12.9 million, as a result of to recent changes in the borrower's financial status due to the COVID-19 pandemic.
(8) Impairment charges recognized during the year ended December 31, 2020, related to nine properties with revised estimated undiscounted cash flows and shorter hold periods as a result of the COVID-19 pandemic. Impairment charges recognized during the year ended December 31, 2020 were comprised of $70.7 million of impairments of real estate investments and $15.0 million of impairments of operating lease right-of-use assets. Impairment charges recognized during the year ended December 31, 2019, related to one theatre property.
(9) The increase in depreciation and amortization expense resulted primarily from acquisitions and developments completed in 2019 and 2020 as well as the acceleration of amortization on an in-place lease intangible related to a vacant property. This increase was partially offset by decreases related to property dispositions that occurred during 2019 and 2020.
(10) The increase in equity in loss from joint ventures resulted primarily from losses recognized at our joint ventures projects located in St. Petersburg Beach, Florida, and our joint ventures in three theatre projects in China. These properties were negatively impacted due to COVID-19 closures.
(11) Impairment charges on joint ventures for the year ended December 31, 2020 related to other-than-temporary impairment charges on three theatre projects located in China. See Note 7 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.
(12) The gain on sale of real estate for the year ended December 31, 2020 related to the exercise of a tenant purchase option on six private schools and four early childhood education centers as well as the sale of three early education center properties, four experiential properties and two land parcels. The gain on sale of real estate for the year ended December 31, 2019 related to the sale of one early childhood education center property, one attraction property and four land parcels.
(13) The increase in income tax expense for the year ended December 31, 2020 compared to income tax benefit for the year ended December 31, 2019 is primarily related to the recognition of a full valuation allowance on deferred tax assets for our Canadian operations and certain TRSs as a result of the economic uncertainty caused by the COVID-19 pandemic.
(14) Income from discontinued operations before other items for the year ended December 31, 2019 related to the operating results of all public charter school investments disposed in 2019. See Note 17 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information on discontinued operations.
(15) Impairment on public charter school portfolio sale for the year ended December 31, 2019 related to the sale of substantially all of our public charter school portfolio, consisting of 47 public charter school related assets. See Note 4 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information on these impairment charges.
(16) Gain on sale of real estate from discontinued operations for the year ended December 31, 2019 was due to the disposition of ten public charter schools pursuant to tenant purchase options and seven other public charter school properties sold during 2019.
Year ended December 31, 2019 compared to year ended December 31, 2018
Analysis of Revenue
The following table summarizes our total revenue (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
Minimum rent (1)
|
|
$
|
544,279
|
|
|
$
|
478,087
|
|
|
$
|
66,192
|
|
|
|
Percentage rent (2)
|
|
14,962
|
|
|
10,663
|
|
|
4,299
|
|
|
|
Straight-line rent (3)
|
|
10,557
|
|
|
4,703
|
|
|
5,854
|
|
|
|
Tenant reimbursements (4)
|
|
22,864
|
|
|
15,305
|
|
|
7,559
|
|
|
|
Other rental revenue
|
|
360
|
|
|
328
|
|
|
32
|
|
|
|
Total Rental Revenue
|
|
$
|
593,022
|
|
|
$
|
509,086
|
|
|
$
|
83,936
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (5)
|
|
25,920
|
|
|
2,076
|
|
|
23,844
|
|
|
|
Mortgage and other financing income (6)
|
|
33,027
|
|
|
128,759
|
|
|
(95,732)
|
|
|
|
Total revenue
|
|
$
|
651,969
|
|
|
$
|
639,921
|
|
|
$
|
12,048
|
|
|
(1) For the year ended December 31, 2019 compared to the year ended December 31, 2018, the increase in minimum rent resulted from $41.2 million of rental revenue related to property acquisitions and developments completed in 2019 and 2018, an increase of $3.5 million in rental revenue related to our 21 early childhood education center properties that were transferred from CLA to Crème and an increase of $0.2 million in rental revenue on existing properties. In addition, during the year ended December 31, 2019, we recognized $22.6 million in lease revenue on our existing operating ground leases in which we are sub-lessor, in connection with our adoption of Topic 842. These increases were partially offset by a decrease of $1.3 million from property dispositions not included in discontinued operations.
During the year ended December 31, 2019, we renewed 10 lease agreements on approximately 783 thousand square feet and funded or agreed to fund an average of $17.25 per square foot in tenant improvements. We experienced a decrease of approximately 6.3% in rental rates and paid no leasing commissions with respect to these lease renewals.
(2) The increase in percentage rent related primarily to higher percentage rent recognized during the year ended December 31, 2019 from one of our ski properties, our gaming property and several attraction and Education properties.
(3) The increase in straight-line rent related primarily to property acquisitions and developments completed in 2019 and 2018 as well as $0.9 million in straight-line revenue on our existing operating ground leases in which we are a sub-lessor, in connection with our adoption of Topic 842.
(4) The increase in tenant reimbursements related primarily to the gross-up of tenant reimbursed expenses of $6.9 million recognized during the year ended December 31, 2019 in accordance with Topic 842.
(5) The increase in other income for the year ended December 31, 2019 related primarily to the operating income from the Kartrite Resort, as well as the operating income from a theatre.
(6) The decrease in mortgage and other financing income was primarily due to prepayment fees received in connection with prepayments on two non-Education mortgage notes during the year ended December 31, 2018 totaling $71.3 million as well as note and direct financing lease payoffs in 2018 and 2019.
Analysis of Expenses and Other Line Items
The following table summarizes our expenses and other line items (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
Property operating expense (1)
|
|
$
|
60,739
|
|
|
$
|
29,654
|
|
|
$
|
31,085
|
|
|
|
Other expense (2)
|
|
29,667
|
|
|
443
|
|
|
29,224
|
|
|
|
General and administrative expense
|
|
46,371
|
|
|
48,889
|
|
|
(2,518)
|
|
|
|
Severance expense
|
|
2,364
|
|
|
5,938
|
|
|
(3,574)
|
|
|
|
Litigation settlement expense
|
|
—
|
|
|
2,090
|
|
|
(2,090)
|
|
|
|
Costs associated with loan refinancing or payoff (3)
|
|
38,269
|
|
|
31,958
|
|
|
6,311
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net (4)
|
|
142,002
|
|
|
135,870
|
|
|
6,132
|
|
|
|
Transaction costs (5)
|
|
23,789
|
|
|
3,698
|
|
|
20,091
|
|
|
|
Impairment charges (6)
|
|
2,206
|
|
|
27,283
|
|
|
(25,077)
|
|
|
|
Depreciation and amortization (7)
|
|
158,834
|
|
|
138,395
|
|
|
20,439
|
|
|
|
Equity in loss from joint ventures
|
|
(381)
|
|
|
(22)
|
|
|
(359)
|
|
|
|
Gain on sale of real estate
|
|
4,174
|
|
|
3,037
|
|
|
1,137
|
|
|
|
Gain on sale of investment in direct financing leases (8)
|
|
—
|
|
|
5,514
|
|
|
(5,514)
|
|
|
|
Income tax benefit (expense) (9)
|
|
3,035
|
|
|
(2,285)
|
|
|
5,320
|
|
|
|
Income from discontinued operations before other items (10)
|
|
37,241
|
|
|
45,036
|
|
|
(7,795)
|
|
|
|
Impairment on public charter school portfolio sale (11)
|
|
(21,433)
|
|
|
—
|
|
|
(21,433)
|
|
|
|
Gain on sale of real estate from discontinued operations (12)
|
|
31,879
|
|
|
—
|
|
|
31,879
|
|
|
|
Preferred dividend requirements
|
|
(24,136)
|
|
|
(24,142)
|
|
|
6
|
|
|
|
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|
(1) Our property operating expenses arise from the operations of our entertainment districts and other specialty properties as well as operating ground lease expense and the gross-up of tenant reimbursed expenses. The increase in property operating expenses resulted primarily from ground lease expense of $24.6 million from our existing operating ground leases as well as the gross-up of tenant reimbursed expenses of $6.9 million recognized during the year ended December 31, 2019, in accordance with Topic 842, adopted January 1, 2019.
(2) The increase in other expense for the year ended December 31, 2019 related to operating expenses for the Kartrite Resort, as well as operating expense for a theatre.
(3) Costs associated with loan refinancing or payoff for the year ended December 31, 2019 related to the tender and redemption of the 5.75% Senior Notes due 2022. Costs associated with loan refinancing or payoff for the year ended December 31, 2018 related to the redemption of the 7.75% Senior Notes due 2020.
(4) The increase in our net interest expense for the year ended December 31, 2019 compared to the year ended December 31, 2018 resulted primarily from an increase in average borrowings used to finance our real estate acquisitions and fund our mortgage notes receivable as well as a decrease in interest cost capitalized on development projects. This was partially offset by an increase in interest income recognized during the year ended December 31, 2019.
(5) The increase in transaction costs for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to pre-opening costs related to the Kartrite Resort, which opened in May 2019, as well as costs related to the transfer of our CLA properties to Crème.
(6) Impairment charges recognized during the year ended December 31, 2019 related to one theatre property. Impairment charges recognized during the year ended December 31, 2018 related to two partially completed early childhood education centers and two land parcels with site improvements, as well as an impairment charge related to two guarantees of the payment of certain economic development revenue bonds secured by leasehold interest and improvements at two theatres in Louisiana. See Note 4 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information on these impairment charges.
(7) The increase in depreciation and amortization expense resulted primarily from acquisitions and developments completed in 2018 and 2019 and was partially offset by property dispositions that occurred during 2018 and 2019.
(8) Gain on sale of investment in direct financing leases for the year ended December 31, 2018 related to the sale of four public charter school properties leased to Imagine Schools, Inc. ("Imagine").
(9) The change in income tax benefit for the year ended December 31, 2019 compared to the income tax expense for the year ended December 31, 2018 is primarily related to lower deferred taxes due to the treatment of pre-opening costs and other expected tax losses for the Kartrite Resort, as well as certain expenses related to our Canadian trust.
(10) Income from discontinued operations before other items for the year ended December 31, 2019 and 2018 related to the operating results of all public charter school investments disposed in 2019. See Note 17 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information on discontinued operations.
(11) Impairment on public charter school portfolio sale for the year ended December 31, 2019 related to the sale of substantially all of our public charter school portfolio, consisting of 47 public charter school related assets, which occurred on November 22, 2019. See Note 4 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information on these impairment charges.
(12) Gain on sale of real estate from discontinued operations for the year ended December 31, 2019 was due to the disposition of ten public charter schools pursuant to tenant purchase options and seven other public charter school properties sold during 2019.
Liquidity and Capital Resources
Cash and cash equivalents were $1.0 billion at December 31, 2020. In addition, we had restricted cash of $2.4 million at December 31, 2020. Of the restricted cash at December 31, 2020, $1.3 million related to cash held for our tenants' off-season rent reserves and $1.1 million related to escrow deposits required for property management agreements or held for potential acquisitions and redevelopments.
Mortgage Debt, Senior Notes, Unsecured Revolving Credit Facility and Unsecured Term Loan Facility
As of December 31, 2020, we had total debt outstanding of $3.7 billion of which 99% was unsecured.
At December 31, 2020, we had outstanding $2.4 billion in aggregate principal amount of unsecured senior notes (excluding the private placement notes discussed below) ranging in interest rates from 3.75% to 5.25%. The notes contain various covenants, including: (i) a limitation on incurrence of any debt that would cause the ratio of our debt to adjusted total assets to exceed 60%; (ii) a limitation on incurrence of any secured debt that would cause the ratio of secured debt to adjusted total assets to exceed 40%; (iii) a limitation on incurrence of any debt that would cause our debt service coverage ratio to be less than 1.5 times; and (iv) the maintenance at all times of our total unencumbered assets such that they are not less than 150% of our outstanding unsecured debt.
In light of the continuing financial and operational impacts of the COVID-19 pandemic on us, our tenants and borrowers, on June 29, 2020 and November 3, 2020, we amended our Consolidated Credit Agreement, which governs our unsecured revolving credit facility and our unsecured term loan facility. The amendments modified certain provisions and waived our obligation to comply with certain covenants under this debt agreement through December 31, 2021. We can elect to terminate the Covenant Relief Period early, subject to certain conditions.
On June 29, 2020 and December 24, 2020, we further amended our Note Purchase Agreement, which governs our private placement notes. The amendments modified certain provisions and waived our obligation to comply with certain covenants under these debt agreements through October 1, 2021. We can elect to extend such period through January 1, 2022 and may elect to terminate the Covenant Relief Period early, subject to certain conditions. See Note 8 to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional details.
At December 31, 2020, we had $590.0 million outstanding balance under our $1.0 billion unsecured revolving credit facility with interest at a floating rate of LIBOR plus 1.625% (with a LIBOR floor of 0.50%), which was 2.125%, with a facility fee of 0.375%. During the three months ended December 31, 2020, our unsecured debt rating was downgraded to BB+ by both Fitch and Standard & Poor's. If our unsecured debt rating is further downgraded by Moody's, the interest rate on the revolving credit facility would increase by 0.35% during the Covenant Relief Period. After the Covenant Relief Period and based on our current unsecured debt ratings, the interest rate will be LIBOR plus 1.20% (with a LIBOR floor of zero) and the facility fee will be 0.25%, however these rates are subject to change based on our unsecured debt ratings. Subsequent to December 31, 2020, due to stronger collections, disposition proceeds and significant liquidity, we used a portion of our cash on hand to reduce borrowing under our unsecured revolving credit facility by $500.0 million, resulting in a remaining balance of $90.0 million on our $1.0 billion facility.
At December 31, 2020, our unsecured term loan facility had a balance of $400.0 million with interest at a floating rate of LIBOR plus 2.00% (with a LIBOR floor of 0.50%), which was 2.50%. Similar to the unsecured revolving credit facility discussed above, if our unsecured debt rating is further downgraded by Moody's, the interest rate on the term loan facility would increase by 0.35% during the Covenant Relief Period. After the Covenant Relief Period and based on our current unsecured debt ratings, the interest rate will be LIBOR plus 1.35% (with a LIBOR floor of zero), however these rates are subject to change based on our unsecured debt ratings. As of December 31, 2020, all of this LIBOR-based debt was fixed with interest rate swaps from April 5, 2019 to February 7, 2022. During the Covenant Relief Period and based on our current unsecured debt ratings, the interest rate swaps are fixed at 4.40% for $350.0 million of borrowings and 4.60% for the remaining $50.0 million of borrowings, and after the Covenant Relief Period will be 3.40% for $350.0 million of borrowings and 3.60% for the remaining $50.0 million of borrowings, however these rates are subject to change based on the Company’s unsecured debt ratings.
At December 31, 2020, we had outstanding $340.0 million of senior unsecured notes that were issued in a private placement transaction. The private placement notes were issued in two tranches with $148.0 million due August 22, 2024, and $192.0 million due August 22, 2026. As noted above, we amended the Note Purchase Agreement, which governs our private placement notes, on June 29, 2020 and December 24, 2020 to modify certain provisions and obtain covenant waivers. At December 31, 2020, the interest rates for the private placement notes were 5.60% and 5.81% for the Series A notes due 2024 and the Series B notes due 2026, respectively. After the Covenant Relief Period, the interest rates for the private placement notes are scheduled to return to 4.35% and 4.56% for the Series A notes due 2024 and the Series B notes due 2026, respectively. Subsequent to December 31, 2020, we used a portion of our cash proceeds from property sales to reduce the principal of our private placement notes by $23.8 million in accordance with the above amendments to the Note Purchase Agreement.
Our unsecured credit facilities and the private placement notes contain financial covenants or restrictions that limit our levels of consolidated debt, secured debt, investment levels outside certain categories, stock repurchases and dividend distributions and require us to maintain a minimum consolidated tangible net worth and meet certain coverage levels for fixed charges and debt service. The amendments to these debt agreements imposed a new minimum liquidity financial covenant during the Covenant Relief Period, provided relief from compliance with certain other financial covenants during the Covenant Relief Period and permanently modified certain other financial covenants. The amendments also imposed additional restrictions on us during the Covenant Relief Period, including limitations on making investments, incurring indebtedness, making capital expenditures and paying dividends and making other distributions, repurchasing our shares, voluntarily prepaying certain indebtedness, encumbering certain assets and maintaining a minimum liquidity amount, in each case subject to certain exceptions. In addition, the amendments required us to cause certain of our key subsidiaries to guarantee our obligations based on our unsecured debt ratings, and we are required to pledge the equity interests of such subsidiary guarantors if certain subsequent events occur; however, both of these requirements end when the Covenant Relief Period is over. See Note 8 to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional details regarding these amendments.
Additionally, these debt instruments contain cross-default provisions if we default under other indebtedness exceeding certain amounts. Those cross-default thresholds vary from $50.0 million to $75.0 million, depending upon
the debt instrument. We were in compliance with these financial and other covenants under our debt instruments at December 31, 2020.
Our principal investing activities are acquiring, developing and financing Experiential and Education properties. These investing activities have generally been financed with senior unsecured notes, as well as the proceeds from equity offerings. Our unsecured revolving credit facility is also used to finance the acquisition or development of properties, and to provide mortgage financing. We have and expect to continue to issue debt securities in public or private offerings. We have and may in the future assume mortgage debt in connection with property acquisitions or, after the expiration of the Covenant Relief Period, incur new mortgage debt on existing properties. We may also issue equity securities in connection with acquisitions. Continued growth of our real estate investments and mortgage financing portfolios will depend in part on our continued ability to access funds through additional borrowings and securities offerings and, to a lesser extent, our ability to assume debt in connection with property acquisitions. We may also fund investments with the proceeds from asset dispositions.
Capital Markets
During the year ended December 31, 2020, our Board of Trustees approved a share repurchase program to repurchase up to $150.0 million of our common shares. The share repurchase program was set to expire on December 31, 2020; however, we suspended the program on the effective date of the covenant modification agreements, June 29, 2020, as discussed above. During the year ended December 31, 2020, we repurchased 4,066,716 common shares under the share repurchase program for approximately $106.0 million. The repurchases were made under a Rule 10b5-1 trading plan.
During the year ended December 31, 2020, we issued an aggregate of 36,176 common shares under our DSP Plan for net proceeds of $1.1 million.
Liquidity Requirements
Short-term liquidity requirements consist primarily of normal recurring corporate operating expenses, debt service requirements, distributions to shareholders and, to a lesser extent, share repurchases. We have historically met these requirements primarily through cash provided by operating activities. The table below summarizes our cash flows (dollars in thousands):
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|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
Net cash provided by operating activities
|
|
$
|
65,273
|
|
|
$
|
439,530
|
|
|
Net cash provided by investing activities
|
|
133,986
|
|
|
96,505
|
|
|
Net cash provided (used) by financing activities
|
|
297,169
|
|
|
(23,223)
|
|
We currently anticipate that our cash on hand, cash from operations and proceeds from asset dispositions will provide adequate liquidity to meet our financial commitments for the next 12 months, including to fund our operations, make interest and principal payments on our debt, allow distributions to our preferred shareholders, and allow distributions to our common shareholders to avoid corporate level federal income or excise tax in accordance with REIT Internal Revenue Code requirements. We may also use funds available under our unsecured revolving credit facility, subject to compliance with financial covenants.
As discussed above, we have agreed to rent and mortgage payment deferral arrangements with most of our customers as a result of the COVID-19 pandemic. Under these deferral arrangements, our customers are required to resume rent and mortgage payments at negotiated times, and begin repaying deferred amount under negotiated schedules, which will begin at various times in the future. In addition, the continuing impact of the COVID-19 pandemic may result in further extensions or adjustments for our customers, which we cannot predict at this time. In the near term, we believe we can fund our short-term liquidity requirements primarily with cash on hand, including funds borrowed under our unsecured revolving credit facility.
Liquidity requirements at December 31, 2020 consisted primarily of maturities of debt. Contractual obligations as of December 31, 2020 are as follows (in thousands):
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|
Year ended December 31,
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|
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Contractual Obligations
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
|
Total
|
|
Long Term Debt Obligations
|
$
|
—
|
|
|
$
|
590,000
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|
|
$
|
675,000
|
|
|
$
|
148,000
|
|
|
$
|
300,000
|
|
|
$
|
2,016,995
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|
|
$
|
3,729,995
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|
|
Interest on Long Term Debt Obligations
|
157,078
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|
|
131,911
|
|
|
117,895
|
|
|
106,927
|
|
|
92,653
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|
|
175,670
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|
|
782,134
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|
|
Operating Lease Obligation - Corporate Office
|
884
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|
|
967
|
|
|
967
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|
|
967
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|
|
967
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|
|
724
|
|
|
5,476
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|
|
Operating Ground Lease Obligations (1)
|
22,520
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|
|
22,058
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|
|
21,340
|
|
|
20,840
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|
|
20,936
|
|
|
203,467
|
|
|
311,161
|
|
|
Total
|
$
|
180,482
|
|
|
$
|
744,936
|
|
|
$
|
815,202
|
|
|
$
|
276,734
|
|
|
$
|
414,556
|
|
|
$
|
2,396,856
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|
|
$
|
4,828,766
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|
(1) Our tenants, who are generally sub-tenants under the ground leases, are responsible for paying the rent under these ground leases. As of December 31, 2020, rental revenue from several of our tenants, who are also sub-tenants under the ground leases, are being recognized on a cash basis. In most cases, the ground lease sub-tenants have continued to pay the rent under these ground leases. In addition, two of these properties are vacant. In the event the tenant fails to pay the ground lease rent or the property is vacant, we would be primarily responsible for the payment, assuming we do not sell or re-tenant the property. The above amounts exclude contingent rent due under leases where the ground lease payment, or a portion thereof, is based on the level of the tenant's sales.
Commitments
As of December 31, 2020, we had 17 development projects with commitments to fund an aggregate of approximately $118.3 million, of which approximately $46.9 million is expected to be funded in 2021. Development costs are advanced by us in periodic draws. If we determine that construction is not being completed in accordance with the terms of the development agreement, we can discontinue funding construction draws. We have agreed to lease the properties to the operators at pre-determined rates upon completion of construction.
We have certain commitments related to our mortgage notes and notes receivable investments that we may be required to fund in the future. We are 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 December 31, 2020, we had three mortgage notes and one note receivable with commitments totaling approximately $31.8 million, of which approximately $21.7 million is expected to be funded in 2021. If commitments are funded in the future, interest will be charged at rates consistent with the existing investments.
In connection with construction of our development projects and related infrastructure, certain public agencies require posting of surety bonds to guarantee that our obligations are satisfied. These bonds expire upon the completion of the improvements or infrastructure. As of December 31, 2020, we had two surety bonds outstanding totaling $31.6 million.
Liquidity Analysis
As noted above, we had $590.0 million outstanding under our unsecured revolving credit facility at December 31, 2020. We borrowed $750.0 million on March 20, 2020 as a precautionary measure to increase our cash position and preserve financial flexibility in light of uncertainty in the global markets due to the COVID-19 pandemic. In addition, during 2020, we deferred our anticipated gaming venue investment and all other uncommitted investment spending. On December 30, 2020, we paid down our unsecured revolving credit facility by $160.0 million. In January 2021, due to stronger collections, disposition proceeds and significant liquidity, we used $500.0 million of our cash on hand to reduce the balance outstanding on our $1.0 billion unsecured revolving credit facility from
$590.0 million to $90.0 million. We believe our unrestricted cash position and borrowing capacity on our unsecured revolving credit facility will provide us with sufficient liquidity and aid us in this time of market disruption.
We have no scheduled debt payments due until 2022. We currently believe that we will be able to repay, extend, refinance or otherwise settle our debt maturities as the debt comes due and that we will be able to fund our remaining commitments, as necessary. However, there can be no assurance that additional financing or capital will be available, or that terms will be acceptable or advantageous to us, particularly in light of the current economic uncertainty caused by the COVID-19 pandemic.
Our primary use of cash after paying operating expenses, debt service, distributions to shareholders, funding share repurchases and funding existing commitments is in growing our investment portfolio through the acquisition, development and financing of additional properties. We expect to finance these investments with borrowings under our unsecured revolving credit facility, as well as debt and equity financing alternatives or proceeds from asset dispositions. The availability and terms of any such financing or sales will depend upon market and other conditions, which have been negatively impacted by the COVID-19 pandemic. If we borrow the maximum amount available under our unsecured revolving credit facility, there can be no assurance that we will be able to obtain additional or substitute investment financing. We may also assume mortgage debt in connection with property acquisitions.
Our investment spending and uses of cash during the Covenant Relief Period will be subject to limitations under the amendments to the agreements governing our Consolidated Credit Agreement and Note Purchase Agreement as discussed above. In addition, in certain circumstances, we will be required to apply 100% of the proceeds, net of certain costs, received during the Covenant Relief Period from certain sales and dispositions, debt issuances or equity issuances, in each case, subject to certain exceptions, to repay amounts outstanding under our Consolidated Credit Agreement and Note Purchase Agreement.
Capital Structure
We believe that our shareholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet as measured primarily by our net debt to adjusted EBITDA ratio (see "Non-GAAP Financial Measures" for definitions). We also seek to maintain conservative interest, fixed charge, debt service coverage and net debt to gross asset ratios.
Our net debt to adjusted EBITDAre ratio was not meaningful at December 31, 2020 given the temporary disruption caused by the COVID-19 pandemic and the associated accounting for tenant rent deferrals and other lease modifications. Our net debt to gross assets ratio was 40% as of December 31, 2020 (see "Non-GAAP Financial Measures" for calculation).
Non-GAAP Financial Measures
Funds From Operations (FFO), Funds From Operations As Adjusted (FFOAA) and Adjusted Funds from Operations (AFFO)
The National Association of Real Estate Investment Trusts (“NAREIT”) developed FFO as a relative non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. Pursuant to the definition of FFO by the Board of Governors of NAREIT, we calculate FFO as net (loss) income available to common shareholders, computed in accordance with GAAP, excluding gains and losses from disposition of real estate and impairment losses on real estate, 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. We have calculated FFO for all periods presented in accordance with this definition.
In addition to FFO, we present FFOAA and AFFO. FFOAA is presented by adding to FFO costs associated with loan refinancing or payoff, transaction costs, severance expense, preferred share redemption costs, impairment of
operating lease right-of-use assets, termination fees associated with tenants' exercises of public charter school buy-out options and credit loss expense and subtracting gain on insurance recovery and deferred income tax (benefit) expense. AFFO is presented by adding to FFOAA non-real estate depreciation and amortization, deferred financing fees amortization, share-based compensation expense to management and Trustees and amortization of above and below market leases, net and tenant allowances; and subtracting maintenance capital expenditures (including second generation tenant improvements and leasing commissions), straight-lined rental revenue (removing impact of straight-line ground sublease expense), and the non-cash portion of mortgage and other financing income.
FFO, FFOAA and AFFO are widely used measures of the operating performance of real estate companies and are provided here as a supplemental measure to GAAP net (loss) income available to common shareholders and earnings per share, and management provides FFO, FFOAA and AFFO herein because it believes this information is useful to investors in this regard. FFO, FFOAA and AFFO are non-GAAP financial measures. FFO, FFOAA and AFFO do not represent cash flows from operations as defined by GAAP and are not indicative that cash flows are adequate to fund all cash needs and are not to be considered alternatives to net income or any other GAAP measure as a measurement of the results of our operations or our cash flows or liquidity as defined by GAAP. It should also be noted that not all REITs calculate FFO, FFOAA and AFFO the same way so comparisons with other REITs may not be meaningful.
The following table summarizes our FFO, FFOAA and AFFO including per share amounts for FFO and FFOAA, for the years ended December 31, 2020, 2019 and 2018 and reconciles such measures to net (loss) income available to common shareholders, the most directly comparable GAAP measure (unaudited, in thousands, except per share information):
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|
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Year ended December 31,
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|
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2020
|
|
2019
|
|
2018
|
|
FFO:
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|
|
|
|
|
|
Net (loss) income available to common shareholders of EPR Properties
|
$
|
(155,864)
|
|
|
$
|
178,107
|
|
|
$
|
242,841
|
|
|
Gain on sale of real estate
|
(50,119)
|
|
|
(36,053)
|
|
|
(3,037)
|
|
|
Gain on sale of investment in direct financing leases
|
—
|
|
|
—
|
|
|
(5,514)
|
|
|
Impairment of real estate investments, net (1)
|
70,648
|
|
|
23,639
|
|
|
27,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate depreciation and amortization
|
169,253
|
|
|
170,717
|
|
|
152,508
|
|
|
Allocated share of joint venture depreciation
|
1,491
|
|
|
2,213
|
|
|
226
|
|
|
Impairment charges on joint ventures
|
3,247
|
|
|
—
|
|
|
—
|
|
|
FFO available to common shareholders of EPR Properties
|
$
|
38,656
|
|
|
$
|
338,623
|
|
|
$
|
414,307
|
|
|
|
|
|
|
|
|
|
FFO available to common shareholders of EPR Properties
|
$
|
38,656
|
|
|
$
|
338,623
|
|
|
$
|
414,307
|
|
|
Add: Preferred dividends for Series C preferred shares
|
—
|
|
|
7,754
|
|
|
7,759
|
|
|
Add: Preferred dividends for Series E preferred shares
|
—
|
|
|
7,756
|
|
|
7,756
|
|
|
Diluted FFO available to common shareholders of EPR Properties
|
$
|
38,656
|
|
|
$
|
354,133
|
|
|
$
|
429,822
|
|
|
FFOAA:
|
|
|
|
|
|
|
FFO available to common shareholders of EPR Properties
|
$
|
38,656
|
|
|
$
|
338,623
|
|
|
$
|
414,307
|
|
|
Costs associated with loan refinancing or payoff
|
1,632
|
|
|
38,450
|
|
|
31,958
|
|
|
Transaction costs
|
5,436
|
|
|
23,789
|
|
|
3,698
|
|
|
Severance expense
|
2,868
|
|
|
2,364
|
|
|
5,938
|
|
|
Litigation settlement expense
|
—
|
|
|
—
|
|
|
2,090
|
|
|
|
|
|
|
|
|
|
Termination fee included in gain on sale
|
—
|
|
|
24,075
|
|
|
1,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on insurance recovery (included in other income)
|
(809)
|
|
|
—
|
|
|
—
|
|
|
Impairment of operating lease right-of-use assets (1)
|
15,009
|
|
|
—
|
|
|
—
|
|
|
Credit loss expense
|
30,695
|
|
|
—
|
|
|
—
|
|
|
Deferred income tax expense (benefit)
|
15,246
|
|
|
(4,115)
|
|
|
573
|
|
|
FFOAA available to common shareholders of EPR Properties
|
$
|
108,733
|
|
|
$
|
423,186
|
|
|
$
|
460,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFOAA available to common shareholders of EPR Properties
|
$
|
108,733
|
|
|
$
|
423,186
|
|
|
$
|
460,428
|
|
|
Add: Preferred dividends for Series C preferred shares
|
—
|
|
|
7,754
|
|
|
7,759
|
|
|
Add: Preferred dividends for Series E preferred shares
|
—
|
|
|
7,756
|
|
|
7,756
|
|
|
Diluted FFOAA available to common shareholders of EPR Properties
|
$
|
108,733
|
|
|
$
|
438,696
|
|
|
$
|
475,943
|
|
|
AFFO:
|
|
|
|
|
|
|
FFOAA available to common shareholders of EPR Properties
|
$
|
108,733
|
|
|
$
|
423,186
|
|
|
$
|
460,428
|
|
|
Non-real estate depreciation and amortization
|
1,080
|
|
|
1,045
|
|
|
922
|
|
|
Deferred financing fees amortization
|
6,606
|
|
|
6,192
|
|
|
5,797
|
|
|
Share-based compensation expense to management and trustees
|
13,819
|
|
|
13,180
|
|
|
15,111
|
|
|
Amortization of above/below-market leases, net and tenant allowances
|
(480)
|
|
|
(343)
|
|
|
(581)
|
|
|
Maintenance capital expenditures (2)
|
(11,377)
|
|
|
(5,453)
|
|
|
(2,101)
|
|
|
Straight-lined rental revenue
|
24,550
|
|
|
(13,552)
|
|
|
(10,229)
|
|
|
Straight-lined ground sublease expense
|
749
|
|
|
882
|
|
|
—
|
|
|
Non-cash portion of mortgage and other financing income
|
(250)
|
|
|
(2,411)
|
|
|
(3,043)
|
|
|
AFFO available to common shareholders of EPR Properties
|
$
|
143,430
|
|
|
$
|
422,726
|
|
|
$
|
466,304
|
|
|
FFO per common share:
|
|
|
|
|
|
|
Basic
|
$
|
0.51
|
|
|
$
|
4.41
|
|
|
$
|
5.58
|
|
|
Diluted
|
0.51
|
|
|
4.39
|
|
|
5.51
|
|
|
FFOAA per common share:
|
|
|
|
|
|
|
Basic
|
$
|
1.43
|
|
|
$
|
5.51
|
|
|
$
|
6.20
|
|
|
Diluted
|
1.43
|
|
|
5.44
|
|
|
6.10
|
|
|
Shares used for computation (in thousands):
|
|
|
|
|
|
|
Basic
|
75,994
|
|
|
76,746
|
|
|
74,292
|
|
|
Diluted
|
75,994
|
|
|
76,782
|
|
|
74,337
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-diluted EPS
|
75,994
|
|
|
76,782
|
|
|
74,337
|
|
|
Effect of dilutive Series C preferred shares
|
—
|
|
|
2,164
|
|
|
2,114
|
|
|
|
|
|
|
|
|
|
Effect of dilutive Series E preferred shares
|
—
|
|
|
1,631
|
|
|
1,607
|
|
|
Adjusted weighted average shares outstanding - diluted Series C and Series E
|
75,994
|
|
|
80,577
|
|
|
78,058
|
|
|
Other financial information:
|
|
|
|
|
|
|
Dividends per common share
|
$
|
1.515
|
|
|
$
|
4.500
|
|
|
$
|
4.320
|
|
|
|
|
|
|
|
|
Amounts above include the impact of discontinued operations, which are separately classified in the consolidated statements of (loss) income and comprehensive (loss) income included in this Annual Report on Form 10-K. See Note 17 to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information related to discontinued operations.
(1) Impairment charges recognized during the year ended December 31, 2020 totaled $85.7 million, which was comprised of $70.7 million of impairments of real estate investments and $15.0 million of impairments of operating lease right-of-use assets.
(2) Includes maintenance capital expenditures and certain second-generation tenant improvements and leasing commissions.
The effect of the conversion of our convertible preferred shares is calculated using the if-converted method and the conversion which results in the most dilution is included in the computation of per share amounts. The conversion of the 5.75% Series C cumulative convertible preferred shares and the 9.00% Series E cumulative convertible preferred shares would be dilutive to FFO and FFOAA per share for years ended December 31, 2019 and 2018. Therefore, the additional common shares that would result from the conversion and the corresponding add-back of the preferred dividends declared on those shares are included in the calculation of diluted FFO and FFOAA per share for these periods.
Net Debt
Net Debt represents debt (reported in accordance with GAAP) adjusted to exclude deferred financing costs, net and reduced for cash and cash equivalents. By excluding deferred financing costs, net and reducing debt for cash and cash equivalents on hand, the result provides an estimate of the contractual amount of borrowed capital to be repaid, net of cash available to repay it. We believe this calculation constitutes a beneficial supplemental non-GAAP financial disclosure to investors in understanding our financial condition. Our method of calculating Net Debt may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs.
Gross Assets
Gross Assets represents total assets (reported in accordance with GAAP) adjusted to exclude accumulated depreciation and reduced for cash and cash equivalents. By excluding accumulated depreciation and reducing cash and cash equivalents, the result provides an estimate of the investment made by us. We believe that investors commonly use versions of this calculation in a similar manner. Our method of calculating Gross Assets may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs.
Net Debt to Gross Assets
Net Debt to Gross Assets is a supplemental measure derived from non-GAAP financial measures that we use to evaluate capital structure and the magnitude of debt to gross assets. We believe that investors commonly use versions of this ratio in a similar manner. Our method of calculating Net Debt to Gross Assets may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs.
EBITDAre
NAREIT developed EBITDAre as a relative non-GAAP financial measure of REITs, independent of a company's capital structure, to provide a uniform basis to measure the enterprise value of a company. Pursuant to the definition of EBITDAre by the Board of Governors of NAREIT, we calculate EBITDAre as net (loss) income, computed in accordance with GAAP, excluding interest expense (net), income tax (benefit) expense, depreciation and amortization, gains and losses from disposition of real estate, impairment losses on real estate, costs associated with loan refinancing or payoff and adjustments for unconsolidated partnerships, joint ventures and other affiliates.
Management provides EBITDAre herein because it believes this information is useful to investors as a supplemental performance measure as it can help facilitate comparisons of operating performance between periods and with other REITs. Our method of calculating EBITDAre may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. EBITDAre is not a measure of performance under GAAP, does not represent cash generated from operations as defined by GAAP and is not indicative of cash available to fund all cash needs, including distributions. This measure should not be considered an alternative to net income or any other GAAP measure as a measurement of the results of our operations or cash flows or liquidity as defined by GAAP.
Adjusted EBITDAre
Management uses Adjusted EBITDAre in its analysis of the performance of the business and operations of the Company. Management believes Adjusted EBITDAre is useful to investors because it excludes various items that management believes are not indicative of operating performance, and that it is an informative measure to use in computing various financial ratios to evaluate the Company. We define Adjusted EBITDAre as EBITDAre (defined above) for the quarter excluding gain on insurance recovery, severance expense, credit loss expense, transaction costs, impairment losses on operating lease right-of-use assets and prepayment fees. For the three months ended December 31, 2020, Adjusted EBITDAre was further adjusted to add back prior period receivable write-offs related to certain theatre tenants placed on cash basis or receiving abatements during the quarter.
Our method of calculating Adjusted EBITDAre may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. Adjusted EBITDAre is not a measure of performance
under GAAP, does not represent cash generated from operations as defined by GAAP and is not indicative of cash available to fund all cash needs, including distributions. This measure should not be considered as an alternative to net income or any other GAAP measure as a measurement of the results of our operations or cash flows or liquidity as defined by GAAP.
Reconciliations of debt, total assets and net (loss) income available to common shareholders (all reported in accordance with GAAP) to Net Debt, Gross Assets, Net Debt to Gross Assets, EBITDAre and Adjusted EBITDAre (each of which is a non-GAAP financial measure) are included in the following tables (unaudited, in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
Net Debt:
|
|
|
|
|
Debt
|
$
|
3,694,443
|
|
|
$
|
3,102,830
|
|
|
Deferred financing costs, net
|
35,552
|
|
|
37,165
|
|
|
Cash and cash equivalents
|
(1,025,577)
|
|
|
(528,763)
|
|
|
Net Debt
|
$
|
2,704,418
|
|
|
$
|
2,611,232
|
|
|
|
|
|
|
|
Gross Assets:
|
|
|
|
|
Total Assets
|
$
|
6,704,185
|
|
|
$
|
6,577,511
|
|
|
Accumulated depreciation
|
1,062,087
|
|
|
989,254
|
|
|
Cash and cash equivalents
|
(1,025,577)
|
|
|
(528,763)
|
|
|
Gross Assets
|
$
|
6,740,695
|
|
|
$
|
7,038,002
|
|
|
|
|
|
|
|
Net Debt to Gross Assets
|
40
|
%
|
|
37
|
%
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
2020
|
|
2019
|
|
EBITDAre and Adjusted EBITDAre:
|
|
|
|
|
Net (loss) income
|
$
|
(19,977)
|
|
|
$
|
36,297
|
|
|
Interest expense, net
|
42,838
|
|
|
34,907
|
|
|
Income tax expense (benefit)
|
402
|
|
|
(530)
|
|
|
Depreciation and amortization
|
42,014
|
|
|
44,530
|
|
|
Gain on sale of real estate
|
(49,877)
|
|
|
(5,648)
|
|
|
Impairment of real estate investments, net
|
22,832
|
|
|
23,639
|
|
|
Costs associated with loan refinancing or payoff
|
812
|
|
|
43
|
|
|
Allocated share of joint venture depreciation
|
361
|
|
|
551
|
|
|
Allocated share of joint venture interest expense
|
872
|
|
|
735
|
|
|
EBITDAre (for the quarter)
|
$
|
40,277
|
|
|
$
|
134,524
|
|
|
Gain on insurance recovery (1)
|
(809)
|
|
|
—
|
|
|
Severance expense
|
2,868
|
|
|
423
|
|
|
Transaction costs
|
814
|
|
|
5,784
|
|
|
Credit loss expense
|
20,312
|
|
|
—
|
|
|
Accounts receivable write-offs from prior periods (2)
|
4,301
|
|
|
—
|
|
|
Straight-line receivable write-offs from prior periods (2)
|
870
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDAre (for the quarter)
|
$
|
68,633
|
|
|
$
|
140,731
|
|
|
|
|
|
|
|
Amounts above include the impact of discontinued operations, which are separately classified in the consolidated statements of (loss) income and comprehensive (loss) income included in this Annual Report on Form 10-K.
|
|
(1) Included in other income in the consolidated statements of (loss) income and comprehensive (loss) income for the quarter. Other income includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
2020
|
|
2019
|
|
Income from settlement of foreign currency swap contracts
|
$
|
110
|
|
|
$
|
252
|
|
|
Gain on insurance recovery
|
809
|
|
|
—
|
|
|
Operating income from operated properties
|
45
|
|
|
7,996
|
|
|
|
|
|
|
|
Miscellaneous income
|
4
|
|
|
138
|
|
|
Other income
|
$
|
968
|
|
|
$
|
8,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Included in rental revenue from continuing operations in the consolidated statements of (loss) income and comprehensive (loss) income for the quarter. Rental revenue includes the following:
|
|
|
Three Months Ended December 31,
|
|
|
2020
|
|
2019
|
|
Minimum rent
|
$
|
79,342
|
|
|
$
|
139,529
|
|
|
Accounts receivable write-offs from prior periods
|
(4,301)
|
|
|
—
|
|
|
Tenant reimbursements
|
4,831
|
|
|
5,790
|
|
|
Percentage rent
|
3,040
|
|
|
6,428
|
|
|
Straight-line rental revenue
|
1,768
|
|
|
2,926
|
|
|
Straight-line receivable write-offs from prior periods
|
(870)
|
|
|
—
|
|
|
Other rental revenue
|
201
|
|
|
92
|
|
|
Rental revenue
|
$
|
84,011
|
|
|
$
|
154,765
|
|
Total Investments
Total investments is a non-GAAP financial measure defined as the sum of the carrying values of real estate investments (before accumulated depreciation), land held for development, property under development, mortgage notes receivable (including related accrued interest receivable), investment in joint ventures, intangible assets, gross (before accumulated amortization and included in other assets) and notes receivable and related accrued interest receivable, net (included in other assets). Total investments is a useful measure for management and investors as it illustrates across which asset categories the Company's funds have been invested. Our method of calculating total investments may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. A reconciliation of total investments to total assets (computed in accordance with GAAP) is included in the following table (unaudited, in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Total Investments:
|
|
|
|
|
Real estate investments, net of accumulated depreciation
|
$
|
4,851,302
|
|
|
$
|
5,197,308
|
|
|
Add back accumulated depreciation on real estate investments
|
1,062,087
|
|
|
989,254
|
|
|
Land held for development
|
23,225
|
|
|
28,080
|
|
|
Property under development
|
57,630
|
|
|
36,756
|
|
|
Mortgage notes and related accrued interest receivable
|
365,628
|
|
|
357,391
|
|
|
|
|
|
|
|
Investment in joint ventures
|
28,208
|
|
|
34,317
|
|
|
Intangible assets, gross (1)
|
57,962
|
|
|
57,385
|
|
|
Notes receivable and related accrued interest receivable, net (1)
|
7,300
|
|
|
14,026
|
|
|
Total investments
|
$
|
6,453,342
|
|
|
$
|
6,714,517
|
|
|
|
|
|
|
|
Total investments
|
$
|
6,453,342
|
|
|
$
|
6,714,517
|
|
|
Operating lease right-of-use assets
|
163,766
|
|
|
211,187
|
|
|
Cash and cash equivalents
|
1,025,577
|
|
|
528,763
|
|
|
Restricted cash
|
2,433
|
|
|
2,677
|
|
|
Accounts receivable
|
116,193
|
|
|
86,858
|
|
|
Less: accumulated depreciation on real estate investments
|
(1,062,087)
|
|
|
(989,254)
|
|
|
Less: accumulated amortization on intangible assets (1)
|
(16,330)
|
|
|
(12,693)
|
|
|
Prepaid expenses and other current assets (1)
|
21,291
|
|
|
35,456
|
|
|
Total assets
|
$
|
6,704,185
|
|
|
$
|
6,577,511
|
|
|
|
|
|
|
|
(1) Included in other assets in the accompanying consolidated balance sheet. Other assets include the following:
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Intangible assets, gross
|
$
|
57,962
|
|
|
$
|
57,385
|
|
|
Less: accumulated amortization on intangible assets
|
(16,330)
|
|
|
(12,693)
|
|
|
Notes receivable and related accrued interest receivable, net
|
7,300
|
|
|
14,026
|
|
|
Prepaid expenses and other current assets
|
21,291
|
|
|
35,456
|
|
|
Total other assets
|
$
|
70,223
|
|
|
$
|
94,174
|
|
Impact of Recently Issued Accounting Standards
See Note 2 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information on the impact of recently issued accounting standards on our business.
Inflation
Investments by EPR are financed with a combination of equity and debt. 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.
A substantial portion of our leases provide for base and participating rent features. In addition, certain of our mortgage notes receivable similarly provide for base and participating interest. To the extent inflation causes tenant or borrower revenues at our properties to increase, we would participate in those revenue increases through our right to receive variable rent and annual percentage rent and/or participating interest over the base amounts, as applicable.
Our leases and mortgage notes receivable also may provide for escalation in base rents or interest in the event of increases in the Consumer Price Index, with generally a limit of 2% per annum, or fixed periodic increases. During deflationary periods, the escalations in base rents or interest that are dependent on increases in the Consumer Price Index in our leases and mortgage notes receivable may be adversely affected.
Our leases are generally 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 leases are non-triple-net leases. These non-triple net leases represent approximately 18% 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.
Some of our investments have been structured using more traditional REIT lodging structures or are managed through a third-party manager. In the traditional REIT lodging structure, we hold qualified lodging facilities under the REIT and we separately hold the operations of the facilities in taxable REIT subsidiaries (TRSs) which are facilitated by management agreements with eligible independent contractors. Under this structure and when we manage properties through a third-party manager, we rely on the performance of our properties and the ability of the properties' managers to increase revenues to keep pace with inflation which may be limited by competitive pressures.
Additionally, our general and administrative costs may be subject to increases resulting from inflation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, primarily relating to potential losses due to changes in interest rates and foreign currency exchange 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. As of December 31, 2020, we had a $1.0 billion unsecured revolving credit facility with $590.0 million outstanding. Subsequent to December 31, 2020, we paid down $500.0 million on our revolving credit facility. We also had a $400.0 million unsecured term loan facility and a $25.0 million bond that bear interest at a floating rate but have been fixed through interest rate swap agreements.
As of December 31, 2020, we had a 65% investment interest in two unconsolidated real estate joint ventures related to two experiential lodging properties located in St. Petersburg Beach, Florida. At December 31, 2020, the joint venture had a secured mortgage loan with an outstanding balance of $85.0 million. The mortgage loan bears interest at an annual rate equal to the greater of 6.00% or LIBOR plus 3.75%. The joint venture has an interest rate cap agreement to limit the variable portion of the interest rate (LIBOR) on this note to 3.0% from March 28, 2019 to April 1, 2023. In response to the COVID-19 pandemic, on May 28, 2020, the joint venture was granted a three-month interest deferral, which is required to be paid on the maturity date of the loan and is not considered a troubled debt restructuring.
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, particularly in light of the current economic uncertainty caused by the COVID-19 pandemic. The majority of our borrowings are subject to contractual agreements or mortgages which limit the amount of indebtedness we may incur. Accordingly, if we are unable to raise additional equity or borrow money due to these limitations, our ability to make additional real estate investments may be limited.
The following table presents the principal amounts, weighted average interest rates, and other terms required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of December 31 (including the impact of the interest rate swap agreements described below):
Expected Maturities (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
|
Total
|
|
Estimated
Fair Value
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
675.0
|
|
|
$
|
148.0
|
|
|
$
|
300.0
|
|
|
$
|
2,017.0
|
|
|
$
|
3,140.0
|
|
|
$
|
3,114.8
|
|
|
Average interest rate
|
—
|
%
|
|
—
|
%
|
|
4.76
|
%
|
|
5.60
|
%
|
|
4.50
|
%
|
|
4.55
|
%
|
|
4.67
|
%
|
|
4.64
|
%
|
|
Variable rate debt
|
$
|
—
|
|
|
$
|
590.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
590.0
|
|
|
$
|
590.0
|
|
|
Average interest rate (as of December 31, 2020)
|
—
|
%
|
|
2.13
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
2.13
|
%
|
|
2.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
Total
|
|
Estimated
Fair Value
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
675.0
|
|
|
$
|
148.0
|
|
|
$
|
2,317.0
|
|
|
$
|
3,140.0
|
|
|
$
|
3,295.5
|
|
|
Average interest rate
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
4.02
|
%
|
|
4.35
|
%
|
|
4.44
|
%
|
|
4.34
|
%
|
|
3.45
|
%
|
|
Variable rate debt
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Average interest rate (as of December 31, 2019)
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
The fair value of our debt as of December 31, 2020 and 2019 is estimated by discounting the future cash flows of each instrument using current market rates including current market spreads.
We are exposed to foreign currency risk against our functional currency, the U.S. dollar, on our four Canadian properties and the rents received from tenants of the properties are payable in CAD. In order to hedge our net investment in our four Canadian properties, we entered into two fixed-to-fixed cross-currency swaps, with a fixed notional value of $200.0 million CAD. These investments became effective on July 1, 2018, mature on July 1, 2023 and are designated as net investment hedges of our Canadian net investments. The net effect of this hedge is to lock in an exchange rate of $1.32 CAD per U.S. dollar on $200.0 million CAD of our foreign net investments. The cross-currency swaps also have a monthly settlement feature locked in at an exchange rate of $1.32 CAD per USD on $4.5 million of CAD annual cash flows, the net effect of which is an excluded component from the effectiveness testing of this hedge.
During the year ended December 31, 2020, we entered into three USD-CAD cross-currency swaps that were effective July 1, 2020 with a total fixed original notional value of $100.0 million CAD and $76.6 million USD. The net effect of these swaps is to lock in an exchange rate of $1.31 CAD per USD on approximately $7.2 million annual CAD denominated cash flows through June 2022.
For foreign currency derivatives designated as net investment hedges, the change in the fair value of the derivatives are reported in accumulated other comprehensive income (AOCI) as part of the cumulative translation adjustment. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.
See Note 9 to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information on our derivative financial instruments and hedging activities.
Item 8. Financial Statements and Supplementary Data
EPR Properties
Contents
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
|
Audited Financial Statements
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
|
|
|
Consolidated Statements of Changes in Equity
|
|
|
Consolidated Statements of Cash Flows
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
|
Financial Statement Schedules
|
|
|
|
|
|
Schedule II – Valuation and Qualifying Accounts
|
|
|
Schedule III - Real Estate and Accumulated Depreciation
|
|
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders
EPR Properties:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of EPR Properties and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of (loss) income and comprehensive (loss) income, changes in equity, and cash flows for each of the years in the three‑year period ended December 31, 2020, and the related notes and financial statement schedules II and III (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Adoption of New Accounting Pronouncements
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method for accounting for expected credit losses as of January 1, 2020 due to the adoption of Accounting Standards Update (ASU) No. 2016‑13, Measurement of Credit Losses on Financial Instruments (Topic 326).
As discussed in Note 15 to the consolidated financial statements, the Company has changed its method for accounting for its leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of indicators real estate investments may not be recoverable
As discussed in Notes 2 and 3 to the consolidated financial statements, the real estate investments, net balance as of December 31, 2020 was $4.9 billion. The Company reviews a real estate investment for impairment whenever events or changes in circumstances indicate that the carrying value of the real estate investment may not be recoverable.
We identified the evaluation of indicators real estate investments may not be recoverable as a critical audit matter. There is a high degree of subjective judgement in evaluating the events or changes in circumstances that may indicate the carrying value of real estate investments may not be recoverable. In particular, the judgments regarding the expected period the Company will hold the real estate investments and the impact of changes in market and tenant conditions on the determination of the recoverability of the real estate investments required a higher degree of auditor judgment.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This included controls related to the Company’s process to identify and evaluate events or changes in circumstances that may indicate the carrying amount of real estate investments may not be recoverable, including controls related to determining the period the Company will hold the real estate investments. We inquired of Company officials and inspected documents such as meeting minutes of the Board of Trustees to evaluate the likelihood that a real estate investment would be sold prior to the estimated holding period. We also performed independent evaluations, including examining current tenant information including status of accounts receivable and committee minutes related to lease negotiations for indications that the carrying value of the real estate investments may not be recoverable.
Impairment of real estate investments and right‑of‑use assets
As discussed in Notes 2, 3, 4 and 15 to the consolidated financial statements, the real estate investments, net balance and operating lease right‑of‑use assets balance as of December 31, 2020 was $4.9 billion and $163.8 million, respectively. The Company reviews a property for impairment whenever events or changes in circumstances indicate that the carrying value of the property may not be recoverable. The Company recognized impairment charges of $70.7 million on real estate investments and $15.0 million on the operating lease right‑of‑use assets, which are the amounts that the carrying value of the assets exceeded the estimated fair value.
We identified the assessment of the fair values of real estate investments and operating lease right‑of‑use assets based on recent independent appraisals used to determine the impairment charges as a critical audit matter. There is a high degree of subjective auditor judgment in evaluating the relevance of comparable land sales, market rents, capitalization rates, and discount rates used to determine the fair value of these assets.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This included controls related to the determination of comparable land sales, market rents, capitalization rates and discount rates. We involved valuation professionals with specialized skills and knowledge, who assisted in:
•Comparing the Company’s estimated fair value of land to a range of independently developed estimates based on publicly available and comparable land sales.
•Comparing the Company’s estimated assumptions of market rents, capitalization rates, and discount rates to a range of independently developed estimates based on publicly available industry data.
Collectability of lease receivables
As discussed in Notes 2 and 5 to the consolidated financial statements, the Company assesses the probability of collecting lease receivables on a lease‑by‑lease basis. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of the Company’s tenants, historical trends of the tenants, current economic conditions, and changes in customer payment terms. Whenever the results of that assessment, events, or changes in circumstances indicate that it is no longer probable that the Company will be able to collect substantially all lease receivables or future lease payments, the Company records a charge to rental revenue for the outstanding receivable balance and suspends revenue recognition. The Company recorded charges to rental revenue of $65.1 million during the year ended December 31, 2020.
We identified the evaluation of the probability of collection of substantially all lease receivables as a critical audit matter. The assessment required subjective auditor judgment to evaluate the financial strength of tenants and the expected operating performance of the leased property.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s determination of lease receivable collectability. This included controls related to the evaluation of the financial strength of tenants, and the expected operating performance of the leased property. To assess the financial strength of tenants and the expected operating performance of the leased property, for certain tenants we evaluated (1) the aging of outstanding accounts receivable, (2) recent payment history, (3) certain publicly available information about the tenants, and (4) property financial information regarding the tenant.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
|
|
|
|
|
Kansas City, Missouri
|
|
February 25, 2021
|
EPR PROPERTIES
Consolidated Balance Sheets
(Dollars in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
Assets
|
|
|
|
|
Real estate investments, net of accumulated depreciation of $1,062,087 and $989,254 at December 31, 2020 and 2019, respectively
|
$
|
4,851,302
|
|
|
$
|
5,197,308
|
|
|
|
|
|
|
|
Land held for development
|
23,225
|
|
|
28,080
|
|
|
Property under development
|
57,630
|
|
|
36,756
|
|
|
Operating lease right-of-use assets
|
163,766
|
|
|
211,187
|
|
|
Mortgage notes and related accrued interest receivable
|
365,628
|
|
|
357,391
|
|
|
|
|
|
|
|
Investment in joint ventures
|
28,208
|
|
|
34,317
|
|
|
Cash and cash equivalents
|
1,025,577
|
|
|
528,763
|
|
|
Restricted cash
|
2,433
|
|
|
2,677
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
116,193
|
|
|
86,858
|
|
|
|
|
|
|
|
Other assets
|
70,223
|
|
|
94,174
|
|
|
Total assets
|
$
|
6,704,185
|
|
|
$
|
6,577,511
|
|
|
Liabilities and Equity
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
105,379
|
|
|
$
|
122,939
|
|
|
Operating lease liabilities
|
202,223
|
|
|
235,650
|
|
|
Common dividends payable
|
36
|
|
|
29,424
|
|
|
Preferred dividends payable
|
6,034
|
|
|
6,034
|
|
|
Unearned rents and interest
|
65,485
|
|
|
74,829
|
|
|
Debt
|
3,694,443
|
|
|
3,102,830
|
|
|
Total liabilities
|
4,073,600
|
|
|
3,571,706
|
|
|
Equity:
|
|
|
|
|
Common Shares, $0.01 par value; 100,000,000 shares authorized; and 81,917,876 and 81,588,489 shares issued at December 31, 2020 and 2019, respectively
|
819
|
|
|
816
|
|
|
Preferred Shares, $0.01 par value; 25,000,000 shares authorized:
|
|
|
|
|
5,394,050 Series C convertible shares issued at December 31, 2020 and 2019; liquidation preference of $134,851,250
|
54
|
|
|
54
|
|
|
|
|
|
|
|
3,447,381 Series E convertible shares issued at December 31, 2020 and 2019; liquidation preference of $86,184,525
|
34
|
|
|
34
|
|
|
|
|
|
|
|
6,000,000 Series G shares issued at December 31, 2020 and 2019; liquidation preference of $150,000,000
|
60
|
|
|
60
|
|
|
Additional paid-in-capital
|
3,857,632
|
|
|
3,834,858
|
|
|
Treasury shares at cost: 7,315,087 and 3,125,569 common shares at December 31, 2020 and 2019, respectively
|
(261,238)
|
|
|
(147,435)
|
|
|
Accumulated other comprehensive income
|
216
|
|
|
7,275
|
|
|
Distributions in excess of net income
|
(966,992)
|
|
|
(689,857)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
$
|
2,630,585
|
|
|
$
|
3,005,805
|
|
|
Total liabilities and equity
|
$
|
6,704,185
|
|
|
$
|
6,577,511
|
|
See accompanying notes to consolidated financial statements.
EPR PROPERTIES
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
Rental revenue
|
$
|
372,176
|
|
|
$
|
593,022
|
|
|
$
|
509,086
|
|
|
Other income
|
9,139
|
|
|
25,920
|
|
|
2,076
|
|
|
Mortgage and other financing income
|
33,346
|
|
|
33,027
|
|
|
128,759
|
|
|
Total revenue
|
414,661
|
|
|
651,969
|
|
|
639,921
|
|
|
Property operating expense
|
58,587
|
|
|
60,739
|
|
|
29,654
|
|
|
Other expense
|
16,474
|
|
|
29,667
|
|
|
443
|
|
|
General and administrative expense
|
42,596
|
|
|
46,371
|
|
|
48,889
|
|
|
Severance expense
|
2,868
|
|
|
2,364
|
|
|
5,938
|
|
|
Litigation settlement expense
|
—
|
|
|
—
|
|
|
2,090
|
|
|
Costs associated with loan refinancing or payoff
|
1,632
|
|
|
38,269
|
|
|
31,958
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
157,675
|
|
|
142,002
|
|
|
135,870
|
|
|
Transaction costs
|
5,436
|
|
|
23,789
|
|
|
3,698
|
|
|
Credit loss expense
|
30,695
|
|
|
—
|
|
|
—
|
|
|
Impairment charges
|
85,657
|
|
|
2,206
|
|
|
27,283
|
|
|
Depreciation and amortization
|
170,333
|
|
|
158,834
|
|
|
138,395
|
|
|
(Loss) income before equity in loss from joint ventures, other items and discontinued operations
|
(157,292)
|
|
|
147,728
|
|
|
215,703
|
|
|
Equity in loss from joint ventures
|
(4,552)
|
|
|
(381)
|
|
|
(22)
|
|
|
Impairment charges on joint ventures
|
(3,247)
|
|
|
—
|
|
|
—
|
|
|
Gain on sale of real estate
|
50,119
|
|
|
4,174
|
|
|
3,037
|
|
|
Gain on sale of investment in a direct financing lease
|
—
|
|
|
—
|
|
|
5,514
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
(114,972)
|
|
|
151,521
|
|
|
224,232
|
|
|
Income tax (expense) benefit
|
(16,756)
|
|
|
3,035
|
|
|
(2,285)
|
|
|
(Loss) income from continuing operations
|
$
|
(131,728)
|
|
|
$
|
154,556
|
|
|
$
|
221,947
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
Income from discontinued operations before other items
|
—
|
|
|
37,241
|
|
|
45,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment on public charter school portfolio sale
|
—
|
|
|
(21,433)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate from discontinued operations
|
—
|
|
|
31,879
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
—
|
|
|
47,687
|
|
|
45,036
|
|
|
Net (loss) income
|
(131,728)
|
|
|
202,243
|
|
|
266,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividend requirements
|
(24,136)
|
|
|
(24,136)
|
|
|
(24,142)
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders of EPR Properties
|
$
|
(155,864)
|
|
|
$
|
178,107
|
|
|
$
|
242,841
|
|
|
Net (loss) income available to common shareholders of EPR Properties per share:
|
|
|
|
|
|
Continuing operations
|
$
|
(2.05)
|
|
|
$
|
1.70
|
|
|
$
|
2.66
|
|
|
Discontinued operations
|
—
|
|
|
0.62
|
|
|
0.61
|
|
|
Basic
|
$
|
(2.05)
|
|
|
$
|
2.32
|
|
|
$
|
3.27
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(2.05)
|
|
|
$
|
1.70
|
|
|
$
|
2.66
|
|
|
Discontinued operations
|
—
|
|
|
0.62
|
|
|
0.61
|
|
|
Diluted
|
$
|
(2.05)
|
|
|
$
|
2.32
|
|
|
$
|
3.27
|
|
|
Shares used for computation (in thousands):
|
|
|
|
|
|
|
Basic
|
75,994
|
|
|
76,746
|
|
|
74,292
|
|
|
Diluted
|
75,994
|
|
|
76,782
|
|
|
74,337
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(131,728)
|
|
|
$
|
202,243
|
|
|
$
|
266,983
|
|
|
Foreign currency translation adjustment
|
3,494
|
|
|
9,253
|
|
|
(16,177)
|
|
|
Change in unrealized (loss) gain on derivatives
|
(10,553)
|
|
|
(14,063)
|
|
|
15,779
|
|
|
Comprehensive (loss) income attributable to EPR Properties
|
$
|
(138,787)
|
|
|
$
|
197,433
|
|
|
$
|
266,585
|
|
See accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPR PROPERTIES
Consolidated Statements of Changes in Equity
Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
|
|
EPR Properties Shareholders’ Equity
|
|
|
|
|
|
|
Common Stock
|
|
Preferred Stock
|
|
Additional
paid-in capital
|
|
Treasury
shares
|
|
Accumulated
other
comprehensive
income (loss)
|
|
Distributions
in excess of
net income (loss)
|
|
|
|
Total
|
|
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
|
|
Balance at December 31, 2017
|
76,858,632
|
|
|
$
|
769
|
|
|
14,848,165
|
|
|
$
|
148
|
|
|
$
|
3,478,986
|
|
|
$
|
(121,591)
|
|
|
$
|
12,483
|
|
|
$
|
(443,470)
|
|
|
|
|
$
|
2,927,325
|
|
|
Restricted share units issued to Trustees
|
23,571
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
Issuance of nonvested shares, net of cancellations
|
295,202
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
4,588
|
|
|
(617)
|
|
|
—
|
|
|
—
|
|
|
|
|
3,974
|
|
|
Purchase of common shares for vesting
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,156)
|
|
|
—
|
|
|
—
|
|
|
|
|
(7,156)
|
|
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,111
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
15,111
|
|
|
Share-based compensation included in severance expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,218
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
3,218
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,177)
|
|
|
—
|
|
|
|
|
(16,177)
|
|
|
Change in unrealized gain on derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,779
|
|
|
—
|
|
|
|
|
15,779
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
266,983
|
|
|
|
|
266,983
|
|
|
Issuances of common shares
|
20,553
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,286
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
1,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series E Convertible Preferred shares to common shares
|
800
|
|
|
—
|
|
|
(1,734)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
Conversion of Series C Convertible Preferred shares to common shares
|
1,964
|
|
|
—
|
|
|
(5,000)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises, net
|
25,721
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,305
|
|
|
(1,364)
|
|
|
—
|
|
|
—
|
|
|
|
|
(59)
|
|
|
Dividends to common shareholders ($4.32 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(321,119)
|
|
|
|
|
(321,119)
|
|
|
Dividends to Series C preferred shareholders ($1.4375 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,760)
|
|
|
|
|
(7,760)
|
|
|
Dividends to Series E preferred shareholders ($2.25 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,757)
|
|
|
|
|
(7,757)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to Series G preferred shareholders ($1.4375 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,625)
|
|
|
|
|
(8,625)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
77,226,443
|
|
|
$
|
772
|
|
|
14,841,431
|
|
|
$
|
148
|
|
|
$
|
3,504,494
|
|
|
$
|
(130,728)
|
|
|
$
|
12,085
|
|
|
$
|
(521,748)
|
|
|
|
|
$
|
2,865,023
|
|
|
Restricted share units issued to Trustees
|
27,392
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
Issuance of nonvested shares, net of cancellations
|
208,755
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
4,926
|
|
|
(498)
|
|
|
—
|
|
|
—
|
|
|
|
|
4,430
|
|
|
Purchase of common shares for vesting
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,691)
|
|
|
—
|
|
|
—
|
|
|
|
|
(9,691)
|
|
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,180
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
13,180
|
|
|
Share-based compensation included in severance expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
580
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
580
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,253
|
|
|
—
|
|
|
|
|
9,253
|
|
|
Change in unrealized loss on derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,063)
|
|
|
—
|
|
|
|
|
(14,063)
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
202,243
|
|
|
|
|
202,243
|
|
|
Issuances of common shares
|
4,007,113
|
|
|
41
|
|
|
—
|
|
|
—
|
|
|
305,893
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
305,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises, net
|
118,786
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
5,785
|
|
|
(6,518)
|
|
|
—
|
|
|
—
|
|
|
|
|
(732)
|
|
|
Dividends to common shareholders ($4.50 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(346,216)
|
|
|
|
|
(346,216)
|
|
|
Dividends to Series C preferred shareholders ($1.4375 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,756)
|
|
|
|
|
(7,756)
|
|
|
Dividends to Series E preferred shareholders ($2.25 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,756)
|
|
|
|
|
(7,756)
|
|
|
Dividends to Series G preferred shareholders ($1.4375 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,624)
|
|
|
|
|
(8,624)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
81,588,489
|
|
|
$
|
816
|
|
|
14,841,431
|
|
|
$
|
148
|
|
|
$
|
3,834,858
|
|
|
$
|
(147,435)
|
|
|
$
|
7,275
|
|
|
$
|
(689,857)
|
|
|
|
|
$
|
3,005,805
|
|
|
Continued on next page.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPR PROPERTIES
Consolidated Statements of Changes in Equity
Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands) (continued)
|
|
|
EPR Properties Shareholders’ Equity
|
|
|
|
|
|
|
Common Stock
|
|
Preferred Stock
|
|
Additional
paid-in capital
|
|
Treasury
shares
|
|
Accumulated
other
comprehensive
income (loss)
|
|
Distributions
in excess of
net income (loss)
|
|
|
|
Total
|
|
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
|
|
Continued from previous page.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
81,588,489
|
|
|
$
|
816
|
|
|
14,841,431
|
|
|
$
|
148
|
|
|
$
|
3,834,858
|
|
|
$
|
(147,435)
|
|
|
$
|
7,275
|
|
|
$
|
(689,857)
|
|
|
|
|
$
|
3,005,805
|
|
|
Credit loss expense for implementation of Current Expected Credit Loss standard
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,163)
|
|
|
|
|
(2,163)
|
|
|
Restricted share units issued to Trustees
|
74,767
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
1
|
|
|
Issuance of nonvested shares and performance shares, net of cancellations
|
217,034
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
6,505
|
|
|
(359)
|
|
|
—
|
|
|
—
|
|
|
|
|
6,148
|
|
|
Purchase of common shares for vesting
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,387)
|
|
|
—
|
|
|
—
|
|
|
|
|
(7,387)
|
|
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,819
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
13,819
|
|
|
Share-based compensation included in severance expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,258
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
1,258
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,494
|
|
|
—
|
|
|
|
|
3,494
|
|
|
Change in unrealized loss on derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,553)
|
|
|
—
|
|
|
|
|
(10,553)
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(131,728)
|
|
|
|
|
(131,728)
|
|
|
Issuances of common shares
|
36,176
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,129
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
1,129
|
|
|
Repurchase of common shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(105,994)
|
|
|
—
|
|
|
—
|
|
|
|
|
(105,994)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises, net
|
1,410
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
63
|
|
|
(63)
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
Dividend equivalents accrued on performance shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(50)
|
|
|
|
|
(50)
|
|
|
Dividends to common shareholders ($1.515 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(119,058)
|
|
|
|
|
(119,058)
|
|
|
Dividends to Series C preferred shareholders ($1.4375 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,756)
|
|
|
|
|
(7,756)
|
|
|
Dividends to Series E preferred shareholders ($2.25 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,756)
|
|
|
|
|
(7,756)
|
|
|
Dividends to Series G preferred shareholders ($1.4375 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,624)
|
|
|
|
|
(8,624)
|
|
|
Balance at December 31, 2020
|
81,917,876
|
|
|
$
|
819
|
|
|
14,841,431
|
|
|
$
|
148
|
|
|
$
|
3,857,632
|
|
|
$
|
(261,238)
|
|
|
$
|
216
|
|
|
$
|
(966,992)
|
|
|
|
|
$
|
2,630,585
|
|
See accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPR PROPERTIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
Operating activities:
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(131,728)
|
|
|
$
|
202,243
|
|
|
$
|
266,983
|
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges
|
85,657
|
|
|
23,639
|
|
|
27,283
|
|
|
Impairment charges on joint ventures
|
3,247
|
|
|
—
|
|
|
—
|
|
|
Gain on sale of real estate
|
(50,119)
|
|
|
(36,053)
|
|
|
(3,037)
|
|
|
Gain on insurance recovery
|
(809)
|
|
|
—
|
|
|
—
|
|
|
Deferred income tax expense (benefit), net
|
15,246
|
|
|
(4,115)
|
|
|
573
|
|
|
Credit loss expense
|
30,695
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of investment in a direct financing lease
|
—
|
|
|
—
|
|
|
(5,514)
|
|
|
Costs associated with loan refinancing or payoff
|
1,632
|
|
|
38,450
|
|
|
31,958
|
|
|
Equity in loss from joint ventures
|
4,552
|
|
|
381
|
|
|
22
|
|
|
Distributions from joint ventures
|
—
|
|
|
112
|
|
|
567
|
|
|
Depreciation and amortization
|
170,333
|
|
|
171,763
|
|
|
153,430
|
|
|
Amortization of deferred financing costs
|
6,606
|
|
|
6,192
|
|
|
5,797
|
|
|
Amortization of above/below market leases and tenant allowances, net
|
(480)
|
|
|
(343)
|
|
|
(581)
|
|
|
Share-based compensation expense to management and Trustees
|
13,819
|
|
|
13,180
|
|
|
15,111
|
|
|
Share-based compensation expense included in severance expense
|
1,258
|
|
|
580
|
|
|
3,218
|
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
Operating lease assets and liabilities
|
344
|
|
|
1,194
|
|
|
—
|
|
|
Mortgage notes accrued interest receivable
|
(7,576)
|
|
|
(381)
|
|
|
(517)
|
|
|
Accounts receivable
|
(47,383)
|
|
|
(1,385)
|
|
|
(22,300)
|
|
|
|
|
|
|
|
|
|
Direct financing lease receivable
|
—
|
|
|
(186)
|
|
|
(563)
|
|
|
Other assets
|
(2,698)
|
|
|
(1,301)
|
|
|
(1,055)
|
|
|
Accounts payable and accrued liabilities
|
(16,128)
|
|
|
27,540
|
|
|
4,979
|
|
|
Unearned rents and interest
|
(11,195)
|
|
|
(1,980)
|
|
|
7,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
65,273
|
|
|
439,530
|
|
|
484,328
|
|
|
Investing activities:
|
|
|
|
|
|
|
Acquisition of and investments in real estate and other assets
|
(38,714)
|
|
|
(500,629)
|
|
|
(187,460)
|
|
|
Proceeds from sale of real estate
|
227,742
|
|
|
216,020
|
|
|
22,134
|
|
|
Proceeds from sale of public charter school portfolio
|
—
|
|
|
449,555
|
|
|
—
|
|
|
Investment in unconsolidated joint ventures
|
(1,690)
|
|
|
(325)
|
|
|
(29,473)
|
|
|
Proceeds from settlement of derivative
|
—
|
|
|
—
|
|
|
30,796
|
|
|
Investment in mortgage notes receivable
|
(8,141)
|
|
|
(142,456)
|
|
|
(36,105)
|
|
|
Proceeds from mortgage note receivable paydown
|
481
|
|
|
217,459
|
|
|
335,168
|
|
|
|
|
|
|
|
|
|
Investment in promissory notes receivable
|
(6,134)
|
|
|
(12,271)
|
|
|
(7,863)
|
|
|
Proceeds from promissory note receivable paydown
|
103
|
|
|
3,738
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from insurance recovery
|
809
|
|
|
—
|
|
|
—
|
|
|
Proceeds from sale of investment in direct financing leases, net
|
—
|
|
|
—
|
|
|
43,447
|
|
|
Additions to properties under development
|
(40,470)
|
|
|
(134,586)
|
|
|
(274,956)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
133,986
|
|
|
96,505
|
|
|
(96,812)
|
|
|
Financing activities:
|
|
|
|
|
|
|
Proceeds from long-term debt facilities and senior unsecured notes
|
750,000
|
|
|
962,000
|
|
|
908,000
|
|
|
Principal payments on debt
|
(160,000)
|
|
|
(866,735)
|
|
|
(949,684)
|
|
|
Deferred financing fees paid
|
(6,330)
|
|
|
(9,386)
|
|
|
(8,642)
|
|
|
Costs associated with loan refinancing or payoff (cash portion)
|
(1,632)
|
|
|
(36,918)
|
|
|
(28,650)
|
|
|
Net proceeds from issuance of common shares
|
972
|
|
|
305,556
|
|
|
956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of stock option exercises, net
|
—
|
|
|
(732)
|
|
|
(62)
|
|
|
Purchase of common shares for treasury for vesting
|
(7,387)
|
|
|
(9,691)
|
|
|
(7,156)
|
|
|
Purchase of common shares under share repurchase program
|
(105,994)
|
|
|
—
|
|
|
—
|
|
|
Dividends paid to shareholders
|
(172,460)
|
|
|
(367,317)
|
|
|
(342,315)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities
|
297,169
|
|
|
(23,223)
|
|
|
(427,553)
|
|
|
Effect of exchange rate changes on cash
|
142
|
|
|
121
|
|
|
(442)
|
|
|
Net change in cash and cash equivalents and restricted cash
|
496,570
|
|
|
512,933
|
|
|
(40,479)
|
|
|
Cash and cash equivalents and restricted cash at beginning of the year
|
531,440
|
|
|
18,507
|
|
|
58,986
|
|
|
Cash and cash equivalents and restricted cash at end of the year
|
$
|
1,028,010
|
|
|
$
|
531,440
|
|
|
$
|
18,507
|
|
|
Supplemental information continued on next page.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPR PROPERTIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Continued from previous page.
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
Reconciliation of cash and cash equivalents and restricted cash:
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the year
|
$
|
528,763
|
|
|
$
|
5,872
|
|
|
$
|
41,917
|
|
|
Restricted cash at beginning of the year
|
2,677
|
|
|
12,635
|
|
|
17,069
|
|
|
Cash and cash equivalents and restricted cash at beginning of the year
|
$
|
531,440
|
|
|
$
|
18,507
|
|
|
$
|
58,986
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year
|
$
|
1,025,577
|
|
|
$
|
528,763
|
|
|
$
|
5,872
|
|
|
Restricted cash at end of the year
|
2,433
|
|
|
2,677
|
|
|
12,635
|
|
|
Cash and cash equivalents and restricted cash at end of the year
|
$
|
1,028,010
|
|
|
$
|
531,440
|
|
|
$
|
18,507
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash activity:
|
|
|
|
|
|
|
Transfer of property under development to real estate investments
|
$
|
20,657
|
|
|
$
|
354,568
|
|
|
$
|
228,572
|
|
|
|
|
|
|
|
|
|
Issuance of nonvested shares and restricted share units at fair value, including nonvested shares issued for payment of bonuses
|
$
|
20,062
|
|
|
$
|
17,590
|
|
|
$
|
18,252
|
|
|
Credit loss expense related to adoption of ASC Topic 326
|
$
|
2,163
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Conversion or reclassification of mortgage notes receivable to real estate investments
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
155,185
|
|
|
Mortgage note received for sale of real estate investments
|
$
|
—
|
|
|
$
|
27,423
|
|
|
$
|
—
|
|
|
Amounts related to adoption of ASC Topic 842:
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
$
|
—
|
|
|
$
|
229,620
|
|
|
$
|
—
|
|
|
Operating lease liabilities
|
$
|
—
|
|
|
$
|
253,486
|
|
|
$
|
—
|
|
|
Sub-lessor straight-line receivable
|
$
|
—
|
|
|
$
|
24,454
|
|
|
$
|
—
|
|
|
Acquisition of real estate in exchange for assumption of debt at fair value
|
$
|
—
|
|
|
$
|
14,000
|
|
|
$
|
—
|
|
|
Assumption of debt
|
$
|
—
|
|
|
$
|
18,585
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid during the year for interest
|
$
|
152,393
|
|
|
$
|
143,530
|
|
|
$
|
145,559
|
|
|
Cash paid during the year for income taxes
|
$
|
1,507
|
|
|
$
|
1,842
|
|
|
$
|
1,363
|
|
|
Interest cost capitalized
|
$
|
1,233
|
|
|
$
|
5,326
|
|
|
$
|
9,903
|
|
|
Change in accrued capital expenditures
|
$
|
(12,376)
|
|
|
$
|
(35,155)
|
|
|
$
|
32,993
|
|
See accompanying notes to consolidated financial statements.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
1. Organization
Description of Business
EPR Properties (the Company) was formed on August 22, 1997 as a Maryland real estate investment trust (REIT), and an initial public offering of the Company's common shares of beneficial interest (common shares) was completed on November 18, 1997. Since that time, the Company has been a leading Experiential net lease REIT specializing in select enduring experiential properties. The Company's underwriting is centered on key industry and property cash flow criteria, as well as the credit metrics of the Company's tenants and customers. The Company’s properties are located in the United States and Canada.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of EPR Properties and its subsidiaries, all of which are wholly owned.
Risks and Uncertainties
On March 11, 2020, the World Health Organization declared a novel strain of coronavirus (COVID-19) a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as information is rapidly evolving. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many jurisdictions within the United States and abroad reacted by instituting quarantines, mandating business and school closures and restricting travel. As a result, the COVID-19 pandemic has severely impacted experiential real estate properties, given that such properties involve congregate social activity and discretionary consumer spending. Substantially all the Company's non-theatre locations and many of the Company's theatre locations have re-opened as of December 31, 2020. However, certain theatre locations remain closed due to local restrictions or operator decision to close as a result of the impact of the COVID-19 pandemic, specifically the decision by many movie studios to delay the release of blockbuster movies in hopes that larger audiences will be available as additional markets open. The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the scope, severity and duration of the pandemic, the actions taken to contain the outbreak or mitigate its impact, the development and distribution of vaccines and the efficacy of those vaccines, the public’s confidence in the health and safety measures implemented by the Company's tenants and borrowers, and the direct and indirect economic effects of the outbreak and containment measures, all of which are uncertain and cannot be predicted. During 2020, the COVID-19 pandemic negatively affected the Company's business, and could continue to have material, adverse effects on the Company's financial condition, results of operations and cash flows.
The Company’s consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. The Company considered the impact of the COVID-19 pandemic on the assumptions and estimates used in determining the Company’s financial condition and results of operations for the year ended December 31, 2020. The following were adverse impacts to its financial statements and business during the year ended December 31, 2020:
•The Company wrote-off receivables from tenants and straight-line rent receivables totaling $65.1 million directly to rental revenue in the accompanying consolidated statements of (loss) income and comprehensive (loss) income upon determination that the collectibility of these receivables or future lease payments from these tenants were no longer probable. Additionally, the Company determined that future rental revenue related to these tenants, including American-Multi Cinema, Inc. (AMC) and Regal Cinemas (Regal), a subsidiary of Cineworld Group, will be recognized on a cash basis. The straight line rent receivable
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
represented $38.0 million of this write-off and was comprised of $26.5 million of straight-line rent receivable and $11.5 million of sub-lessor ground lease straight-line rent receivable.
•The Company reduced rental revenue by $13.6 million due to rent abatements.
•The Company deferred approximately $76.0 million of amounts due from tenants and $3.4 million due from borrowers that were booked as receivables. Additionally, the Company has amounts due from tenants that were not booked as receivables as the full amounts were not deemed probable of collection as a result of the COVID-19 pandemic. The amounts not booked as receivables remain obligations of the tenants and will be recognized as revenue when received. The repayment terms for all of these deferments vary by tenant or borrower.
•The Company recognized $85.7 million in impairment charges during the year ended December 31, 2020, which was comprised of $70.7 million of impairments of real estate investments, and $15.0 million of impairments of operating lease right-of-use assets. The Company also recognized impairment charges on joint ventures of $3.2 million related to its equity investments in three theatre projects located in China.
•The Company increased its expected credit losses by $30.7 million from its implementation estimate of $2.2 million. This increase was primarily due to credit loss expense related to fully reserving the outstanding principal balance of $12.6 million and unfunded commitment to fund $12.9 million, totaling $25.5 million, related to notes receivable from one borrower, as a result of recent changes in the borrower's financial status due to the impact of the COVID-19 pandemic. The remaining increase was due to economic uncertainty and the rapidly changing environment surrounding the pandemic.
•The Company recognized a full valuation allowance of $18.0 million during the third quarter 2020 on the Company's net deferred tax assets related to the Company's taxable REIT subsidiary (TRS) and Canadian tax paying entity as a result of the uncertainty of realization caused by the impact of the COVID-19 pandemic. At December 31, 2020, the Company had a valuation allowance totaling $24.9 million on its net deferred tax assets.
•On March 20, 2020, the Company borrowed $750.0 million under its unsecured revolving credit facility as a precautionary measure to increase the Company's cash position and preserve financial flexibility given the global uncertainty caused by the COVID-19 pandemic. On December 30, 2020, the Company paid down its revolving credit facility by $160.0 million, following the sale of six private schools and four early childhood education centers. Subsequent to year-end, the Company paid down an additional $500.0 million on its revolving credit facility.
•The Company amended the agreement which governs its unsecured revolving credit facility and its unsecured term loan facility (Consolidated Credit Agreement) and the agreement which governs its private placement notes (Note Purchase Agreement). The amendments modified certain provisions and waived the Company's obligation to comply with certain covenants under these debt agreements during the Covenant Relief Period in light of the uncertainty related to impacts of the COVID-19 pandemic on the Company and its tenants and borrowers. The Company pays higher interest costs during the Covenant Relief Period. The amendments to the Consolidated Credit Agreement and Note Purchase Agreement also impose additional restrictions on the Company during the Covenant Relief Period, including limitations on making investments, incurring indebtedness, making capital expenditures, paying dividends or making other distributions, repurchasing the Company's shares, voluntarily prepaying certain indebtedness, encumbering certain assets and maintaining a minimum liquidity amount, in each case subject to certain exceptions. See Note 8 for additional details. The term "Covenant Relief Period," as used in these notes to consolidated financial statements, generally means the period of time beginning on June 29, 2020 and ending on (i) December 31, 2021, in the case of the Company's Consolidated Credit Agreement, or (ii) October 1, 2021 (subject to extension to January 1, 2022 at the Company's election, subject to certain conditions), in the case of the Company's Note Purchase Agreement governing its private placement notes. The Company has the right under certain circumstances to terminate the Covenant Relief Period earlier.
•In connection with the loan amendments discussed above, certain of the Company's key subsidiaries guaranteed the Company's obligations based on the Company's unsecured debt ratings. If the Company's unsecured debt rating is further downgraded by Moody's, it will be required to pledge the equity interest in certain subsidiary guarantors to secure its obligations under its unsecured credit facilities and private placement notes. See Note 8 for additional details.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
On June 29, 2020, the effective date of the loan amendments discussed above, the Company suspended its share repurchase plan. Prior to the effective date, during the year ended December 31, 2020, the Company repurchased 4,066,716 common shares under the share repurchase program for approximately $106.0 million. The repurchases were made under a Rule 10b5-1 trading plan.
The monthly cash dividends to common shareholders were suspended following the common share dividend paid on May 15, 2020 to shareholders of record as of April 30, 2020. The suspension of the monthly cash dividend to common shareholders will continue through the Covenant Relief Period, except as may be necessary to maintain REIT status and to not owe income tax.
On July 31, 2020, the Company entered into a Forbearance Agreement (the Forbearance Agreement), a Master Lease Agreement (the Master Lease) and seven amended lease agreements (the Transitional Leases and collectively with the Master Lease, the Leases) with AMC, its affiliate tenants of the Company (AMC and such affiliates, collectively, AMC Tenant), and AMC Entertainment Holdings, Inc. (Guarantor), relating to all 53 properties leased to AMC Tenant (the Leased Properties) on the date the agreement was executed. These agreements restructured the then-existing lease terms for the Leased Properties in light of the continuing impact of the COVID-19 pandemic on AMC Tenant's operations. Effective July 1, 2020, the Leased Properties are leased to AMC Tenant pursuant to the following leases:
•Master Lease relating to 46 Leased Properties (the Master Lease Properties); and
•Seven Transitional Leases relating to seven Leased Properties (the Transitional Properties). These leases were subsequently terminated by the Company during 2020.
In addition, AMC Tenant and the Company entered into the following related agreements:
•Security Agreement granting to the Company a security interest subordinated to AMC's secured credit agreements and indentures in all of AMC Tenant’s property located at the Leased Properties to secure AMC Tenant’s obligations to the Company under the Forbearance Agreement and the Leases;
•Guaranty providing a guaranty by Guarantor of AMC Tenant’s obligations to the Company under the Forbearance Agreement and the Leases; and
•Capital Improvements Agreement providing a financial mechanism for the Company to provide AMC Tenant with up to $35 million of funds to complete improvements to the Master Lease Properties in exchange for increased annual fixed rent.
The prior leases for the 46 Master Lease Properties were replaced with a single Master Lease. The Company agreed to reduce total annual fixed rent on the 46 Master Lease Properties by approximately $19.4 million to approximately $87.8 million (including approximately $6.8 million of ground rent and the repayment of deferral amounts for the months of April, May and June 2020 which the Company had agreed to defer and amortize as part of fixed rent over the first 14 years of the Master Lease term).
The Master Lease Properties have been divided into four tranches, with the initial term of each tranche expiring on a different date: June 30, 2034, June 30, 2035, June 30, 2036 and June 30, 2037. The AMC Tenant may exercise up to three 5-year extensions for each tranche. If AMC Tenant elects not to exercise an extension option with respect to a tranche, fixed rent will be reduced by the fair market rental value of Master Lease Properties included in such tranche at that time, determined in accordance with the Master Lease. Upon the expiration of the initial term of each tranche or expiration of any extension option of each tranche and the election by AMC Tenant to further extend the term of such tranche, AMC Tenant may elect to remove up to two Master Lease Properties included in the tranche, which will result in a reduction in the annual fixed rent equal to the fair market rental value of such removed Master Lease Properties at that time, determined in accordance with the Master Lease. AMC Tenant may not remove more than 10 Master Lease Properties in total and not more than three Master Lease Properties per tranche during the entirety of the Master Lease term.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
Pursuant to the Leases and the Forbearance Agreement, commencing on July 1, 2020 and continuing through December 31, 2020, in lieu of monthly fixed rent AMC Tenant agreed to pay percentage rent of 15% of total gross receipts during such month, not to exceed the deferred monthly fixed rent for the Leased Properties. The difference between the scheduled monthly fixed rent and the percentage rent actually paid to the Company for the Master Lease became additional deferred rent that, beginning in February 2021, will be added to fixed cash rent and amortized over the remaining portion of the first 14 years of the term of the Master Lease and beginning January 2021 will be rent due related to the Transitional Leases amortized over the prior lease terms. Accordingly, the new annual contractual rent under the Master Lease will increase from $87.8 million to $90.7 million by February 2021 (including approximately $4.9 million of ground rent).
The Leases are triple-net leases requiring AMC Tenant to be responsible at all times for taxes, assessments, maintenance and operating costs, common area charges, association fees, ground rent, insurance premiums, utility charges and similar pass-through charges. Fixed rent of the Master Lease (excluding the portion attributable to deferred rent) will increase by 7.5% every five years during the term and any extensions.
Each lease for the seven Transitional Properties was amended by the parties. The Company agreed to reduce the aggregate annual fixed rent on the Transitional Properties by approximately $6.2 million to approximately $8.1 million (including approximately $1.2 million of ground rent and the repayment of deferral amounts for the months of April, May and June 2020 which the Company had agreed to defer and amortize as part of fixed rent over the remaining terms of the new leases).
The Company had the right to terminate each Transitional Lease by giving the AMC Tenant 90 days' prior notice of termination. Upon termination of a Transitional Lease by the Company, AMC Tenant agreed to (1) cooperate with the Company in transitioning the applicable Transitional Property to a new operator to ensure seamless transfer of management and re-branding, and (2) transfer certain property, including fixtures, furnishings and equipment, located or used at the applicable Transitional Property in exchange for a credit to the unpaid deferred amount due under the Transitional Lease. Prior to December 31, 2020, the Company terminated all Transitional Leases with AMC. The total amount deferred under each Transitional Lease prior to the Company terminating these agreements is still due by AMC and is scheduled to be paid over what would have been the remaining terms of the related property leases.
In March 2020, the Company's employees transitioned to a fully remote work force to protect the safety and well-being of the Company's personnel. The Company's prior investments in technology, business continuity planning and cyber-security protocols have enabled the Company to continue working with limited operational impacts.
Variable Interest Entities
The Company consolidates certain entities when it is deemed to be the primary beneficiary in a variable interest entity (VIE) in which it has a controlling financial interest in accordance with the consolidation guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The equity method of accounting is applied to entities in which the Company is not the primary beneficiary as defined in the FASB ASC Topic on Consolidation (Topic 810), but can exercise significant influence over the entity with respect to its operations and major decisions.
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. The primary beneficiary generally is defined as the party with the controlling financial interest. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. As of December 31, 2020 and 2019, the Company does not have any investments in consolidated VIEs.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
Use of Estimates
Management of the Company has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP). Actual results could differ from those estimates.
Real Estate Investments
Real estate investments are carried at initial recorded value less accumulated depreciation. Costs incurred for the acquisition and development of the properties are capitalized. In addition, the Company capitalizes certain costs that relate to property under development including interest and a portion of internal legal personnel costs. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which generally are estimated to be 30 years to 40 years for buildings, three years to 25 years for furniture, fixtures and equipment and 10 years to 20 years for site improvements. Tenant improvements, including allowances, are depreciated over the shorter of the lease term or the estimated useful life and leasehold interests are depreciated over the useful life of the underlying ground lease.
Management reviews the Company's real estate investments, including operating lease right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable, which 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 it is probable the assets will be sold within one year. 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.
Real Estate Acquisitions
Upon acquisition of real estate properties, the Company evaluates the acquisition to determine if it is a business combination or an asset acquisition. If the acquisition is determined to be an asset acquisition, the Company records the purchase price and other related costs incurred to the acquired tangible assets and identified intangible assets and liabilities on a relative fair value basis. In addition, costs incurred for asset acquisitions including transaction costs, are capitalized.
If the acquisition is determined to be a business combination, the Company records the fair value of acquired tangible assets and identified intangible assets and liabilities as well as any noncontrolling interest. Acquisition-related costs in connection with business combinations are expensed as incurred and included in transaction costs in the accompanying consolidated statements of (loss) income and comprehensive (loss) income.
In addition to acquisition-related costs in connection with business combinations, transaction costs include costs associated with terminated transactions, pre-opening costs and certain leasing and tenant transition costs. Transaction costs expensed totaled $5.4 million, $23.8 million and $3.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
For real estate acquisitions (asset acquisitions or business combinations), the fair value (or relative fair value in an asset acquisition) of the tangible assets is determined by valuing the property using recent independent appraisals or methods similar to those used by independent appraisers. Land is valued using the sales comparison approach which uses available market data from recent comparable land sales as an input to estimate the fair value. Site improvements and tenant improvements are valued using the cost approach which uses replacement cost data obtained from industry recognized guides less depreciation as an input to estimate the fair value. The building is valued either using the cost approach described above or a combination of the cost and the income approach. The
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
income approach uses market leasing assumptions to estimate the fair value of the property as if vacant. The cost and income approaches are reconciled to arrive at an estimated building fair value.
Intangibles
The fair value of acquired in-place leases also includes management’s estimate, on a lease-by-lease basis, of the present value of the following amounts: (i) the value associated with avoiding the cost of originating the acquired in-place leases (i.e. the market cost to execute the leases, including leasing commissions, legal and other related costs); (ii) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed re-leasing period, (i.e. real estate taxes, insurance and other operating expenses); (iii) the value associated with lost rental revenue from existing leases during the assumed re-leasing period; and (iv) the value associated with avoided tenant improvement costs or other inducements to secure a tenant lease. These values are amortized over the lease term of the respective leases.
In determining the fair value of acquired above and below-market leases, the Company considers many factors. On a lease-by-lease basis, management considers the present value of the difference between the contractual amounts to be paid pursuant to the leases and management’s estimate of fair market lease rates. For above-market leases and below-market leases, management considers such differences over the lease terms. The capitalized above-market lease values are amortized as a reduction of rental income over the lease terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the lease terms of the respective leases. The lease term includes the minimum base term plus any extension options that are reasonably certain to be exercised. Management considers several factors in determining the discount rate used in the present value calculations, including the credit risks associated with the respective tenants.
If debt is assumed in the acquisition, the determination of whether it is above or below-market is based upon a comparison of similar financing terms for similar real estate investments at the time of the acquisition.
In determining the fair value of tradenames, the Company historically uses the relief from royalty method, which estimates the fair value of hypothetical royalty income that could be generated if the intangible asset was licensed from an independent third-party.
In determining the fair value of a contract intangible, the Company considers the present value of the difference between the estimated "with" and "without" scenarios. The "with" scenario presents the contract in place and the "without" scenario incorporates the potential profits that may be lost over the period without the contract in place. The capitalized contract value is amortized over the estimated useful life of the underlying asset.
The excess of the cost of an acquired business (in a business combination) over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. Goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Management of the Company reviews the carrying value of intangible assets for impairment on an annual basis.
Intangible assets and liabilities (included in Other assets and Accounts payable and accrued liabilities in the accompanying consolidated balance sheets) consist of the following at December 31 (in thousands):
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Assets:
|
|
|
|
|
In-place leases, net of accumulated amortization of $13.9 million and $10.8 million, respectively
|
$
|
21,684
|
|
|
$
|
24,528
|
|
|
Above-market lease, net of accumulated amortization of $1.2 million and $1.1 million, respectively
|
354
|
|
|
71
|
|
|
Tradenames, net of accumulated amortization of $317 thousand and $184 thousand, respectively (1)
|
8,847
|
|
|
8,980
|
|
|
Contract value, net of accumulated amortization of $914 thousand and $548 thousand, respectively
|
10,054
|
|
|
10,420
|
|
|
Goodwill
|
693
|
|
|
693
|
|
|
Total intangible assets, net
|
$
|
41,632
|
|
|
$
|
44,692
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Below-market lease, net of accumulated amortization of $1.5 million and $1.1 million, respectively
|
$
|
8,397
|
|
|
$
|
8,934
|
|
(1) At December 31, 2020 and 2019, $5.4 million in tradenames had indefinite lives and were not amortized.
Aggregate lease intangible amortization included in expense was $5.6 million, $3.7 million and $2.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. The net amount amortized as an increase to rental revenue for capitalized above and below-market lease intangibles was $0.5 million, $0.4 million and $0.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Future amortization of in-place leases, net, above-market lease, net, tradenames, net, contract value, net and below-market lease, net at December 31, 2020 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In place leases
|
|
Tradenames (1)
|
|
Contract Value
|
|
Above-market lease
|
|
Below-market lease
|
|
Year:
|
|
|
|
|
|
|
|
|
|
|
2021
|
$
|
3,283
|
|
|
$
|
133
|
|
|
$
|
365
|
|
|
$
|
51
|
|
|
$
|
(456)
|
|
|
2022
|
2,658
|
|
|
133
|
|
|
365
|
|
|
46
|
|
|
(437)
|
|
|
2023
|
2,654
|
|
|
133
|
|
|
365
|
|
|
46
|
|
|
(415)
|
|
|
2024
|
2,095
|
|
|
133
|
|
|
365
|
|
|
46
|
|
|
(396)
|
|
|
2025
|
2,085
|
|
|
133
|
|
|
365
|
|
|
46
|
|
|
(387)
|
|
|
Thereafter
|
8,909
|
|
|
2,827
|
|
|
8,229
|
|
|
119
|
|
|
(6,306)
|
|
|
Total
|
$
|
21,684
|
|
|
$
|
3,492
|
|
|
$
|
10,054
|
|
|
$
|
354
|
|
|
$
|
(8,397)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average amortization period (years)
|
11.2
|
|
27.2
|
|
27.5
|
|
7.5
|
|
30.1
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Excludes $5.4 million in tradenames with indefinite lives.
|
Deferred Financing Costs
Deferred financing costs are amortized over the terms of the related debt obligations or mortgage note receivable as applicable. Deferred financing costs of $35.6 million and $37.2 million as of December 31, 2020 and 2019, respectively, are shown as a reduction of debt. The deferred financing costs of $4.8 million and $3.5 million as of December 31, 2020 and 2019, respectively, related to the unsecured revolving credit facility are included in other assets.
Reportable Segments
The Company has two reportable operating segments: Experiential and Education. The Experiential segment includes the following property types: theatres, eat & play (including seven theatres located in entertainment districts), attractions, ski, experiential lodging, gaming, cultural and fitness & wellness. The Education segment
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
includes the following property types: early childhood education centers and private schools. See Note 19 for financial information related to these reportable segments.
Rental Revenue
The Company leases real estate to its tenants primarily under leases that are predominately classified as operating leases. The Company's leases generally provide for rent escalations throughout the lease terms. Rents that are fixed are recognized on a straight-line basis over the lease term. Base rent escalations that include a variable component are recognized upon the occurrence of the specified event as defined in the Company's lease agreements. Many of the Company's leasing arrangements include options to extend the lease, which are not included in the minimum lease terms unless it is reasonably certain to be exercised. Straight-line rental revenue is subject to an evaluation for collectibility, and the Company records a direct write-off against rental revenue if collectibility of these future rents is not probable. For the year ended December 31, 2020, the Company recognized straight-line write-offs totaling $38.0 million, which were comprised of $26.5 million of straight-line accounts receivable and $11.5 million of sub-lessor ground lease straight-line accounts receivable. Straight-line rental revenue, net of write-offs, was a reduction to total rental revenue of $24.5 million for the year ended December 31, 2020. For the year ended December 31, 2019, the Company recognized straight-line write-offs of $1.4 million (of which $1.2 million has been classified within discontinued operations). There were no straight-line write-offs recognized during the year ended December 31, 2018. For the years ended December 31, 2019 and 2018, the Company recognized straight-line rental revenue, net of write-offs of $13.6 million (of which $3.0 million has been classified within discontinued operations) and $10.2 million (of which $5.5 million has been classified within discontinued operations), respectively.
Substantially all the Company's customers' operations were temporarily closed for a portion of the year ended December 31, 2020, as a result of the COVID-19 pandemic. Many of the Company's non-theatre locations have re-opened. However, certain of the Company's theatre locations remain closed due to local restrictions or operator decision to close as a result of the impact of the COVID-19 pandemic, specifically the decision by many movie studios to delay the release of films. In response, the Company has agreed to defer rent for a substantial portion of its customers. On April 10, 2020, the FASB issued a Staff Q&A on Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic. In reliance upon the FASB Staff Q&A, the Company has not treated qualifying deferrals or rent concessions during the period effected by the COVID-19 pandemic as lease modifications. While deferments for this and future periods delay rent payments, these deferments generally do not release customers from the obligation to pay the deferred amounts in the future. Deferred rent amounts are reflected in the Company's financial statements as accounts receivable if collection is determined to be probable or recognized when received as variable lease payments if collection is determined to not be probable. Certain agreements with tenants where remaining lease terms are extended, or other changes are made that do not qualify for the treatment in the FASB Staff Q&A, are treated as lease modifications. In these circumstances, upon an executed lease modification, if the tenant is not being recognized on a cash basis, the contractual rent reflected in accounts receivable and straight-line rent receivable will be amortized over the remaining term of the lease against rental revenue. In limited cases, customers may be entitled to the abatement of rent during governmentally imposed prohibitions on business operations which is recognized in the period to which it relates, or the Company may provide rent concessions to tenants. In cases where the Company provides concessions to tenants to which they are not otherwise entitled, those amounts will be recognized in the period in which the concession is granted unless the changes are accounted for as lease modifications.
Most of the Company’s lease contracts are triple-net leases, which require the tenants to make payments directly to third parties for lessor costs (such as property taxes and insurance) associated with the properties. In accordance with Topic 842, the Company does not include these payments made by the lessees to third parties in rental revenue or property operating expenses. In certain situations, the Company pays these lessor costs directly to third-parties and the tenants reimburse the Company. In accordance with Topic 842, these payments are presented on a gross basis in rental revenue and property operating expense. During the year ended December 31, 2020 and 2019, the Company recognized $2.2 million and $6.9 million, respectively, related to the gross-up of these reimbursed expenses which are included in rental revenue and property operating expenses.
Certain of the Company's leases, particularly at its entertainment districts, require the tenants to make payments to the Company for property related expenses such as common area maintenance. The Company has elected to
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
combine these non-lease components with the lease components in rental revenue. For the years ended December 31, 2020, 2019 and 2018, the non-lease components included in rental revenue totaled $12.9 million, $16.0 million and $15.3 million, respectively.
In addition, most of the Company's tenants are subject to additional rents (above base rents) if gross revenues of the properties exceed certain thresholds defined in the lease agreements (percentage rents). Percentage rents are recognized at the time when specific triggering events occur as provided by the lease agreement. Rental revenue included percentage rents of $8.6 million, $15.0 million and $10.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. Furthermore, due to the impact of the COVID-19 pandemic, certain of the Company's tenants paid a portion of base rent in 2020 based on a percentage of gross revenue. This variable rent totaled $5.2 million for the year ended December 31, 2020.
The Company regularly evaluates the collectibility of its receivables on a lease by lease basis. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of the Company's tenants, historical trends of the tenant, current economic conditions and changes in customer payment terms. When the collectibility of lease receivables or future lease payments are no longer probable, the Company records a direct write-off of the receivable to rental revenue and recognizes future rental revenue on a cash basis.
Property Sales
Sales of real estate properties are recognized when a contract exists and the purchaser has obtained control of the property. Gains on sales of properties are recognized in full in a partial sale of nonfinancial assets, to the extent control is not retained. Any noncontrolling interest retained by the seller would, accordingly, be measured at fair value.
The Company evaluates each sale or disposal transaction to determine if it meets the criteria to qualify as discontinued operations. A discontinued operation is a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on the Company's operations and financial results. If the sale or disposal transaction does not meet the criteria, the operations and related gain or loss on sale is included in income from continuing operations. Certain reclassifications have been made to prior period amounts to conform to the current period presentation for assets that qualify for presentation as discontinued operations. See Note 17 for further details.
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 less allowance for credit loss. Interest income is recognized using the effective interest method based on the stated interest rate over the estimated life of the note. Premiums and discounts are amortized or accreted into income over the estimated life of the note using the effective interest method.
The Company adopted Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326) effective January 1, 2020, which requires allowance for credit losses to be recorded to reflect that all mortgage notes and notes receivable have some inherent risk of loss regardless of credit quality, collateral, or other mitigating factors. The Company adopted the standard on the effective date and used the effective date as the date of initial application. Accordingly, comparative periods have not been recast, and required disclosures will not be provided for dates and periods prior to January 1, 2020. On the effective date, the Company recognized credit loss expense through retained earnings and the corresponding allowance for credit losses of approximately $2.2 million, which was comprised of $2.1 million related to mortgage notes receivable and $0.1 million related to notes receivable (which are presented within other assets in the accompanying consolidated balance sheet). While Topic 326 does not require any particular method for determining the reserves, it does specify that it should be based on relevant information about past events, including historical loss experience, current portfolio and market conditions, as well as reasonable and supportable forecasts for the term of each mortgage note or note receivable. The Company uses a forward-looking commercial real estate forecasting tool to estimate its current expected credit losses (CECL) for each of its mortgage notes and notes receivable on a loan-by-loan basis.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
The CECL allowance required by Topic 326 is a valuation account that is deducted from the related mortgage note or note receivable.
Certain of the Company’s mortgage notes and notes receivable include commitments to fund incremental amounts to its borrowers. These future funding commitments are also subject to the CECL model. The allowance related to future funding is recorded as a liability and is included in Accounts payable and accrued liabilities in the accompanying consolidated balance sheet.
As permitted under Topic 326, the Company made an accounting policy election to not measure an allowance for credit losses for accrued interest receivables related to its mortgage notes and notes receivable. Accordingly, if accrued interest receivable is deemed to be uncollectible, the Company will record any necessary write-offs as a reversal of interest income. During the year ended December 31, 2020, the Company wrote off approximately $0.3 million of accrued interest income against interest income related to one note receivable. As of December 31, 2020, the Company believes that all outstanding accrued interest is collectible.
In the event the Company has a past due mortgage note or note receivable and the Company determines it is collateral dependent, the Company measures expected credit losses based on the fair value of the collateral. The Company evaluates the collectability of both interest and principal for each of its mortgage notes and notes receivable on a quarterly basis to determine if foreclosure is probable. As of December 31, 2020, the Company does not have any mortgage notes or notes receivable with past due principal balances.
Mortgage and Other Financing Income
Certain of the Company's borrowers are subject to additional interest based on certain thresholds defined in the mortgage agreements (participating interest). Participating interest income is recognized at the time when specific triggering events occur as provided by the mortgage agreement. Mortgage and other financing income included participating interest income of $0.6 million for the year ended December 31, 2019. No participating interest income was recognized for the years ended December 31, 2020 and 2018. In addition, for the years ended December 31, 2019 and 2018, mortgage and other financing income included $2.7 million (of which $1.8 million has been classified in discontinued operations) and $74.7 million, respectively, in prepayment fees related to mortgage notes that were paid fully in advance of their maturity date. No prepayment fees were recognized for the year ended December 31, 2020.
Income Taxes
The Company qualifies as a REIT under the Internal Revenue Code (the Code). A REIT that distributes at least 90% of its taxable income to its shareholders each year and which meets certain other conditions is not taxed on that portion of its taxable income which is distributed to its shareholders. The Company intends to continue to qualify as a REIT and distribute substantially all of its taxable income to its shareholders.
The Company is subject to income tax in certain instances in both the US and in certain foreign jurisdictions, as more fully described herein. The Company’s income tax expense includes deferred income tax expense or benefit, which represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. The Company evaluates the realizability of its deferred income tax assets and assesses the need for a valuation allowance for each jurisdiction for which it is subject to income tax. The realization of the deferred tax assets depends upon all positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of existing deferred tax assets.
The Company owns certain real estate assets which are subject to income tax in Canada. At December 31, 2020, the net deferred tax assets related to the Company's Canadian operations totaled $17.0 million resulting from the temporary differences between income for financial reporting purposes and taxable income relating primarily to depreciation, capital improvements and straight-line rents. Due to the impacts of the COVID-19 pandemic, it is more likely than not the Company will not generate sufficient taxable income to realize the net deferred tax assets related to the Company's Canadian operations as of December 31, 2020 totaling $17.0 million.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
The Company has certain taxable REIT subsidiaries (TRSs), as permitted under the Code, through which it conducts certain business activities and are subject to federal and state income taxes on their net taxable income. The Company uses two such TRS entities exclusively to hold the operational aspect of the traditional REIT lodging structure for three Experiential lodging properties that are facilitated by management agreements with eligible independent contractors. The real estate for these investments are held by the REIT either directly or through an investment in a joint venture and leased to the respective operations entity under a triple-net lease. Management has determined the real estate meets the requirements to be classified as qualified lodging facilities as required in a traditional REIT lodging structure.
At December 31, 2020, the net deferred tax assets related to the Company's TRSs totaled $7.9 million resulting from the temporary differences between income for financial reporting purposes and taxable income relate primarily to net operating loss carryovers and pre-opening cost amortization. Due to the impacts of the COVID-19 pandemic, it is more likely than not the Company will not generate sufficient taxable income to realize the net deferred tax assets related to the Company's TRSs as of December 31, 2020 totaling $7.9 million.
As of December 31, 2020 and 2019, respectively, the Canadian operations and the Company's TRSs had deferred tax assets included in other assets in the accompanying consolidated balance sheet totaling approximately $28.5 million and $19.3 million and deferred tax liabilities included in accounts payable and accrued liabilities in the accompanying consolidated balance sheet totaling approximately $3.6 million and $3.9 million. At December 31, 2020, the Company had a valuation allowance offsetting the net deferred tax assets included in the accompanying consolidated balance sheet totaling $24.9 million. The Company’s consolidated deferred tax position is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Fixed assets
|
$
|
18,077
|
|
|
$
|
14,462
|
|
|
Net operating losses
|
6,546
|
|
|
1,656
|
|
|
Start-up costs
|
2,495
|
|
|
2,768
|
|
|
Other
|
1,392
|
|
|
367
|
|
|
Total deferred tax assets
|
$
|
28,510
|
|
|
$
|
19,253
|
|
|
|
|
|
|
|
Capital improvements
|
$
|
(2,888)
|
|
|
$
|
(2,765)
|
|
|
Straight-line receivable
|
(706)
|
|
|
(1,097)
|
|
|
Other
|
(9)
|
|
|
(1)
|
|
|
Total deferred tax liabilities
|
$
|
(3,603)
|
|
|
$
|
(3,863)
|
|
|
|
|
|
|
|
Valuation allowance
|
(24,907)
|
|
|
—
|
|
|
Net deferred tax asset
|
$
|
—
|
|
|
$
|
15,390
|
|
Additionally, during the years ended December 31, 2020, 2019 and 2018, the Company recognized current income and withholding tax expense of $1.5 million, $1.1 million and $1.7 million, respectively, primarily related to certain state income taxes and foreign withholding tax. The table below details the current and deferred income tax benefit (expense) for the years ended December 31, 2020, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Current TRS income tax
|
$
|
7
|
|
|
$
|
376
|
|
|
$
|
(221)
|
|
|
Current state income tax expense
|
(503)
|
|
|
(405)
|
|
|
(422)
|
|
|
Current foreign income tax
|
3
|
|
|
—
|
|
|
—
|
|
|
Current foreign withholding tax
|
(1,018)
|
|
|
(1,051)
|
|
|
(1,069)
|
|
|
Deferred TRS income tax (expense) benefit
|
(4,448)
|
|
|
3,719
|
|
|
319
|
|
|
Deferred foreign withholding tax
|
—
|
|
|
—
|
|
|
—
|
|
|
Deferred income tax (expense) benefit
|
(10,797)
|
|
|
396
|
|
|
(892)
|
|
|
Income tax benefit (expense)
|
$
|
(16,756)
|
|
|
$
|
3,035
|
|
|
$
|
(2,285)
|
|
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
The Company's effective tax rate for the years ended December 31, 2020, 2019 and 2018 was 13.5%, 1.5% and 0.8%, respectively. The differences between the income tax expense calculated at the statutory U.S. federal income tax rates and the actual income tax expense recorded for continuing operations is mostly attributable to the dividends paid deduction available for REITs.
Furthermore, the Company qualified as a REIT and distributed the necessary amount of taxable income such that no current U.S. federal income taxes were due for the years ended December 31, 2020, 2019 and 2018. Accordingly, no provision for current U.S. federal income taxes was recorded for any of those years. If the Company fails to qualify as a REIT in any taxable year, without the benefit of certain provisions, it will be subject to federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax for years prior to January 1, 2019) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company is subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income. Tax years 2017 through 2019 remain generally open to examination for U.S. federal income tax and state tax purposes and from 2015 through 2019 for Canadian income tax purposes.
The Company’s policy is to recognize interest and penalties as general and administrative expense. The Company did not recognize any interest and penalties in 2020, 2019 or 2018. The Company did not have any accrued interest and penalties at December 31, 2020, 2019 and 2018. Additionally, the Company did not have any unrecorded tax benefits as of December 31, 2020, 2019 and 2018.
Concentrations of Risk
Topgolf USA (Topgolf), Cinemark, AMC and Regal represented a significant portion of the Company's total revenue for the years ended December 31, 2020, 2019 and 2018. The Company began recognizing revenue on a cash basis for AMC at the end of the first quarter of 2020 and for Regal at the end of the third quarter of 2020 and cash payments have been reduced due to the impact of the COVID-19 pandemic. The following is a summary of the Company's total revenue (including revenue from discontinued operations) from Topgolf, Cinemark, AMC and Regal (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
Total Revenue
|
% of Company's Total Revenue
|
|
Total Revenue
|
% of Company's Total Revenue
|
|
Total Revenue
|
% of Company's Total Revenue
|
|
Topgolf
|
$
|
80,714
|
|
19.5
|
%
|
|
$
|
78,962
|
|
11.2
|
%
|
|
$
|
64,459
|
|
9.2
|
%
|
|
Cinemark
|
42,065
|
|
10.1
|
%
|
|
38,927
|
|
5.5
|
%
|
|
37,303
|
|
5.3
|
%
|
|
AMC
|
29,964
|
|
7.2
|
%
|
|
123,792
|
|
17.6
|
%
|
|
115,805
|
|
16.5
|
%
|
|
Regal
|
13,056
|
|
3.1
|
%
|
|
75,784
|
|
10.8
|
%
|
|
57,614
|
|
8.2
|
%
|
Cash Equivalents
Cash equivalents include bank demand deposits.
Restricted Cash
Restricted cash represents cash held for tenants' off-season rent reserves and escrow deposits required in connection with property management agreements or held for potential acquisitions and redevelopments.
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 and share-based compensation to non-employee Trustees of the Company is granted pursuant to the Company's Trustee compensation program.
Share based compensation expense consists of share option expense and amortization of nonvested share grants issued to employees, 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 (loss) income and comprehensive (loss) income.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
Share Options
Share options are granted to employees pursuant to the Long-Term Incentive Plan. 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. Expense recognized related to share options and included in general and administrative expense in the accompanying consolidated statements of (loss) income and comprehensive (loss) income was $12 thousand, $10 thousand and $0.3 million for the years ended December 31, 2020, 2019 and 2018, 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 years to four years). Expense recognized related to nonvested shares and included in general and administrative expense in the accompanying consolidated statements of (loss) income and comprehensive (loss) income was $10.6 million, $11.3 million and $13.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. Expense related to nonvested shares and included in severance expense in the accompanying consolidated statements of (loss) income and comprehensive (loss) income was $1.0 million, $0.6 million and $3.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Nonvested Performance Shares Issued to Employees
During the year ended December 31, 2020, the Compensation and Human Capital Committee of the Company's Board of Trustees (Board) approved the 2020 Long Term Incentive Plan (the 2020 LTIP) as a sub-plan under the Company's 2016 Equity Incentive Plan. Under the 2020 LTIP, the Company awards performance shares and restricted shares to the Company's executive officers. The performance shares contain both a market condition and a performance condition. The Company amortizes the expense related to the performance shares over the future vesting period of three years. Expense recognized related to performance shares and included in general and administrative expense in the accompanying consolidated statements of (loss) income and comprehensive (loss) income was $1.0 million for the year ended December 31, 2020. Expense related to nonvested performance shares and included in severance expense in the accompanying consolidated statements of (loss) income and comprehensive (loss) income was $261 thousand for the year ended December 31, 2020.
Restricted Share Units Issued to Non-Employee Trustees
The Company issues restricted share units to non-employee Trustees for payment of their annual retainers under the Company's Trustee compensation program. 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 and included in general and administrative expense in the accompanying consolidated statements of (loss) income and comprehensive (loss) income was $2.2 million, $1.9 million and $1.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Foreign Currency Translation
The Company accounts for the operations of its Canadian properties in Canadian dollars. The assets and liabilities related to the Company’s Canadian properties and mortgage note are translated into U.S. dollars using the spot rates at the respective balance sheet dates; revenues and expenses are translated at average exchange rates. Resulting translation adjustments are recorded as a separate component of comprehensive income.
Derivative Instruments
The Company uses derivative instruments to reduce exposure to fluctuations in foreign currency exchange rates and variable interest rates.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
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 foreign currency risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows are considered cash flow hedges. 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 hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. For its net investment hedges that hedge the foreign currency exposure of its Canadian investments, the Company has elected to assess hedge effectiveness using a method based on changes in spot exchange rates and record the changes in the fair value amounts excluded from the assessment of effectiveness into earnings on a systematic and rational basis. 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. If hedge accounting is not applied, realized and unrealized gains or losses are reported in earnings.
The Company's policy is to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Impact of Recently Issued Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the year ended December 31, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. The Company intends to amend agreements referencing the LIBOR-index to a replacement index and will apply the optional expedients offered in Topic 848.
3. Real Estate Investments
The following table summarizes the carrying amounts of real estate investments as of December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Buildings and improvements
|
$
|
4,526,342
|
|
|
$
|
4,747,101
|
|
|
Furniture, fixtures & equipment
|
118,334
|
|
|
123,239
|
|
|
Land
|
1,242,663
|
|
|
1,290,181
|
|
|
Leasehold interests
|
26,050
|
|
|
26,041
|
|
|
|
5,913,389
|
|
|
6,186,562
|
|
|
Accumulated depreciation
|
(1,062,087)
|
|
|
(989,254)
|
|
|
Total
|
$
|
4,851,302
|
|
|
$
|
5,197,308
|
|
Depreciation expense on real estate investments from continuing operations was $162.6 million, $153.2 million and $133.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Acquisitions and Development
During the year ended December 31, 2020, the Company completed the acquisition of real estate investments and lease related intangibles, as further discussed in Note 2, for Experiential properties totaling $22.1 million, that consisted of two theatre properties.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
Additionally, during the year ended December 31, 2020, the Company had investment spending on build-to-suit development and redevelopment for Experiential properties totaling $46.9 million.
During the year ended December 31, 2019, the Company completed the acquisition of real estate investments and lease related intangibles, for Experiential properties totaling $451.9 million, that consisted of 26 theatre properties for approximately $426.5 million, one eat & play property for $1.4 million and two cultural properties for $24.0 million. The Company completed the acquisition of real estate investments and lease related intangibles for Education properties totaling $5.9 million that consisted of the acquisition of two early childhood education centers.
Additionally, during the year ended December 31, 2019, the Company had investment spending on build-to-suit development and redevelopment for Experiential properties totaling $146.2 million and Education properties totaling $38.6 million.
During the year ended December 31, 2019, the Company completed the construction of the Kartrite Resort and Indoor Waterpark in Sullivan County, New York. The indoor waterpark resort is being operated under a traditional REIT lodging structure and facilitated by a management agreement with an eligible independent contractor. The related operating revenue and expense are included in other income and other expense in the accompanying consolidated statements of (loss) income and comprehensive (loss) income for the year ended December 31, 2019. Additionally, during the year ended December 31, 2018, the Company completed the construction of the Resorts World Catskills common infrastructure. In June 2016, the Sullivan County Infrastructure Local Development Corporation issued $110.0 million of Series 2016 Revenue Bonds which funded a substantial portion of such construction costs. For the years ended December 31, 2018, 2017 and 2016, the Company received total reimbursements of $74.2 million of construction costs. During the year ended December 31, 2019, the Company received an additional reimbursement of $11.5 million.
Dispositions
On December 29, 2020, pursuant to a tenant purchase option, the Company completed the sale of six private schools and four early childhood education centers for net proceeds of approximately $201.2 million and recognized a gain on sale of approximately $39.7 million. Additionally, during the year ended December 31, 2020, the Company completed the sale of three early education properties, four experiential properties and two land parcels for net proceeds totaling $26.6 million and recognized a combined gain on sale of $10.4 million.
During the year ended December 31, 2019, the Company completed the sale of all of its public charter school portfolio through the following transactions:
•On November 22, 2019, the Company sold 47 public charter school related assets, classified as real estate investments, mortgage notes receivable and investment in direct financing leases, for net proceeds of approximately $449.6 million. The Company recognized an impairment on this public charter school portfolio sale of $21.4 million that included the write-off of non-cash straight-line rent and effective interest receivables totaling $24.8 million. See Note 4 for additional information related to the impairment.
•The Company sold ten public charter schools pursuant to tenant purchase options for net proceeds totaling $138.5 million and recognized a combined gain on sale of $30.0 million.
•The Company sold seven public charter schools (not as result of exercise of tenant purchase options) for net proceeds totaling $44.4 million and recognized a combined gain on sale of $1.9 million.
•See Note 6 for details on repayments of mortgage notes receivable secured by public charter school properties during 2019.
Due to the Company's disposition of its remaining public charter school portfolio in 2019, the operating results of all public charter schools sold during 2019 have been classified within discontinued operations in the accompanying consolidated statements of (loss) income and comprehensive (loss) income for all periods presented. See Note 17 for further details on discontinued operations.
Additionally, during the year ended December 31, 2019, the Company sold one attraction property, one early childhood education center property and four land parcels for net proceeds totaling $21.9 million and sold one
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
attraction property and received an $11.0 million cash payment and provided seller mortgage financing of $27.4 million. The Company recognized a combined gain on these sales of $4.2 million. See Note 6 for additional information on the seller mortgage note receivable.
4. Impairment Charges
The Company reviews its properties for changes in circumstances that indicate that the carrying value of a property may not be recoverable based on an estimate of undiscounted future cash flows. As a result of the COVID-19 pandemic, the Company experienced vacancies at some of its properties and at others the Company has negotiated lease modifications that included rent reductions. As part of this process, the Company reassessed the expected holding periods and expected future cash flows of such properties, and determined that the estimated cash flows were not sufficient to recover the carrying values of nine properties. Two of these nine properties have operating ground lease arrangements with right-of-use assets. During the year ended December 31, 2020, the Company determined the estimated fair value of the real estate investments and right-of-use assets of these properties using independent appraisals and various purchase offers. The Company reduced the carrying value of the real estate investments, net to $39.5 million and the operating lease right-of-use assets to $13.0 million. The Company recognized impairment charges of $70.7 million on the real estate investments and $15.0 million on the right-of-use assets, which are the amounts that the carrying value of the assets exceeded the estimated fair value.
During the year ended December 31, 2020, the Company also recognized $3.2 million in other-than-temporary impairments related to its equity investments in joint ventures in three theatre projects located in China. See Note 7 for further details on these impairments.
On November 22, 2019, the Company completed the sale of substantially all of its public charter school portfolio, consisting of 47 public charter school related assets, for net proceeds of approximately $449.6 million. Prior to the sale, the Company revised its estimated undiscounted cash flows associated with this portfolio, considering a shorter expected hold period and determined that the estimated cash flows were not sufficient to recover the carrying value of this portfolio. The Company estimated the fair value of this portfolio by taking into account the purchase price in the executed sale agreement. The Company recognized an impairment on public charter school portfolio sale of $21.4 million that included the write-off of non-cash straight-line rent and effective interest receivables totaling $24.8 million. This impairment and the operating results of all of the public charter schools sold in 2019 have been classified within discontinued operations in the accompanying consolidated statements of (loss) income and comprehensive (loss) income. See Note 17 for further details on discontinued operations.
During the year ended December 31, 2019, the Company entered into an agreement to sell a theatre property for approximately $6.2 million. As a result, the Company revised its estimated undiscounted cash flow associated with this property, considering a shorter expected hold period and determined that the estimated cash flow was not sufficient to recover the carrying value of this property. The Company estimated the fair value of this property by taking into account the purchase price in the executed sale agreement. The Company recorded an impairment charge of approximately $2.2 million, which is the amount that the carrying value of the asset exceeds the estimated fair value.
During the year ended December 31, 2018, the Company entered into an agreement with Children’s Learning Adventure USA (CLA) in which CLA relinquished control of four of the Company’s properties that were still under development as the Company no longer intended to develop these properties for CLA. As a result, the Company revised its estimated undiscounted cash flows for these four properties, considering shorter expected holding periods, and determined that those estimated cash flows were not sufficient to recover the carrying values of these four properties. During the year ended December 31, 2018, the Company determined the estimated fair value of these properties using Level 3 inputs, including independent appraisals of these properties, and reduced the carrying value of these assets to $9.8 million, recording an impairment charge of $16.5 million. The charge was primarily related to the cost of improvements specific to the development of CLA’s prototype.
During the year ended December 31, 2018, the Company recognized a $10.7 million impairment charge related to the Company’s guarantees of the payment of two economic development revenue bonds secured by leasehold
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
interests and improvements at two theatres in Louisiana. In accordance with Topic 460, Guarantees, the Company recorded an asset and liability at the inception of the guarantees at fair value, which represented the Company's obligation to stand ready to perform under the terms of the guarantees. During the year ended December 31, 2018, the Company determined that a portion of its asset was no longer recoverable and recorded an impairment charge of $7.8 million.
A contingent future obligation is recognized in accordance with the provisions of Topic 450, Accounting for Contingencies. In the case of the Company’s guarantees, the contingent future obligation is the future payment of the bonds by the Company. At the inception of the guarantees, the Company determined that its future payment of the bonds was not probable, therefore no contingent future obligation was recorded. For the year ended December 31, 2018, the Company determined that its future payment on a portion of the bond obligations was probable due to inadequate performance of the theatre properties and failure of the debtor under the bonds to perform. Accordingly, for the year ended December 31, 2018, the Company recorded an incremental contingent liability of $2.9 million, which in addition to the $7.8 million discussed above, resulted in a total impairment charge recognized relating to the guarantees of $10.7 million.
5. Accounts Receivable
The following table summarizes the carrying amounts of accounts receivable as of December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Receivable from tenants
|
$
|
81,120
|
|
|
$
|
11,373
|
|
|
Receivable from non-tenants
|
505
|
|
|
2,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Straight-line rent receivable
|
34,568
|
|
|
73,382
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
116,193
|
|
|
$
|
86,858
|
|
During the year ended December 31, 2020, the Company wrote-off receivables from tenants totaling $27.1 million and straight-line rent receivables totaling $38.0 million directly to rental revenue in the accompanying consolidated statements of (loss) income and comprehensive (loss) income upon determination that the collectibility of these receivables or future lease payments from these tenants was no longer probable. Additionally, the Company determined that future rental revenue related to these tenants will be recognized on a cash basis. The $38.0 million in write-offs of straight-line rent receivables were comprised of $26.5 million of straight-line rent receivable and $11.5 million of sub-lessor ground lease straight-line rent receivable.
As of December 31, 2020, receivable from tenants includes fixed rent payments of approximately $76.0 million that were deferred due to the COVID-19 pandemic and determined to be collectible. Additionally, the Company has amounts due from tenants that were not booked as receivables as the full amounts were not deemed probable of collection as a result of the COVID-19 pandemic. While deferments for this and future periods delay rent payments, these deferments do not release tenants from the obligation to pay the deferred amounts in the future. The repayment terms for these deferments vary by tenant and agreements.
6. Investment in Mortgage Notes and Notes Receivable
Effective January 1, 2020, the Company adopted Topic 326, which requires the Company to estimate and record credit losses for each of its mortgage notes and note receivable. The Company measures expected credit losses on its mortgage notes and notes receivable on an individual basis over the related contractual term as its financial instruments do not have similar risk characteristics. The Company has not experienced historical losses on its mortgage note portfolio; therefore, the Company uses a forward-looking commercial real estate loss forecasting tool to estimate its expected credit losses. The loss forecasting tool is comprised of a probability of default model and a loss given default model that utilizes the Company’s loan specific inputs as well as selected forward-looking macroeconomic variables and mean loss rates. Based on certain inputs, such as origination year, balance, interest rate as well as collateral value and borrower operating income, the model produces life of loan expected losses on a
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
loan-by-loan basis. As of December 31, 2020, the Company did not anticipate any prepayments therefore the contractual term of its mortgage notes was used for the calculation of the expected credit losses. The Company updates the model inputs at each reporting period to reflect, if applicable, any newly originated loans, changes to loan specific information on existing loans and current macroeconomic conditions.
During the year ended December 31, 2020, the Company increased its expected credit losses by $30.7 million from its implementation estimate of $2.2 million. This increase was primarily due to credit loss expense related to notes receivable from one borrower as described below as well as adjustments to current macroeconomic conditions resulting from the economic uncertainty and the rapidly changing environment surrounding the COVID-19 pandemic.
In response to the COVID-19 pandemic, the Company deferred interest payments for seven borrowers. The deferrals require the borrower to pay the deferred interest in future periods. The Company assessed the deferrals and determined that the modifications did not result in troubled debt restructurings at December 31, 2020.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
Investment in mortgage notes, including related accrued interest receivable, at December 31, 2020 and 2019 consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of Origination
|
Interest Rate
|
Maturity Date
|
Periodic Payment Terms
|
Outstanding principal amount of mortgage
|
Carrying amount as of December 31,
|
Unfunded commitments
|
|
Description
|
2020
|
2019 (1)
|
December 31, 2020
|
|
Attraction property Powells Point, North Carolina
|
2019
|
7.75
|
%
|
6/30/2025
|
Interest only
|
$
|
28,007
|
|
$
|
27,045
|
|
$
|
27,423
|
|
$
|
—
|
|
|
Fitness & wellness property Omaha, Nebraska
|
2017
|
7.85
|
%
|
1/3/2027
|
Interest only
|
10,905
|
|
11,225
|
|
10,977
|
|
—
|
|
|
Fitness & wellness property Merriam, Kansas
|
2019
|
7.55
|
%
|
7/31/2029
|
Interest only
|
9,095
|
|
9,355
|
|
5,985
|
|
248
|
|
|
Ski property Girdwood, Alaska
|
2019
|
8.24
|
%
|
12/31/2029
|
Interest only
|
40,869
|
|
40,680
|
|
37,000
|
|
16,131
|
|
|
Fitness & wellness property Omaha, Nebraska
|
2016
|
7.85
|
%
|
6/30/2030
|
Interest only
|
8,410
|
|
8,630
|
|
5,803
|
|
2,508
|
|
|
Experiential lodging property Nashville, Tennessee
|
2019
|
7.01
|
%
|
9/30/2031
|
Interest only
|
71,223
|
|
67,235
|
|
70,396
|
|
—
|
|
|
Eat & play property Austin, Texas
|
2012
|
11.31
|
%
|
6/1/2033
|
Principal & Interest-fully amortizing
|
11,361
|
|
11,929
|
|
11,582
|
|
—
|
|
|
Ski property West Dover and Wilmington, Vermont
|
2007
|
11.78
|
%
|
12/1/2034
|
Interest only
|
51,050
|
|
51,031
|
|
51,050
|
|
—
|
|
|
Four ski properties Ohio and Pennsylvania
|
2007
|
10.91
|
%
|
12/1/2034
|
Interest only
|
37,562
|
|
37,413
|
|
37,562
|
|
—
|
|
|
Ski property Chesterland, Ohio
|
2012
|
11.38
|
%
|
12/1/2034
|
Interest only
|
4,550
|
|
4,396
|
|
4,550
|
|
—
|
|
|
Ski property Hunter, New York
|
2016
|
8.57
|
%
|
1/5/2036
|
Interest only
|
21,000
|
|
21,000
|
|
21,000
|
|
—
|
|
|
Eat & play property Midvale, Utah
|
2015
|
10.25
|
%
|
5/31/2036
|
Interest only
|
17,505
|
|
18,289
|
|
17,505
|
|
—
|
|
|
Eat & play property West Chester, Ohio
|
2015
|
9.75
|
%
|
8/1/2036
|
Interest only
|
18,068
|
|
18,830
|
|
18,068
|
|
—
|
|
|
Private school property Mableton, Georgia
|
2017
|
9.02
|
%
|
4/30/2037
|
Interest only
|
5,088
|
|
5,278
|
|
5,048
|
|
—
|
|
|
Fitness & wellness property Fort Collins, Colorado
|
2018
|
7.85
|
%
|
1/31/2038
|
Interest only
|
10,292
|
|
10,408
|
|
10,360
|
|
—
|
|
|
Early childhood education center Lake Mary, Florida
|
2019
|
7.87
|
%
|
5/9/2039
|
Interest only
|
4,200
|
|
4,348
|
|
4,258
|
|
—
|
|
|
Eat & play property Eugene, Oregon
|
2019
|
8.13
|
%
|
6/17/2039
|
Interest only
|
14,700
|
|
14,799
|
|
14,800
|
|
—
|
|
|
Early childhood education center Lithia, Florida
|
2017
|
8.25
|
%
|
10/31/2039
|
Interest only
|
3,959
|
|
3,737
|
|
4,024
|
|
—
|
|
|
|
|
|
|
|
$
|
367,844
|
|
$
|
365,628
|
|
$
|
357,391
|
|
$
|
18,887
|
|
(1) Balances as of December 31, 2019 are prior to the adoption of ASC Topic 326.
Investment in notes receivable, including related accrued interest receivable, was $7.3 million and $14.0 million at December 31, 2020 and 2019, respectively, and is included in Other assets in the accompanying consolidated balance sheets.
During the year ended December 31, 2020, the Company entered into an amended and restated loan and security agreement with one of its notes receivable borrowers in response to the impacts of the COVID-19 pandemic on the borrower. The restated note receivable consists of the previous note balance of $6.5 million and provides the borrower with a term loan for up to $13.0 million and a $6.0 million revolving line of credit. The restated note receivable has a maturity date of June 30, 2032 and the line of credit matures on December 31, 2022. Interest is deferred through June 30, 2022, at which time monthly principal and interest payments will be due over 10 years. Although the borrower is not in default, nor has the borrower declared bankruptcy, the Company determined these modifications resulted in a troubled debt restructuring (TDR) at December 31, 2020 due to the impacts of the
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
COVID-19 pandemic on the borrower's financial condition. These note receivables are considered collateral dependent and expected credit losses are based on the fair value of the underlying collateral at the reporting date. The notes are secured by the working capital and non-real estate assets of the borrower. The Company assessed the fair value of the collateral as of December 31, 2020 and recognized credit loss expense for the year ended December 31, 2020 consisting of the outstanding principal balance of $12.6 million and the $12.9 million unfunded commitment on the term loan and line of credit as of December 31, 2020. Income for this borrower will be recognized on a cash basis.
At December 31, 2020, the Company's investment in this note receivable was a variable interest and the underlying entity is a VIE. The Company is not the primary beneficiary of this VIE, as the Company does not individually have the power to direct the activities that are most significant to the entity and accordingly, this investment is not consolidated. The Company's maximum exposure to loss associated with this VIE is limited to the Company's outstanding note receivable of $12.6 million and the unfunded commitment of $12.9 million, both of which were fully reserved in the allowance for credit losses at December 31, 2020.
The following summarizes the activity within the allowance for credit losses related to mortgage notes, unfunded commitments and notes receivable for the year ended December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes receivable
|
Unfunded commitments - mortgage notes
|
Notes receivable
|
Unfunded commitments - notes receivable
|
Total
|
|
Allowance for credit losses at January 1, 2020
|
$
|
2,000
|
|
$
|
114
|
|
$
|
49
|
|
$
|
—
|
|
$
|
2,163
|
|
|
Credit loss expense
|
5,000
|
|
24
|
|
12,805
|
|
12,866
|
|
30,695
|
|
|
Charge-offs
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Recoveries
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Allowance for credit losses
|
$
|
7,000
|
|
$
|
138
|
|
$
|
12,854
|
|
$
|
12,866
|
|
$
|
32,858
|
|
7. Unconsolidated Real Estate Joint Ventures
As of December 31, 2020 and 2019, the Company had a 65% investment interest in two unconsolidated real estate joint ventures related to two experiential lodging properties located in St. Petersburg Beach, Florida. The Company's partner, Gencom Acquisition, LLC and its affiliates, own the remaining 35% interest in the joint ventures. There are two separate joint ventures, one that holds the investment in the real estate of the experiential lodging properties and the other that holds lodging operations, which are facilitated by a management agreement with an eligible independent contractor. The Company's investment in the operating entity is held in a taxable REIT subsidiary (TRS). The Company accounts for its investment in these joint ventures under the equity method of accounting. As of December 31, 2020 and 2019, the Company had invested $27.4 million and $29.7 million, respectively, in these joint ventures.
The joint venture that holds the real property has a secured mortgage loan of $85.0 million at December 31, 2020, that is due April 1, 2022. The note can be extended for two additional one year periods upon the satisfaction of certain conditions. Additionally, the Company has guaranteed the completion of the renovations in the amount of approximately $32.7 million, with $23.9 million remaining to fund at December 31, 2020. The mortgage loan bears interest at an annual rate equal to the greater of 6.00% or LIBOR plus 3.75%. Interest is payable monthly beginning on May 1, 2019 until the stated maturity date of April 1, 2022, which can be extended to April 1, 2023. The joint venture has an interest rate cap agreement to limit the variable portion of the interest rate (LIBOR) on this note to 3.0% from March 28, 2019 to April 1, 2023. In response to the COVID-19 pandemic, on May 28, 2020, the joint venture was granted a three-month interest deferral, which is required to be paid on the maturity date of the loan and is not considered a troubled debt restructuring.
The Company recognized losses of $4.0 million and $140 thousand and income of $52 thousand during the years ended December 31, 2020, 2019 and 2018, respectively, and received no distributions during the years ended December 31, 2020, 2019 and 2018 related to the equity investment in these joint ventures.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
As of December 31, 2020 and 2019, the Company's investments in these joint ventures were considered to be variable interests and the underlying entities are VIEs. The Company is not the primary beneficiary of the VIEs as the Company does not individually have the power to direct the activities that are most significant to the joint ventures and accordingly these investments are not consolidated. The Company's maximum exposure to loss at December 31, 2020, is its investment in the joint ventures of $27.4 million as well as the Company's guarantee of the estimated costs to complete renovations of approximately $23.9 million.
In addition, as of December 31, 2020 and 2019, the Company had invested $0.8 million and $4.6 million, respectively, in unconsolidated joint ventures for three theatre projects located in China. During the year ended December 31, 2020, the Company recognized $3.2 million in other-than-temporary impairment charges on these equity investments. The Company determined the estimated fair value of these investments based primarily on discounted cash flow projections. The Company recognized losses of $559 thousand, $241 thousand and $74 thousand, during the years ended December 31, 2020, 2019 and 2018, respectively, and received distributions of $112 thousand and $567 thousand, from its investment in these joint ventures for the years ended December 31, 2019 and 2018, respectively. No distributions were received during the year ended December 31, 2020.
8. Debt
Debt at December 31, 2020 and 2019 consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
Unsecured revolving variable rate credit facility, LIBOR + 1.625% at December 31, 2020, due February 27, 2022 (1)
|
$
|
590,000
|
|
|
$
|
—
|
|
|
|
|
Unsecured term loan payable, LIBOR + 2.00% at December 31, 2020 with $350,000 fixed at 4.40% and $50,000 fixed at 4.60%, due February 27, 2023 (1)
|
400,000
|
|
|
400,000
|
|
|
|
|
Senior unsecured notes payable, 5.25%, due July 15, 2023 (2)
|
275,000
|
|
|
275,000
|
|
|
|
|
Senior unsecured notes payable, 5.60% at December 31, 2020, due August 22, 2024 (3)
|
148,000
|
|
|
148,000
|
|
|
|
|
Senior unsecured notes payable, 4.50%, due April 1, 2025 (2)
|
300,000
|
|
|
300,000
|
|
|
|
|
Senior unsecured notes payable, 5.81% at December 31, 2020, due August 22, 2026 (3)
|
192,000
|
|
|
192,000
|
|
|
|
|
Senior unsecured notes payable, 4.75%, due December 15, 2026 (2)
|
450,000
|
|
|
450,000
|
|
|
|
|
Senior unsecured notes payable, 4.50%, due June 1, 2027 (2)
|
450,000
|
|
|
450,000
|
|
|
|
|
Senior unsecured notes payable, 4.95%, due April 15, 2028 (2)
|
400,000
|
|
|
400,000
|
|
|
|
|
Senior unsecured notes payable, 3.75%, due August 15, 2029 (2)
|
500,000
|
|
|
500,000
|
|
|
|
|
Bonds payable, variable rate, fixed at 1.39% through September 30, 2024, due August 1, 2047
|
24,995
|
|
|
24,995
|
|
|
|
|
Less: deferred financing costs, net
|
(35,552)
|
|
|
(37,165)
|
|
|
|
|
Total
|
$
|
3,694,443
|
|
|
$
|
3,102,830
|
|
|
(1) At December 31, 2020, the Company had $590.0 million outstanding under its $1.0 billion unsecured revolving credit facility with interest at a floating rate of LIBOR plus 1.625% (with a LIBOR floor of 0.50%), which was 2.125% with a facility fee of 0.375%. Interest is payable monthly. Subsequent to December 31, 2020, the Company paid down $500.0 million on this credit facility.
The Company's unsecured term loan facility had a balance of $400.0 million with interest at a floating rate of LIBOR plus 2.00% (with a LIBOR floor of 0.50%), which was 2.5% on December 31, 2020. Interest is payable monthly. In addition, there is a $1.0 billion accordion feature on the combined unsecured revolving credit and term loan facility (the combined facility) that increases the maximum borrowing amount available under the combined facility, subject to lender approval, from $1.4 billion to $2.4 billion. If the Company exercises all or any portion of the accordion feature, the resulting increase in the combined facility may have a shorter or longer maturity date and different pricing terms. The combined facility contains financial covenants or restrictions that limit the Company's levels of consolidated debt, secured debt, investment levels outside certain categories and dividend distributions, and require the Company to maintain a minimum consolidated tangible net worth and meet certain coverage levels for
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
fixed charges and debt services. As discussed further below, certain of these covenants were modified or waived during 2020.
In light of the continuing financial and operational impacts of the COVID-19 pandemic on the Company and its tenants and borrowers, on June 29, 2020 and November 3, 2020, the Company amended its Consolidated Credit Agreement, which governs its unsecured revolving credit facility and its unsecured term loan facility. As described below, the amendments modified certain provisions and waived the Company's obligation to comply with certain covenants under this debt agreement through December 31, 2021. The Company can elect to terminate the Covenant Relief Period early, subject to certain conditions.
As described below, the loans subject to the modifications bear interest at higher rates during the Covenant Relief Period and will return to the original pre-waiver levels at the end of such period, subject to certain conditions. The rates during and after the Covenant Relief Period continue to be subject to change based on unsecured debt ratings, as defined in the agreement. The amendments also imposed the additional restrictions on the Company discussed below during the Covenant Relief Period. In addition, during the Covenant Relief Period, the amendments require the Company to cause certain of its key subsidiaries to guarantee the Company's obligations based on its unsecured debt ratings, and the Company will be required to pledge the equity interests of certain of those subsidiary guarantors upon the occurrence of certain events, however both of these requirements end when the Covenant Relief Period is over.
During the Covenant Relief Period, the initial interest rates for the revolving credit facility and term loan facility were set at LIBOR plus 1.375% and LIBOR plus 1.75%, respectively, (with a LIBOR floor of 0.50%) and the facility fee on the revolving credit facility was increased to 0.375%. On August 20, 2020, as a result of a downgrade of the Company's unsecured debt rating by Moody's to Baa3, the spreads on the revolving credit and term loan facilities each increased by 0.25%. During the fourth quarter of 2020, the Company's unsecured debt rating was downgraded to BB+ by both Fitch and Standard & Poor's. As a result of these downgrades, certain of the Company's key subsidiaries guarantee the Company's obligations under its bank credit facilities, private placement notes and other outstanding senior unsecured notes in accordance with existing agreements with the holders of such indebtedness. See Note 20 for the Company's supplemental guarantor financial information. If the Company's unsecured debt rating is further downgraded by Moody's, the interest rates on the revolving credit and term loan facilities would both increase by 0.35% during the Covenant Relief Period. After the Covenant Relief Period, the interest rates for the revolving credit and term loan facilities, based on the Company's current unsecured debt ratings, are scheduled to return to LIBOR plus 1.20% and LIBOR plus 1.35%, respectively, (with a LIBOR floor of zero) and the facility fee will be 0.25%, however these rates are subject to change based on the Company's unsecured debt ratings.
The amendments to the Company's revolving credit and term loan facilities permanently modified certain financial covenants and provided relief from compliance with certain financial covenants during the Covenant Relief Period, as follows: (i) a new minimum liquidity financial covenant of $500.0 million during the Covenant Relief Period was added; (ii) compliance with the total-debt-to-total-asset-value, the maximum-unsecured-debt-to-unencumbered-asset-value, the minimum unsecured interest coverage ratio and the minimum fixed charge ratio financial covenants was suspended for the period beginning June 29, 2020 and ending on the earlier to occur of December 31, 2021 or the earlier termination of the Covenant Relief Period; (iii) permanent amendments to the unsecured-debt-to-unencumbered-asset-value financial covenant were made to allow short-term indebtedness to be offset by unrestricted cash in the calculation and to allow unrestricted cash not otherwise offset against short-term indebtedness to be counted as an unencumbered asset; and (iv) permanent amendments to financial covenants were made to allow accrued deferred payments to be included as recurring property revenue in these calculations. The amendments also imposed additional restrictions on the Company and its subsidiaries during the Covenant Relief Period, including limitations on certain investments, incurrences of indebtedness, capital expenditures and payment of dividends or other distributions and stock repurchases, in each case subject to certain exceptions.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
In connection with the amendments, $0.1 million of fees paid to third parties were expensed and included in costs associated with loan refinancing in the accompanying consolidated statements of (loss) income and comprehensive (loss) income for the year ended December 31, 2020. In addition, the Company paid $5.1 million in fees to existing lenders that were capitalized in deferred financing costs and amortized as part of the effective yield. These fees consisted of $3.6 million related to the unsecured revolving credit facility and included in other assets and $1.5 million related to the term loan and shown as a reduction of debt.
As described under (3) below, on June 29, 2020 and December 24, 2020, the Company also amended its Note Purchase Agreement which governs its private placement notes. Under the most favored nations clause included in the Consolidated Credit Agreement, the additional or more restrictive covenants included in the private placement amendments are incorporated into the Consolidated Credit Agreement.
(2) These notes contain various covenants, including: (i) a limitation on incurrence of any debt that would cause the ratio of the Company’s debt to adjusted total assets to exceed 60%; (ii) a limitation on incurrence of any secured debt that would cause the ratio of the Company’s secured debt to adjusted total assets to exceed 40%; (iii) a limitation on incurrence of any debt that would cause the Company’s debt service coverage ratio to be less than 1.5 times; and (iv) the maintenance at all times of the Company's total unencumbered assets such that they are not less than 150% of the Company’s outstanding unsecured debt.
(3) In light of the continuing financial and operational impacts of the COVID-19 pandemic on the Company and its tenants and borrowers, on June 29, 2020 and December 24, 2020, the Company amended its Note Purchase Agreement, which governs its private placement notes. The amendments modified certain provisions and waived the Company's obligation to comply with certain covenants under these debt agreements through October 1, 2021. The Company can elect to extend such period through January 1, 2022 and may elect to terminate the Covenant Relief Period early, subject to certain conditions. These notes: (i) contain certain financial and other covenants that generally conform to the combined credit facility described above; (ii) provide investors thereunder certain additional guaranty and lien rights, in the event that certain events occur; (iii) contain certain "most favored lender" provisions; and (iv) impose restrictions on debt that can be incurred by certain subsidiaries of the Company. As discussed further below, certain of these covenants were modified or waived during 2020.
The amendments provided for an immediate 0.65% waiver premium to be paid on the private placement notes during the Covenant Relief Period. In addition, during the fourth quarter of 2020, as a result of downgrades of the Company's unsecured debt rating to BB+ by both Fitch and Standard and Poor's, the spreads on the private placement notes each increased by an additional 0.60%. As a result, the interest rates for the private placement notes were increased to 5.60% and 5.81% for the Series A notes due 2024 and the Series B notes due 2026, respectively. After the Covenant Relief Period, the interest rates for the private placement notes are scheduled to return to 4.35% and 4.56% for the Series A notes due 2024 and the Series B notes due 2026, respectively.
If the Company elects to extend the Covenant Relief Period until January 1, 2022, the Company must, or must cause certain of its subsidiaries to, grant mortgages on certain unencumbered properties to a collateral agent, on behalf of the holders of the private placement notes and the lenders under the Company's Consolidated Credit Agreement. If the Company provides such mortgages, they must remain in effect until the later of two consecutive fiscal quarters of demonstrated covenant compliance or June 30, 2022, however the additional 0.60% interest rate premium as a result of the downgrades in the Company's unsecured debt rating is removed while mortgages are outstanding. If the Company elects to extend the Covenant Relief Period until January 1, 2022 as described above, the Covenant Relief Period will automatically end on October 29, 2021 if the Company fails to provide such mortgages.
The amendments provide relief from compliance with the following financial covenants during the Covenant Relief Period: the total-debt-to-total-asset-value covenant; the maximum-unsecured-debt-to-unencumbered-asset-value covenant; the minimum unsecured interest coverage ratio; and the minimum fixed charge ratio. The amended Note Purchase Agreement modifies the maximum secured debt to total asset value covenant as follows: (i) neither the Company nor any of its subsidiaries may incur any secured debt during the period beginning on December 24, 2020 and ending on the last day of the Covenant Relief Period, subject to certain exceptions; and (ii) after the Covenant
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
Relief Period the ratio of secured debt to total asset value is reduced from 0.35 to 1.00 to 0.25 to 1.00 until the Company can demonstrate covenant compliance for at least two fiscal quarters.
The amendments impose certain restrictions on the Company during the Covenant Relief Period, including limitations on certain investments, incurrences of indebtedness, capital expenditures, payment of dividends or other distributions and stock repurchases, and maintenance of a minimum liquidity amount of $500.0 million, in each case subject to certain exceptions. The amendments include the following restrictions: (i) the limitation on investments and guarantees of certain indebtedness from October 1, 2020 to the end of the Covenant Relief Period was set at $175.0 million; and (ii) the limitation on capital expenditures from October 1, 2020 to the end of the Covenant Relief Period was set at $175.0 million. In addition, the amount of proceeds from assets sales that are exempt from the requirement to apply such proceeds to the prepayment of outstanding indebtedness under the Company's existing bank credit agreement and the private placement notes is $150.0 million, subject to certain exceptions relating to the sale of specified assets. In addition, the Company is prohibited from voluntarily prepaying its existing public senior notes during the Covenant Relief Period or its term loan debt under its bank facility during the Covenant Relief Period.
In connection with the amendments, $1.5 million of fees paid to third parties were expensed and included in costs associated with loan refinancing in the accompanying consolidated statements of (loss) income and comprehensive (loss) income for the year ended December 31, 2020. In addition, the Company paid $0.9 million in fees to existing lenders that were capitalized in deferred financing costs and amortized as part of the effective yield and shown as a reduction of debt.
Subsequent to year-end, the Company paid down principal of approximately $23.8 million on its private placement notes resulting from the sale of assets in accordance with the amendments.
Certain of the Company’s debt agreements contain customary restrictive covenants related to financial and operating performance as well as certain cross-default provisions. The Company was in compliance with all financial covenants under the Company's debt instruments at December 31, 2020.
Principal payments due on long-term debt obligations subsequent to December 31, 2020 (without consideration of any extensions) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Amount
|
|
Year:
|
|
|
2021
|
$
|
—
|
|
|
2022
|
590,000
|
|
|
2023
|
675,000
|
|
|
2024
|
148,000
|
|
|
2025
|
300,000
|
|
|
Thereafter
|
2,016,995
|
|
|
Less: deferred financing costs, net
|
(35,552)
|
|
|
Total
|
$
|
3,694,443
|
|
The Company capitalizes a portion of interest costs as a component of property under development. The following is a summary of interest expense, net from continuing operations for the years ended December 31, 2020, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Interest on loans
|
$
|
152,058
|
|
|
$
|
140,697
|
|
|
$
|
137,570
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs
|
6,606
|
|
|
6,192
|
|
|
5,797
|
|
|
|
|
|
|
|
|
|
Credit facility and letter of credit fees
|
3,064
|
|
|
2,265
|
|
|
2,411
|
|
|
Interest cost capitalized
|
(1,233)
|
|
|
(4,975)
|
|
|
(9,541)
|
|
|
Interest income
|
(2,820)
|
|
|
(2,177)
|
|
|
(367)
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
$
|
157,675
|
|
|
$
|
142,002
|
|
|
$
|
135,870
|
|
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
9. Derivative Instruments
All derivatives are recognized at fair value in the consolidated balance sheets within the line items "Other assets" and "Accounts payable and accrued liabilities" as applicable. The Company has elected not to offset its derivative position for purposes of balance sheet presentation and disclosure. The Company had derivative assets of $1.1 million at December 31, 2019 and had no derivative assets at December 31, 2020. The Company had derivative liabilities of $14.0 million and $4.5 million at December 31, 2020 and 2019, respectively. The Company has not posted or received collateral with its derivative counterparties as of December 31, 2020 and 2019. See Note 10 for disclosures relating to the fair value of the derivative instruments.
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions including the effect of changes in foreign currency exchange rates on foreign currency transactions and interest rates on its LIBOR based borrowings. The Company manages 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 uses interest rate swaps as its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt or payment of variable-rate amounts from a counterparty which results in the Company recording net interest expense that is fixed over the life of the agreements without exchange of the underlying notional amount.
As of December 31, 2020, the Company had four interest rate swap agreements designated as cash flow hedges of interest rate risk related to its variable rate unsecured term loan facility totaling $400.0 million. Additionally, at December 31, 2020, the Company had an interest rate swap agreement designated as a cash flow hedge of interest rate risk related to its variable rate secured bonds totaling $25.0 million. Interest rate swap agreements outstanding at December 31, 2020 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
|
Notional Amount (in millions)
|
|
Index
|
|
Maturity
|
|
4.3950%
|
(1)
|
|
$
|
116.7
|
|
|
USD LIBOR
|
|
February 7, 2022
|
|
4.4075%
|
(1)
|
|
116.7
|
|
|
USD LIBOR
|
|
February 7, 2022
|
|
4.4080%
|
(1)
|
|
116.6
|
|
|
USD LIBOR
|
|
February 7, 2022
|
|
4.5950%
|
(1)
|
|
50.0
|
|
|
USD LIBOR
|
|
February 7, 2022
|
|
Total
|
|
|
$
|
400.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3925%
|
|
|
25.0
|
|
|
USD LIBOR
|
|
September 30, 2024
|
|
Total
|
|
|
$
|
25.0
|
|
|
|
|
|
(1) As discussed in Note 8, on June 29, 2020 and November 3, 2020, the Company amended its Consolidated Credit Agreement. The above fixed rates increased by 0.90% during the Covenant Relief Period, and as a result of the Company's unsecured debt ratings being downgraded and a LIBOR floor of 0.50% being established. The rates are scheduled to return to previous levels as defined in the agreement at the end of this period, subject to the Company's unsecured debt ratings.
The change 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 within the same income statement line item as the earnings effect of the hedged transaction.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
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 December 31, 2020, the Company estimates that during the twelve months ending December 31, 2020, $8.2 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, USD, on CAD denominated cash flow from its four Canadian properties. The Company uses cross-currency swaps to mitigate its exposure to fluctuations in the USD-CAD exchange rate on cash inflows associated with these properties which should hedge a significant portion of the Company's expected CAD denominated cash flows.
During the year ended December 31, 2020, the Company entered into USD-CAD cross-currency swaps that were effective July 1, 2020 with a fixed original notional value of $100.0 million CAD and $76.6 million USD. The net effect of this swap is to lock in an exchange rate of $1.31 CAD per USD on approximately $7.2 million annual CAD denominated cash flows through June 2022.
The change 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 within the same income statement line item as the earnings effect of the hedged transaction. As of December 31, 2020, the Company estimates that during the twelve months ending December 31, 2020, $0.2 million of losses will be reclassified from AOCI to other expense.
Net Investment Hedges
The Company is exposed to fluctuations in the USD-CAD exchange rate on its net investments in Canada. As such, the Company uses either currency forward agreements or cross-currency swaps to manage its exposure to changes in foreign exchange rates on certain of its foreign net investments. As of December 31, 2020, the Company had the following cross-currency swaps designated as net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
Notional Amount (in millions, CAD)
|
|
Maturity
|
|
$1.32 CAD per USD
|
|
$
|
100.0
|
|
|
July 1, 2023
|
|
$1.32 CAD per USD
|
|
100.0
|
|
|
July 1, 2023
|
|
Total
|
|
$
|
200.0
|
|
|
|
The cross-currency swaps also have a monthly settlement feature locked in at an exchange rate of $1.32 CAD per USD on $4.5 million of CAD annual cash flows, the net effect of which is an excluded component from the effectiveness testing of this hedge.
For qualifying foreign currency derivatives designated as net investment hedges, the change in the fair value of the derivatives are reported in AOCI as part of the cumulative translation adjustment. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company's accounting policy election. The earnings recognition of excluded components are presented in other income.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
Below is a summary of the effect of derivative instruments on the consolidated statements of changes in equity and income for the years ended December 31, 2020, 2019 and 2018:
Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and Comprehensive (Loss) Income for the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Description
|
2020
|
|
2019
|
|
2018
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
|
|
|
|
Amount of (Loss) Gain Recognized in AOCI on Derivative
|
$
|
(11,612)
|
|
|
$
|
(7,476)
|
|
|
$
|
3,172
|
|
|
Amount of (Expense) Income Reclassified from AOCI into Earnings (1)
|
(6,159)
|
|
|
1,138
|
|
|
1,324
|
|
|
Cross Currency Swaps
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in AOCI on Derivative
|
5
|
|
|
(450)
|
|
|
1,689
|
|
|
Amount of Income Reclassified from AOCI into Earnings (2)
|
441
|
|
|
545
|
|
|
1,426
|
|
|
Net Investment Hedges
|
|
|
|
|
|
|
Cross Currency Swaps
|
|
|
|
|
|
|
Amount of (Loss) Gain Recognized in AOCI on Derivative
|
(4,664)
|
|
|
(4,454)
|
|
|
5,108
|
|
|
Amount of Income Recognized in Earnings (2) (3)
|
599
|
|
|
556
|
|
|
271
|
|
|
Currency Forward Agreements
|
|
|
|
|
|
|
Amount of Gain Recognized in AOCI on Derivative
|
—
|
|
|
—
|
|
|
8,560
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Amount of (Loss) Gain Recognized in AOCI on Derivative
|
$
|
(16,271)
|
|
|
$
|
(12,380)
|
|
|
$
|
18,529
|
|
|
Amount of (Expense) Income Reclassified from AOCI into Earnings
|
(5,718)
|
|
|
1,683
|
|
|
2,750
|
|
|
Amount of Income Recognized in Earnings
|
599
|
|
|
556
|
|
|
271
|
|
|
|
|
|
|
|
|
|
Interest expense, net in accompanying consolidated statements of (loss) income and comprehensive (loss) income
|
$
|
157,675
|
|
|
$
|
142,002
|
|
|
$
|
135,870
|
|
|
Other income in accompanying consolidated statements of (loss) income and comprehensive (loss) income
|
$
|
9,139
|
|
|
$
|
25,920
|
|
|
$
|
2,076
|
|
(1) Included in “Interest expense, net” in accompanying consolidated statements of (loss) income and comprehensive (loss) income.
(2) Included in "Other income" in the accompanying consolidated statements of (loss) income and comprehensive (loss) income.
(3) Amounts represent derivative gains excluded from the effectiveness testing.
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 $50.0 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 December 31, 2020, the fair value of the Company's derivatives in a liability position related to these agreements was $14.0 million. If the Company breached any of the contractual provisions of these derivative contracts, it would be required to settle its obligations under the agreements at their termination value of $14.8 million. As of December 31, 2020, the Company had not posted any collateral related to these agreements and was not in breach of any provisions in these agreements.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
10. Fair Value Disclosures
The Company has certain financial instruments that are required to be measured under the FASB’s Fair Value Measurement 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 Measurement 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 use quoted prices (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 value of interest rate swaps is 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 use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of December 31, 2020, 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.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
The table below presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019, 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 December 31, 2020 and 2019
(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
|
|
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross Currency Swaps**
|
$
|
—
|
|
|
$
|
(4,271)
|
|
|
$
|
—
|
|
|
$
|
(4,271)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Agreements**
|
$
|
—
|
|
|
$
|
(9,723)
|
|
|
$
|
—
|
|
|
$
|
(9,723)
|
|
|
2019:
|
|
|
|
|
|
|
|
|
Cross Currency Swaps*
|
$
|
—
|
|
|
$
|
828
|
|
|
$
|
—
|
|
|
$
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Agreements*
|
$
|
—
|
|
|
$
|
225
|
|
|
$
|
—
|
|
|
$
|
225
|
|
|
Interest Rate Swap Agreements**
|
$
|
—
|
|
|
$
|
(4,495)
|
|
|
$
|
—
|
|
|
$
|
(4,495)
|
|
*Included in "Other assets" in the accompanying consolidated balance sheet.
** Included in "Accounts payable and accrued liabilities" in the accompanying consolidated balance sheets.
Non-recurring fair value measurements
The table below presents the Company's assets measured at fair value on a non-recurring basis during the year ended December 31, 2020 and 2019, aggregated by the level in the fair value hierarchy within which those measurements fall.
Assets Measured at Fair Value on a Non-Recurring Basis During the Year Ended
December 31, 2020 and 2019
(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
measurement date
|
|
2020:
|
|
|
|
|
|
|
|
|
Real estate investments, net
|
$
|
—
|
|
|
$
|
29,684
|
|
|
$
|
9,860
|
|
|
$
|
39,544
|
|
|
Operating lease right-of-use assets
|
—
|
|
|
—
|
|
|
12,953
|
|
|
12,953
|
|
|
Investment in joint ventures
|
—
|
|
|
—
|
|
|
771
|
|
|
771
|
|
|
Other assets (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2019:
|
|
|
|
|
|
|
|
|
Real estate investments, net
|
$
|
—
|
|
|
$
|
6,160
|
|
|
$
|
—
|
|
|
$
|
6,160
|
|
(1) Includes collateral dependent notes receivable, which are presented within other assets in the accompanying consolidated balance sheet.
As discussed further in Note 4, during the year ended December 31, 2020, the Company recorded impairment charges of $85.7 million, of which $70.7 million related to real estate investments, net and $15.0 million related to operating lease right-of-use assets. Management estimated the fair value of these investments taking into account various factors including purchase offers, independent appraisals, shortened hold periods and current market conditions. The Company determined, based on the inputs, that its valuation of six of its properties with purchase offers were classified as Level 2 of the fair value hierarchy and were measured at fair value. Three properties, two of which included operating lease right-of-use assets, were measured at fair value using independent appraisals which used discounted cash flow models. The significant inputs and assumptions used in the real estate appraisals included market rents which ranged from $9 per square foot to $28 per square foot, discount rates which ranged from 9.0% to 12.3% and a terminal capitalization rate of 8.75% for the property not under ground lease. Significant inputs and assumptions used in the right-of-use asset appraisals included market rates which ranged from $10 per square foot to
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
$16 per square foot and discount rates which ranged from 8.0% to 8.5%. These measurements were classified within Level 3 of the fair value hierarchy as many of the assumptions were not observable.
Additionally, as discussed further in Note 7, during the year ended December 31, 2020, the Company recorded impairment charges of $3.2 million related to its investment in joint ventures. Management estimated the fair value of these investments, taking into account various factors including implied asset value changes based on discounted cash flow projections and current market conditions. The Company determined, based on the inputs, that its valuation of investment in joint ventures was classified within Level 3 of the fair value hierarchy as many of the assumptions are not observable.
As discussed further in Note 6, during the year ended December 31, 2020, the Company recorded expected credit loss expense totaling $25.5 million related to notes receivable from one borrower to fully reserve the outstanding principal balance of $12.6 million and unfunded commitment to fund $12.9 million, as a result of recent changes in the borrower's financial status due to the impact of the COVID-19 pandemic. Management valued the loan based on the fair value of the underlying collateral which was based on review of the financial statements of the borrower, and was classified within Level 2 of the fair value hierarchy.
As discussed further in Note 4, during the year ended December 31, 2019, the Company recorded an impairment charge of $2.2 million related to real estate investments, net. Management estimated the fair value of this property taking into account various factors including various purchase offers, pending purchase agreements, the shortened holding period and current market conditions. The Company determined, based on the inputs, that its valuation of real estate investments, net was classified within Level 2 of the fair value hierarchy.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments at December 31, 2020 and 2019:
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 December 31, 2020, the Company had a carrying value of $365.6 million in fixed rate mortgage notes receivable outstanding, including related accrued interest, with a weighted average interest rate of approximately 9.03%. The fixed rate mortgage notes bear interest at rates of 7.01% to 11.78%. Discounting the future cash flows for fixed rate mortgage notes receivable using rates of 7.50% to 10.00%, management estimates the fair value of the fixed rate mortgage notes receivable to be $394.0 million with an estimated weighted average market rate of 8.11% at December 31, 2020.
At December 31, 2019, the Company had a carrying value of $357.4 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 6.99% to 11.61%. Discounting the future cash flows for fixed rate mortgage notes receivable using rates of 6.99% to 9.25%, management estimates the fair value of the fixed rate mortgage notes receivable to be $395.6 million with an estimated weighted average market rate of 7.76% at December 31, 2019.
Derivative instruments:
Derivative instruments are carried at their fair value.
Debt instruments:
The fair value of the Company's debt as of December 31, 2020 and 2019 is estimated by discounting the future cash flows of each instrument using current market rates. At December 31, 2020, the Company had a carrying value of $1.0 billion in variable rate debt outstanding with an average weighted interest rate of approximately 2.23%. The carrying value of the variable rate debt outstanding approximates the fair value at December 31, 2020.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
At December 31, 2019, the Company had a carrying value of $425.0 million in variable rate debt outstanding with an average weighted interest rate of approximately 2.75%. The carrying value of the variable rate debt outstanding approximates the fair value at December 31, 2019.
At December 31, 2020 and 2019, $425.0 million, of the Company's variable rate debt, discussed above, had been effectively converted to a fixed rate by interest rate swap agreements. See Note 9 for additional information related to the Company's interest rate swap agreements.
At December 31, 2020, the Company had a carrying value of $2.72 billion in fixed rate long-term debt outstanding with an average weighted interest rate of approximately 4.70%. Discounting the future cash flows for fixed rate debt using December 31, 2020 market rates of 4.09% to 5.81%, management estimates the fair value of the fixed rate debt to be approximately $2.69 billion with an estimated weighted average market rate of 4.70% at December 31, 2020.
At December 31, 2019, the Company had a carrying value of $2.72 billion in fixed rate long-term debt outstanding with an average weighted interest rate of approximately 4.54%. Discounting the future cash flows for fixed rate debt using December 31, 2019 market rates of 2.87% to 4.56%, management estimates the fair value of the fixed rate debt to be approximately $2.87 billion with an estimated weighted average market rate of 3.51% at December 31, 2019.
11. Common and Preferred Shares
On June 3, 2019, the Company filed a shelf registration statement with the SEC, which is effective for a term of three years. The securities covered by this registration statement include common shares, preferred shares, debt securities, depositary shares, warrants, and units. The Company may periodically offer one of more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.
Additionally, on June 3, 2019, the Company filed a shelf registration statement with the SEC, which is effective for a term of three years, for its Dividend Reinvestment and Direct Share Purchase Plan (DSP Plan) which permits the issuance of up to 15,000,000 common shares.
Common Shares
The Company's Board declared cash dividends totaling $1.515 and $4.500 per common share for the years ended December 31, 2020 and 2019, respectively. The monthly cash dividend to common shareholders was suspended following the common share dividend paid on May 15, 2020 to shareholders of record as of April 30, 2020.
Of the total distributions calculated for tax purposes, the amounts characterized as ordinary income, return of capital and long-term capital gain for cash distributions paid per common share for the years ended December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Distributions Per Share
|
|
|
|
2020
|
|
2019
|
|
|
Taxable ordinary income (1)
|
$
|
0.8888
|
|
|
$
|
2.7411
|
|
|
|
Return of capital
|
0.5634
|
|
|
1.3966
|
|
|
|
Long-term capital gain (2)
|
0.4378
|
|
|
0.3473
|
|
|
|
|
|
|
|
|
|
Totals
|
$
|
1.8900
|
|
|
$
|
4.4850
|
|
|
(1) Amounts qualify in their entirety as 199A distributions.
(2) Of the long-term capital gain, $0.1439 and $0.3473 were unrecaptured section 1250 gains for the years ended December 31, 2020 and 2019, respectively.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
During the year ended December 31, 2020, the Company issued an aggregate of 36,176 common shares under its DSP Plan for net proceeds of $1.1 million.
During the year ended December 31, 2020, the Company's Board approved a share repurchase program pursuant to which the Company may repurchase up to $150.0 million of the Company's common shares. The share repurchase program was scheduled to expire on December 31, 2020; however, the Company suspended the program on the effective date of the covenant modification agreements, June 29, 2020, as discussed in Note 8. During the year ended December 31, 2020, the Company repurchased 4,066,716 common shares under the share repurchase program for approximately $106.0 million. The repurchases were made under a Rule 10b5-1 trading plan.
Series C Convertible Preferred Shares
The Company has outstanding 5.4 million 5.75% Series C cumulative convertible preferred shares (Series C preferred shares). The Company will pay cumulative dividends on the Series C preferred shares from the date of original issuance in the amount of $1.4375 per share each year, which is equivalent to 5.75% of the $25 liquidation preference per share. Dividends on the Series C preferred shares are payable quarterly in arrears. The Company does not have the right to redeem the Series C preferred shares except in limited circumstances to preserve the Company’s REIT status. The Series C preferred shares have no stated maturity and will not be subject to any sinking fund or mandatory redemption. As of December 31, 2020, the Series C preferred shares are convertible, at the holder’s option, into the Company’s common shares at a conversion rate of 0.4137 common shares per Series C preferred share, which is equivalent to a conversion price of $60.43 per common share. This conversion ratio may increase over time upon certain specified triggering events including if the Company’s common dividends per share exceeds a quarterly threshold of $0.6875.
Upon the occurrence of certain fundamental changes, the Company will under certain circumstances increase the conversion rate by a number of additional common shares or, in lieu thereof, may in certain circumstances elect to adjust the conversion rate upon the Series C preferred shares becoming convertible into shares of the public acquiring or surviving company.
The Company may, at its option, cause the Series C preferred shares to be automatically converted into that number of common shares that are issuable at the then prevailing conversion rate. The Company may exercise its conversion right only if, at certain times, the closing price of the Company’s common shares equals or exceeds 135% of the then prevailing conversion price of the Series C preferred shares.
Owners of the Series C preferred shares generally have no voting rights, except under certain dividend defaults. Upon conversion, the Company may choose to deliver the conversion value to the owners in cash, common shares, or a combination of cash and common shares.
The Company's Board declared cash dividends totaling $1.4375 per Series C preferred share for each of the years ended December 31, 2020 and 2019. There were non-cash distributions associated with conversion adjustments of $0.2131 and $0.6822 per Series C preferred share for the years ended December 31, 2020 and 2019, respectively. The conversion adjustment provision entitles the shareholders of the Series C preferred shares, upon certain quarterly common share dividend thresholds being met, to receive additional common shares of the Company upon a conversion of the preferred shares into common shares. The increase in common shares to be received upon a conversion is a deemed distribution for federal income tax purposes.
For tax purposes, the amounts characterized as ordinary income, return of capital and long-term capital gain for cash distributions paid and non-cash deemed distributions per Series C preferred share for the years ended December 31, 2020 and 2019 are as follows:
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Distributions per Share
|
|
|
|
2020
|
|
2019
|
|
|
Taxable ordinary income (1)
|
$
|
0.9631
|
|
|
$
|
1.2758
|
|
|
|
Return of capital
|
—
|
|
|
—
|
|
|
|
Long-term capital gain (2)
|
0.4744
|
|
|
0.1617
|
|
|
|
|
|
|
|
|
|
Totals
|
$
|
1.4375
|
|
|
$
|
1.4375
|
|
|
(1) Amounts qualify in their entirety as 199A distributions.
(2) Of the long-term capital gain, $0.1559 and $0.1617 were unrecaptured section 1250 gains for the years ended December 31, 2020 and 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Distributions per Share
|
|
|
|
2020
|
|
2019
|
|
|
Taxable ordinary income (3)
|
$
|
0.0958
|
|
|
$
|
0.1050
|
|
|
|
Return of capital
|
0.0701
|
|
|
0.5639
|
|
|
|
Long-term capital gain (4)
|
0.0472
|
|
|
0.0133
|
|
|
|
|
|
|
|
|
|
Totals
|
$
|
0.2131
|
|
|
$
|
0.6822
|
|
|
(3) Amounts qualify in their entirety as 199A distributions.
(4) Of the long-term capital gain, $0.0155 and $0.0133 were unrecaptured section 1250 gains for the years ended December 31, 2020 and 2019, respectively.
Series E Convertible Preferred Shares
The Company has outstanding 3.4 million 9.00% Series E cumulative convertible preferred shares (Series E preferred shares). The Company will pay cumulative dividends on the Series E preferred shares from the date of original issuance in the amount of $2.25 per share each year, which is equivalent to 9.00% of the $25 liquidation preference per share. Dividends on the Series E preferred shares are payable quarterly in arrears. The Company does not have the right to redeem the Series E preferred shares except in limited circumstances to preserve the Company’s REIT status. The Series E preferred shares have no stated maturity and will not be subject to any sinking fund or mandatory redemption. As of December 31, 2020, the Series E preferred shares are convertible, at the holder’s option, into the Company’s common shares at a conversion rate of 0.4826 common shares per Series E preferred share, which is equivalent to a conversion price of $51.80 per common share. This conversion ratio may increase over time upon certain specified triggering events including if the Company’s common dividends per share exceeds a quarterly threshold of $0.84.
Upon the occurrence of certain fundamental changes, the Company will under certain circumstances increase the conversion rate by a number of additional common shares or, in lieu thereof, may in certain circumstances elect to adjust the conversion rate upon the Series E preferred shares becoming convertible into shares of the public acquiring or surviving company.
The Company may, at its option, cause the Series E preferred shares to be automatically converted into that number of common shares that are issuable at the then prevailing conversion rate. The Company may exercise its conversion right only if, at certain times, the closing price of the Company’s common shares equals or exceeds 150% of the then prevailing conversion price of the Series E preferred shares.
Owners of the Series E preferred shares generally have no voting rights, except under certain dividend defaults. Upon conversion, the Company may choose to deliver the conversion value to the owners in cash, common shares, or a combination of cash and common shares.
The Company's Board declared cash dividends totaling $2.25 per Series E preferred share for each of the years ended December 31, 2020 and 2019. There were non-cash distributions associated with conversion adjustments of $0.1695 and $0.6024 per Series E preferred share for the years ended December 31, 2020 and 2019, respectively. The conversion adjustment provision entitles the shareholders of the Series E preferred shares, upon certain quarterly common share dividend thresholds being met, to receive additional common shares of the Company upon a conversion of the preferred shares into common shares. The increase in common shares to be received upon a conversion is a deemed distribution for federal income tax purposes.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
For tax purposes, the amounts characterized as ordinary income, return of capital and long-term capital gain for cash distributions paid and non-cash deemed distributions per Series E preferred share for the years ended December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Distributions per Share
|
|
|
|
2020
|
|
2019
|
|
|
Taxable ordinary income (1)
|
$
|
1.5075
|
|
|
$
|
1.9970
|
|
|
|
Return of capital
|
—
|
|
|
—
|
|
|
|
Long-term capital gain (2)
|
0.7425
|
|
|
0.2530
|
|
|
|
|
|
|
|
|
|
Totals
|
$
|
2.2500
|
|
|
$
|
2.2500
|
|
|
(1) Amounts qualify in their entirety as 199A distributions.
(2) Of the long-term capital gain, $0.2441 and $0.2530 were unrecaptured section 1250 gains for the years ended December 31, 2020 and 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Distributions per Share
|
|
|
|
2020
|
|
2019
|
|
|
Taxable ordinary income (3)
|
$
|
0.0176
|
|
|
$
|
—
|
|
|
|
Return of capital
|
0.1432
|
|
|
0.6024
|
|
|
|
Long-term capital gain (4)
|
0.0087
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Totals
|
$
|
0.1695
|
|
|
$
|
0.6024
|
|
|
(3) Amounts qualify in their entirety as 199A distributions.
(4) Of the long-term capital gain, $0.0610 was unrecaptured section 1250 gains for the year ended December 31, 2020. There were no unrecaptured section 1250 gains for the year ended December 31, 2019.
Series G Preferred Shares
The Company has outstanding 6.0 million 5.75% Series G cumulative redeemable preferred shares (Series G preferred shares). The Company will pay cumulative dividends on the Series G preferred shares from the date of original issuance in the amount of $1.4375 per share each year, which is equivalent to 5.75% of the $25.00 liquidation preference per share. Dividends on the Series G preferred shares are payable quarterly in arrears. The Company may not redeem the Series G preferred shares before November 30, 2022, except in limited circumstances to preserve the Company's REIT status. On or after November 30, 2022, the Company may, at its option, redeem the Series G preferred shares in whole at any time or in part from time to time by paying $25.00 per share, plus any accrued and unpaid dividends up to, but not including the date of redemption. The Series G preferred shares have no stated maturity and will not be subject to any sinking fund or mandatory redemption. The Series G preferred shares are not convertible into any of the Company's securities, except under certain circumstances in connection with a change of control. Owners of the Series G preferred shares generally have no voting rights except under certain dividend defaults.
The Company's Board declared cash dividends totaling $1.4375 per Series G preferred share for each of the years ended December 31, 2020 and 2019. For tax purposes, the amounts characterized as ordinary income, return of capital and long-term capital gain for cash distributions paid per Series G preferred share for the years ended December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Distributions per Share
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Taxable ordinary income (1)
|
$
|
0.9631
|
|
|
$
|
1.2758
|
|
|
|
|
|
Return of capital
|
—
|
|
|
—
|
|
|
|
|
|
Long-term capital gain (2)
|
0.4744
|
|
|
0.1617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
$
|
1.4375
|
|
|
$
|
1.4375
|
|
|
|
|
(1) Amounts qualify in their entirety as 199A distributions.
(2) Of the long-term capital gain, $0.1559 and $0.1617 were unrecaptured section 1250 gains for the years ended December 31, 2020 and 2019, respectively.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
12. Earnings Per Share
The following table summarizes the Company’s computation of basic and diluted earnings per share (EPS) for the years ended December 31, 2020, 2019 and 2018 (amounts in thousands except per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
|
Income
(numerator)
|
|
Shares
(denominator)
|
|
Per Share
Amount
|
|
Basic EPS:
|
|
|
|
|
|
|
Net loss
|
$
|
(131,728)
|
|
|
|
|
|
|
Less: preferred dividend requirements
|
(24,136)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
$
|
(155,864)
|
|
|
75,994
|
|
|
$
|
(2.05)
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
Net loss available to common shareholders
|
$
|
(155,864)
|
|
|
75,994
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Share options
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
$
|
(155,864)
|
|
|
75,994
|
|
|
$
|
(2.05)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
Income
(numerator)
|
|
Shares
(denominator)
|
|
Per Share
Amount
|
|
Basic EPS:
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
154,556
|
|
|
|
|
|
|
Less: preferred dividend requirements
|
(24,136)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to common shareholders
|
$
|
130,420
|
|
|
76,746
|
|
|
$
|
1.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations available to common shareholders
|
$
|
47,687
|
|
|
76,746
|
|
|
$
|
0.62
|
|
|
Net income available to common shareholders
|
$
|
178,107
|
|
|
76,746
|
|
|
$
|
2.32
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
Income from continuing operations available to common shareholders
|
$
|
130,420
|
|
|
76,746
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Share options
|
—
|
|
|
36
|
|
|
|
|
Income from continuing operations available to common shareholders
|
$
|
130,420
|
|
|
76,782
|
|
|
$
|
1.70
|
|
|
Income from discontinued operations available to common shareholders
|
$
|
47,687
|
|
|
76,782
|
|
|
$
|
0.62
|
|
|
Net income available to common shareholders
|
$
|
178,107
|
|
|
76,782
|
|
|
$
|
2.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
Income
(numerator)
|
|
Shares
(denominator)
|
|
Per Share
Amount
|
|
Basic EPS:
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
221,947
|
|
|
|
|
|
|
Less: preferred dividend requirements and redemption costs
|
(24,142)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to common shareholders
|
$
|
197,805
|
|
|
74,292
|
|
|
$
|
2.66
|
|
|
Income from discontinued operations available to common shareholders
|
$
|
45,036
|
|
|
74,292
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
242,841
|
|
|
74,292
|
|
|
$
|
3.27
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
Income from continuing operations available to common shareholders
|
$
|
197,805
|
|
|
74,292
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Share options
|
—
|
|
|
45
|
|
|
|
|
Income from continuing operations available to common shareholders
|
$
|
197,805
|
|
|
74,337
|
|
|
$
|
2.66
|
|
|
Income from discontinued operations available to common shareholders
|
$
|
45,036
|
|
|
74,337
|
|
|
$
|
0.61
|
|
|
Net income available to common shareholders
|
$
|
242,841
|
|
|
74,337
|
|
|
$
|
3.27
|
|
The additional 2.2 million common shares for both December 31, 2020 and 2019 and 2.1 million common shares for December 31, 2018 that would result from the conversion of the Company’s 5.75% Series C cumulative convertible preferred shares and the additional 1.7 million common shares for December 31, 2020 and 1.6 million common shares for both December 31, 2019 and 2018 that would result from the conversion of the Company’s 9.0% Series E
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
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 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 years ended December 31, 2019 and 2018. The dilutive effect of potential common shares from the exercise of share options is excluded from diluted earnings per share for the year ended December 31, 2020 because the effect is anti-dilutive due to the net loss available to common shareholders. Options to purchase 117 thousand, 4 thousand and 26 thousand of common shares were outstanding at the end of 2020, 2019 and 2018, respectively, at per share prices ranging from $44.62 to $76.63 for 2020, $73.84 to $76.63 for 2019 and per share prices ranging from $61.79 to $76.63 for 2018, but were not included in the computation of diluted earnings per share because they were anti-dilutive.
The dilutive effect of the potential common shares from the performance shares is included in diluted earnings per share upon the satisfaction of certain performance and market conditions. These conditions are evaluated at each reporting period and if the conditions have been satisfied during the reporting period, the number of contingently issuable shares are included in the computation of diluted earnings per share. During the year ended December 31, 2020, the Company determined the performance and market conditions were not met, therefore, none of the 56 thousand contingently issuable performance shares were included in the computation of diluted earnings per share.
13. Severance Expense
On December 31, 2020, the Company's Senior Vice President - Asset Management, Michael L. Hirons, retired from the Company. Mr. Hirons' retirement was a "Qualifying Termination" under the Company's Employee Severance and Retirement Vesting Plan. For the year ended December 31, 2020, severance expense totaled $2.9 million and included cash payments totaling $1.6 million, and accelerated vesting of nonvested shares and performance shares totaling $1.3 million.
During the year ended December 31, 2019, the Company recorded severance expense related to various employees totaling $2.4 million. For the year ended December 31, 2019, severance expense included cash payments totaling $1.8 million, and accelerated vesting of nonvested shares totaling $0.6 million.
On April 5, 2018, the Company and Mr. Earnest, its then Senior Vice President and Chief Investment Officer, entered into an Amended and Restated Employment Agreement, effective March 31, 2018, to reflect the changes in connection with Mr. Earnest's transition to Executive Advisor of the Company. As the Company determined that such services were no longer needed, on December 27, 2018, the Company gave notice that the agreement was going to be terminated pursuant to the provisions of the Amended and Restated Employment Agreement. As a result, during the year ended December 31, 2018, the Company recorded severance expense related to Mr. Earnest, as well as another employee terminated under a similar such agreement, totaling $5.9 million. For the year ended December 31, 2018, severance expense includes cash payments totaling $2.6 million, accelerated vesting of nonvested shares totaling $3.2 million and $0.1 million of related taxes and other expenses.
14. Equity Incentive Plan
All grants of common shares and options to purchase common shares were issued under the Company's 2007 Equity Incentive Plan prior to May 12, 2016 and under the 2016 Equity Incentive Plan on and after May 12, 2016. Under the 2016 Equity Incentive Plan, 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. During the year ended December 31, 2020, the Compensation and Human Capital Committee of the Board approved the 2020 Long Term Incentive Plan (2020 LTIP) as a sub-plan under the Company's 2016 Equity Incentive Plan. Under the 2020 LTIP, the Company awards performance shares and restricted shares to the Company's executive officers. At December 31, 2020, there were 746,828 shares available for grant under the 2016 Equity Incentive Plan.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
Share Options
Share options 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. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
shares
|
|
Option price
per share
|
|
Weighted avg.
exercise price
|
|
Outstanding at December 31, 2017
|
257,606
|
|
|
$
|
19.02
|
|
|
—
|
|
|
$
|
76.63
|
|
|
$
|
51.81
|
|
|
Exercised
|
(25,721)
|
|
|
45.20
|
|
|
—
|
|
|
61.79
|
|
|
50.68
|
|
|
Granted
|
3,835
|
|
|
56.94
|
|
|
—
|
|
|
56.94
|
|
|
56.94
|
|
|
Forfeited/Expired
|
(845)
|
|
|
51.64
|
|
|
—
|
|
|
61.79
|
|
|
61.12
|
|
|
Outstanding at December 31, 2018
|
234,875
|
|
|
$
|
19.02
|
|
|
—
|
|
|
$
|
76.63
|
|
|
$
|
51.98
|
|
|
Exercised
|
(118,786)
|
|
|
19.02
|
|
|
—
|
|
|
61.79
|
|
|
48.71
|
|
|
Granted
|
1,941
|
|
|
73.84
|
|
|
—
|
|
|
73.84
|
|
|
73.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
118,030
|
|
|
$
|
44.62
|
|
|
—
|
|
|
$
|
76.63
|
|
|
$
|
55.63
|
|
|
Exercised
|
(1,410)
|
|
|
44.98
|
|
|
—
|
|
|
44.98
|
|
|
44.98
|
|
|
Granted
|
2,890
|
|
|
69.19
|
|
|
—
|
|
|
69.19
|
|
|
69.19
|
|
|
Forfeited/Expired
|
(2,820)
|
|
|
44.98
|
|
|
—
|
|
|
44.98
|
|
|
44.98
|
|
|
Outstanding at December 31, 2020
|
116,690
|
|
|
$
|
44.62
|
|
|
—
|
|
|
$
|
76.63
|
|
|
$
|
56.36
|
|
The weighted average fair value of options granted was $3.73, $4.64 and $3.03 during 2020, 2019 and 2018, respectively. The intrinsic value of stock options exercised was $22 thousand, $2.8 million, and $0.4 million during the years ended December 31, 2020, 2019 and 2018, respectively. Additionally, the Company repurchased 1,043 shares in conjunction with the stock options exercised during the year ended December 31, 2020 with a total value of $63 thousand.
The following table summarizes outstanding and exercisable options at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
Options exercisable
|
|
Exercise price range
|
|
Options
outstanding
|
Weighted avg. life remaining
|
Weighted avg. exercise price
|
Aggregate intrinsic value (in thousands)
|
|
Options outstanding
|
Weighted avg. life remaining
|
Weighted avg. exercise price
|
Aggregate intrinsic value (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44.62 - 49.99
|
|
27,215
|
|
1.3
|
|
|
|
27,215
|
|
1.3
|
|
|
|
50.00 - 59.99
|
|
31,710
|
|
3.5
|
|
|
|
29,793
|
|
3.3
|
|
|
|
60.00 - 69.99
|
|
53,609
|
|
5.5
|
|
|
|
50,719
|
|
4.1
|
|
|
|
70.00 - 76.63
|
|
4,156
|
|
7.1
|
|
|
|
2,148
|
|
6.6
|
|
|
|
|
|
116,690
|
|
4.0
|
$
|
56.36
|
|
$
|
—
|
|
|
109,875
|
|
3.3
|
$
|
55.67
|
|
$
|
—
|
|
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, 2019
|
509,338
|
|
|
$
|
67.88
|
|
|
|
|
Granted
|
211,549
|
|
|
69.09
|
|
|
|
|
Vested
|
(269,716)
|
|
|
67.84
|
|
|
|
|
Forfeited
|
(5,769)
|
|
|
67.95
|
|
|
|
|
Outstanding at December 31, 2020
|
445,402
|
|
|
$
|
68.47
|
|
|
0.82
|
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
The holders of nonvested shares have voting rights and receive dividends from the date of grant. The fair value of the nonvested shares that vested was $17.4 million, $22.7 million, and $16.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. At December 31, 2020, unamortized share-based compensation expense related to nonvested shares was $11.8 million and will be recognized in future periods as follows (in thousands):
|
|
|
|
|
|
|
|
|
Amount
|
|
Year:
|
|
|
2021
|
$
|
6,783
|
|
|
2022
|
3,811
|
|
|
2023
|
1,248
|
|
|
Total
|
$
|
11,842
|
|
Nonvested Performance Shares
A summary of the Company's nonvested performance share activity and related information is as follows:
|
|
|
|
|
|
|
|
|
Number of
Performance Shares
|
|
Outstanding at December 31, 2019
|
—
|
|
|
Granted
|
61,615
|
|
|
Vested
|
(5,277)
|
|
|
Forfeited
|
—
|
|
|
Outstanding at December 31, 2020
|
56,338
|
|
The number of common shares issuable upon settlement of the performance shares granted during the year ended December 31, 2020 will be based upon the Company's achievement level relative to the following performance measures at December 31, 2022: 50% based upon the Company's Total Shareholder Return (TSR) relative to the TSRs of the Company's peer group companies, 25% based upon the Company's TSR relative to the TSRs of companies in the MSCI US REIT Index and 25% based upon the Company's Average Annual Growth in AFFO per share over the three-year performance period. The Company's achievement level relative to the performance measures is assigned a specific payout percentage which is multiplied by a target number of performance shares.
The performance shares based on relative TSR performance have market conditions and are valued using a Monte Carlo simulation model on the grant date, which resulted in a grant date fair value of approximately $3.0 million. The estimated fair value is amortized to expense over the three-year vesting period, which ends on December 31, 2022. The following assumptions were used in the Monte Carlo simulation for computing the grant date fair value of the performance shares with a market condition: risk-free interest rate of 1.4%, volatility factors in the expected market price of the Company's common shares of 18% and an expected life of three years. At December 31, 2020, unamortized share-based compensation expense related to nonvested performance shares was $1.8 million.
The performance shares based on growth in AFFO have a performance condition. The probability of achieving the performance condition is assessed at each reporting period. If it is deemed probable that the performance condition will be met, compensation cost will be recognized based on the closing price per share of the Company's common shares on the date of the grant multiplied by the number of awards expected to be earned. If it is deemed that it is not probable that the performance condition will be met, the Company will discontinue the recognition of compensation cost and any compensation cost previously recorded will be reversed. At December 31, 2020, achievement of the performance condition for the performance shares granted during the year ended December 31, 2020 was deemed not probable.
The performance shares accrue dividend equivalents which are paid only if common shares are issued upon settlement of the performance shares. During the year ended December 31, 2020, the Company accrued dividend equivalents expected to be paid on earned awards of $50 thousand. In connection with the retirement of the Company's Senior Vice President - Asset Management, Michael L. Hirons, $14 thousand in dividend equivalents were paid resulting in $36 thousand of accrued dividend equivalents expected to be paid on earned awards at December 31, 2020.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
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, 2019
|
26,236
|
|
|
$
|
77.54
|
|
|
|
|
Granted
|
74,767
|
|
|
31.57
|
|
|
|
|
Vested
|
(26,236)
|
|
|
77.54
|
|
|
|
|
Outstanding at December 31, 2020
|
74,767
|
|
|
$
|
31.57
|
|
|
0.42
|
The holders of restricted share units receive dividend equivalents from the date of grant. At December 31, 2020, unamortized share-based compensation expense related to restricted share units was $983 thousand which will be recognized in 2021.
15. Operating Leases
The Company’s real estate investments are leased under operating leases with remaining terms ranging from one year to 29 years. The Company adopted Topic 842 on January 1, 2019 and elected to not reassess its prior conclusions about lease classification. Accordingly, these arrangements continue to be classified as operating leases.
The following table summarizes the future minimum rentals on the Company's lessor and sub-lessor arrangements at December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Operating leases
|
Sub-lessor operating ground leases
|
|
|
|
Operating leases
|
Sub-lessor operating ground leases
|
|
|
|
Amount (1) (2)
|
Amount (1) (2)
|
Total
|
|
|
Amount (2)
|
Amount (2)
|
Total
|
|
Year:
|
|
|
|
|
Year:
|
|
|
|
|
2021
|
$
|
461,473
|
|
$
|
20,440
|
|
$
|
481,913
|
|
|
2020
|
$
|
525,809
|
|
$
|
23,468
|
|
$
|
549,277
|
|
|
2022
|
477,454
|
|
20,743
|
|
498,197
|
|
|
2021
|
518,590
|
|
23,863
|
|
542,453
|
|
|
2023
|
474,504
|
|
20,022
|
|
494,526
|
|
|
2022
|
504,119
|
|
23,291
|
|
527,410
|
|
|
2024
|
471,149
|
|
19,521
|
|
490,670
|
|
|
2023
|
474,889
|
|
22,609
|
|
497,498
|
|
|
2025
|
464,850
|
|
19,636
|
|
484,486
|
|
|
2024
|
453,043
|
|
22,196
|
|
475,239
|
|
|
Thereafter
|
3,939,241
|
|
182,206
|
|
4,121,447
|
|
|
Thereafter
|
3,707,326
|
|
226,150
|
|
3,933,476
|
|
|
Total
|
$
|
6,288,671
|
|
$
|
282,568
|
|
$
|
6,571,239
|
|
|
Total
|
$
|
6,183,776
|
|
$
|
341,577
|
|
$
|
6,525,353
|
|
(1) Amounts presented above are based on contractual obligations and exclude the impact of COVID-19 deferred rent payments. As of December 31, 2020, receivables from tenants included fixed rent payments of approximately $76.0 million that were deferred due to the COVID-19 pandemic and determined to be collectible. The Company is currently scheduled to collect approximately $24.3 million in 2021, $31.6 million in 2022, $19.0 million in 2023 and $1.1 million in 2024.
(2) Included in rental revenue.
In addition to its lessor arrangements on its real estate investments, as of December 31, 2020 and 2019, the Company was lessee in 53 and 58 operating ground leases, respectively, as well as lessee in an operating lease of its executive office. The Company's tenants, who are generally sub-tenants under these ground leases, are responsible for paying the rent under these ground leases. As of December 31, 2020, rental revenue from several of the Company's tenants, who are also sub-tenants under the ground leases, is being recognized on a cash basis. In most cases, the ground lease sub-tenants have continued to pay the rent under these ground leases. In addition, two of these properties are vacant. In the event the tenant fails to pay the ground lease rent or if the property is vacant, the Company is primarily responsible for the payment, assuming the Company does not sell or re-tenant the property. As of December 31, 2020, the ground lease arrangements have remaining terms ranging from one year to 46 years. Most of these leases include one or more options to renew. The Company assesses these options using a threshold of reasonably certain, which also includes an assessment of the term of the Company's tenants' leases. For leases where renewal is reasonably certain, those option periods are included within the lease term and also the measurement of
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
the operating lease right-of-use asset and liability. The ground lease arrangements do not contain any residual value guarantees or any material restrictions. As of December 31, 2020, the Company does not have any leases that have not commenced but that create significant rights and obligations.
The Company determines whether an arrangement is or includes a lease at contract inception. Operating lease right-of-use assets and liabilities are recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term. As the Company's leases do not provide an implicit rate, the Company used its incremental borrowing rate in determining the present value of lease payments. The incremental borrowing rate was adjusted for collateral based on the information available at adoption or the commencement date. Inputs to the calculation of the Company's incremental borrowing rate include its senior notes and their option adjusted credit spreads over comparable U.S. Treasury rates, adjusted to a collateralized basis by estimating the credit spread improvement that would result from an upgrade of one ratings classification.
The following table summarizes the future minimum lease payments under the ground lease obligations and the office lease at December 31, 2020 and 2019, excluding contingent rent due under leases where the ground lease payment, or a portion thereof, is based on the level of the tenant's sales (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Ground Leases (1)
|
Office lease (2)
|
|
|
Ground Leases (1)
|
Office lease (2)
|
|
Year:
|
|
|
|
Year:
|
|
|
|
2021
|
$
|
22,520
|
|
$
|
884
|
|
|
2020
|
$
|
24,085
|
|
$
|
856
|
|
|
2022
|
22,058
|
|
967
|
|
|
2021
|
24,529
|
|
884
|
|
|
2023
|
21,340
|
|
967
|
|
|
2022
|
23,961
|
|
967
|
|
|
2024
|
20,840
|
|
967
|
|
|
2023
|
23,283
|
|
967
|
|
|
2025
|
20,936
|
|
967
|
|
|
2024
|
22,871
|
|
967
|
|
|
Thereafter
|
203,467
|
|
724
|
|
|
Thereafter
|
243,411
|
|
1,691
|
|
|
Total lease payments
|
$
|
311,161
|
|
$
|
5,476
|
|
|
|
$
|
362,140
|
|
$
|
6,332
|
|
|
Less: imputed interest
|
113,730
|
|
684
|
|
|
|
131,901
|
|
921
|
|
|
Present value of lease liabilities
|
$
|
197,431
|
|
$
|
4,792
|
|
|
|
$
|
230,239
|
|
$
|
5,411
|
|
(1) Included in property operating expense.
(2) Included in general and administrative expense.
The following table summarizes the carrying amounts of the operating lease right-of-use assets and liabilities as of December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Classification
|
|
December 31, 2020
|
December 31, 2019
|
|
Assets:
|
|
|
|
|
|
|
Operating ground lease assets
|
|
Operating lease right-of-use assets
|
|
$
|
159,245
|
|
$
|
205,997
|
|
|
Office lease asset
|
|
Operating lease right-of-use assets
|
|
4,521
|
|
5,190
|
|
|
Total operating lease right-of-use assets
|
|
|
|
$
|
163,766
|
|
$
|
211,187
|
|
|
|
|
|
|
|
|
|
Sub-lessor straight-line rent receivable
|
|
Accounts receivable
|
|
12,433
|
|
24,569
|
|
|
Total leased assets
|
|
|
|
$
|
176,199
|
|
$
|
235,756
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Operating ground lease liabilities
|
|
Operating lease liabilities
|
|
$
|
197,431
|
|
$
|
230,239
|
|
|
Office lease liability
|
|
Operating lease liabilities
|
|
4,792
|
|
5,411
|
|
|
Total lease liabilities
|
|
|
|
$
|
202,223
|
|
$
|
235,650
|
|
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
The following table summarizes rental revenue, including sublease arrangements and lease costs, including impairment charges on operating lease right-of-use assets for the years ended December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
Classification
|
|
|
|
2020
|
2019
|
|
Rental revenue
|
|
|
|
|
|
|
|
|
Operating leases (1)
|
|
Rental revenue
|
|
|
|
$
|
361,393
|
|
$
|
569,530
|
|
|
Sublease income - operating ground leases (2)
|
|
Rental revenue
|
|
|
|
$
|
10,783
|
|
$
|
23,492
|
|
|
Lease costs
|
|
|
|
|
|
|
|
|
Operating ground lease cost
|
|
Property operating expense
|
|
|
|
$
|
24,386
|
|
$
|
24,656
|
|
|
Operating office lease cost
|
|
General and administrative expense
|
|
|
|
$
|
905
|
|
$
|
909
|
|
|
Operating lease right-of-use asset impairment charges (3)
|
|
Impairment charges
|
|
|
|
$
|
15,009
|
|
$
|
—
|
|
(1) During the year ended December 31, 2020, the Company wrote-off straight-line rent receivables totaling $26.5 million, to straight-line rental revenue classified in rental revenue in the accompanying consolidated statements of (loss) income and comprehensive (loss) income. Additionally, during the year ended December 31, 2020, the Company wrote-off lease receivables from tenants totaling $25.7 million, to minimum rent, tenant reimbursements and percentage rent classified in rental revenue in the accompanying consolidated statements of (loss) income and comprehensive (loss) income related to tenants being recognized on a cash basis.
(2) During the year ended December 31, 2020, the Company wrote-off sub-lessor ground lease straight-line rent receivables totaling $11.5 million, to straight-line rental revenue classified in rental revenue in the accompanying consolidated statements of (loss) income and comprehensive (loss) income. Additionally, during the year ended December 31, 2020, the Company wrote-off sub-lessor ground lease receivables from tenants totaling $1.4 million to minimum rent classified in rental revenue in the accompanying consolidated statements of (loss) income and comprehensive (loss) income related to tenants being recognized on a cash basis.
(3) During the year ended December 31, 2020, the Company recognized impairment charges of $15.0 million related to the operating lease right-of-use assets at two of its properties. See Note 4 for the details on these impairments.
The following table summarizes the weighted-average remaining lease term and the weighted-average discount rate as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2020
|
2019
|
|
Weighted-average remaining lease term in years
|
|
|
|
|
Operating ground leases
|
|
15.8
|
16.0
|
|
Operating office lease
|
|
5.8
|
6.8
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
|
Operating ground leases
|
|
4.97
|
%
|
4.96
|
%
|
|
Operating office lease
|
|
4.62
|
%
|
4.62
|
%
|
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
16. Quarterly Financial Information (unaudited)
Summarized quarterly financial data for the years ended December 31, 2020 and 2019 are as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
2020:
|
|
|
|
|
|
|
|
|
Total revenue
|
$
|
151,012
|
|
|
$
|
106,360
|
|
|
$
|
63,877
|
|
|
$
|
93,412
|
|
|
Net income (loss)
|
37,118
|
|
|
(62,965)
|
|
|
(85,904)
|
|
|
(19,977)
|
|
|
Net income (loss) available to common shareholders of EPR Properties
|
31,084
|
|
|
(68,999)
|
|
|
(91,938)
|
|
|
(26,011)
|
|
|
Basic net income (loss) per common share
|
0.40
|
|
|
(0.90)
|
|
|
(1.23)
|
|
|
(0.35)
|
|
|
Diluted net income (loss) per common share
|
0.40
|
|
|
(0.90)
|
|
|
(1.23)
|
|
|
(0.35)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
2019:
|
|
|
|
|
|
|
|
|
Total revenue
|
$
|
150,527
|
|
|
$
|
161,740
|
|
|
$
|
169,356
|
|
|
$
|
170,346
|
|
|
Net income
|
65,349
|
|
|
66,594
|
|
|
34,003
|
|
|
36,297
|
|
|
Net income available to common shareholders of EPR Properties
|
59,315
|
|
|
60,560
|
|
|
27,969
|
|
|
30,263
|
|
|
Basic net income per common share
|
0.79
|
|
|
0.80
|
|
|
0.36
|
|
|
0.39
|
|
|
Diluted net income per common share
|
0.79
|
|
|
0.79
|
|
|
0.36
|
|
|
0.39
|
|
During the year ended December 31, 2019, the Company completed the sale of its public charter school portfolio. Accordingly, the historical financial results of public charter school investments disposed of by the Company in 2019 are reflected in the Company's consolidated statements of (loss) income and comprehensive (loss) income as discontinued operations for all periods presented. See Note 17 for further details on discontinued operations.
17. Discontinued Operations
During the year ended December 31, 2019, the Company completed the sale of its public charter school portfolio with the largest disposition occurring on November 22, 2019 consisting of 47 public charter school related assets, for net proceeds of approximately $449.6 million. See Note 3 for additional information related to the sale and Note 4 for additional information related to the impairment recognized related to this sale. The Company determined the dispositions of the remaining public charter school portfolio in 2019 represented a strategic shift that had a major effect on the Company's operations and financial results. Therefore, all public charter school investments disposed of by the Company during the year ended December 31, 2019 qualified as discontinued operations. Accordingly, the historical financial results of these public charter school investments are reflected in the Company's consolidated financial statements as discontinued operations for all periods presented.
The operating results relating to discontinued operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
Rental revenue
|
$
|
36,289
|
|
|
$
|
47,277
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other financing income
|
14,284
|
|
|
13,533
|
|
|
Total revenue
|
50,573
|
|
|
60,810
|
|
|
Property operating expense
|
573
|
|
|
1,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs associated with loan refinancing or payoff
|
181
|
|
|
—
|
|
|
|
|
|
|
|
Interest expense, net
|
(351)
|
|
|
(363)
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
12,929
|
|
|
15,035
|
|
|
Income from discontinued operations before other items
|
37,241
|
|
|
45,036
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment on public charter school portfolio sale
|
(21,433)
|
|
|
—
|
|
|
Gain on sale of real estate
|
31,879
|
|
|
—
|
|
|
Income from discontinued operations
|
$
|
47,687
|
|
|
$
|
45,036
|
|
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
The cash flow information relating to discontinued operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
Depreciation and amortization
|
$
|
12,929
|
|
|
$
|
15,035
|
|
|
Acquisition of and investments in real estate and other assets
|
(6,968)
|
|
|
(5,956)
|
|
|
Proceeds from sale of real estate
|
182,934
|
|
|
—
|
|
|
Proceeds from sale of public charter school portfolio
|
449,555
|
|
|
—
|
|
|
Investment in mortgage notes receivable
|
(5,115)
|
|
|
(17,933)
|
|
|
Proceeds from mortgage notes receivable paydowns
|
28,662
|
|
|
3,355
|
|
|
Additions to properties under development
|
(22,981)
|
|
|
(31,036)
|
|
|
|
|
|
|
|
Non-cash activity:
|
|
|
|
|
Transfer of property under development to real estate investments
|
$
|
28,099
|
|
|
$
|
24,900
|
|
|
Conversion or reclassification of mortgage notes receivable to real estate investments
|
—
|
|
|
12,013
|
|
|
|
|
|
|
|
Interest cost capitalized
|
351
|
|
|
363
|
|
18. Other Commitments and Contingencies
As of December 31, 2020, the Company had 17 development projects with commitments to fund an aggregate of approximately $118.3 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 notes and notes receivable 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 December 31, 2020, the Company had three mortgage notes and one note receivable with commitments totaling approximately $31.8 million. If commitments are funded in the future, interest will be charged at rates consistent with the existing investments.
In connection with construction of its development projects and related infrastructure, certain public agencies require posting of surety bonds to guarantee that the Company's obligations are satisfied. These bonds expire upon the completion of the improvements or infrastructure. As of December 31, 2020, the Company had two surety bonds outstanding totaling $31.6 million.
19. Segment Information
The Company groups its investments into two reportable segments: Experiential and Education. Due to the Company's change to two reportable segments during the year ended December 31, 2019, certain reclassifications have been made to the 2018 presentation to conform to the current presentation.
The financial information summarized below is presented by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
As of December 31, 2020
|
|
|
|
Experiential
|
|
Education
|
|
Corporate/Unallocated
|
|
Consolidated
|
|
Total Assets
|
|
$
|
5,133,486
|
|
|
$
|
529,755
|
|
|
$
|
1,040,944
|
|
|
$
|
6,704,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
Experiential
|
|
Education
|
|
Corporate/Unallocated
|
|
Consolidated
|
|
Total Assets
|
|
$
|
5,307,295
|
|
|
$
|
730,165
|
|
|
$
|
540,051
|
|
|
$
|
6,577,511
|
|
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
|
|
|
Experiential
|
Education
|
Corporate/Unallocated
|
Consolidated
|
|
Rental revenue
|
|
$
|
311,130
|
|
$
|
61,046
|
|
$
|
—
|
|
$
|
372,176
|
|
|
Other income
|
|
8,085
|
|
13
|
|
1,041
|
|
9,139
|
|
|
Mortgage and other financing income
|
|
32,017
|
|
1,329
|
|
—
|
|
33,346
|
|
|
Total revenue
|
|
351,232
|
|
62,388
|
|
1,041
|
|
414,661
|
|
|
|
|
|
|
|
|
|
Property operating expense
|
|
55,500
|
|
2,283
|
|
804
|
|
58,587
|
|
|
Other expense
|
|
16,513
|
|
—
|
|
(39)
|
|
16,474
|
|
|
Total investment expenses
|
|
72,013
|
|
2,283
|
|
765
|
|
75,061
|
|
|
Net operating income - before unallocated items
|
|
279,219
|
|
60,105
|
|
276
|
|
339,600
|
|
|
|
|
|
|
|
|
|
Reconciliation to Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income:
|
|
General and administrative expense
|
|
|
(42,596)
|
|
|
Severance expense
|
|
|
(2,868)
|
|
|
|
|
|
|
|
Costs associated with loan refinancing or payoff
|
|
|
(1,632)
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
(157,675)
|
|
|
Transaction costs
|
|
|
|
|
(5,436)
|
|
|
Credit loss expense
|
|
|
|
|
(30,695)
|
|
|
Impairment charges
|
|
|
|
|
(85,657)
|
|
|
Depreciation and amortization
|
|
|
(170,333)
|
|
|
Equity in loss from joint ventures
|
|
|
(4,552)
|
|
|
Impairment charges on joint ventures
|
|
|
|
|
(3,247)
|
|
|
Gain on sale of real estate
|
|
|
50,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(16,756)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(131,728)
|
|
|
|
|
|
|
|
|
|
Preferred dividend requirements
|
|
(24,136)
|
|
|
|
|
|
|
Net loss available to common shareholders of EPR Properties
|
|
$
|
(155,864)
|
|
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
|
Experiential
|
Education
|
Corporate/Unallocated
|
Consolidated
|
|
Rental revenue
|
|
$
|
525,085
|
|
$
|
67,937
|
|
$
|
—
|
|
$
|
593,022
|
|
|
Other income
|
|
24,818
|
|
—
|
|
1,102
|
|
25,920
|
|
|
Mortgage and other financing income
|
|
31,594
|
|
1,433
|
|
—
|
|
33,027
|
|
|
Total revenue
|
|
581,497
|
|
69,370
|
|
1,102
|
|
651,969
|
|
|
|
|
|
|
|
|
|
Property operating expense
|
|
56,369
|
|
3,481
|
|
889
|
|
60,739
|
|
|
Other expense
|
|
29,222
|
|
—
|
|
445
|
|
29,667
|
|
|
Total investment expenses
|
|
85,591
|
|
3,481
|
|
1,334
|
|
90,406
|
|
|
Net operating income - before unallocated items
|
|
495,906
|
|
65,889
|
|
(232)
|
|
561,563
|
|
|
|
|
|
|
|
|
|
Reconciliation to Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income:
|
|
General and administrative expense
|
|
|
(46,371)
|
|
|
Severance expense
|
|
|
(2,364)
|
|
|
|
|
|
|
Costs associated with loan refinancing or payoff
|
|
(38,269)
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
(142,002)
|
|
|
Transaction costs
|
|
|
|
|
(23,789)
|
|
|
Impairment charges
|
|
|
|
|
(2,206)
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(158,834)
|
|
|
Equity in loss from joint ventures
|
|
|
(381)
|
|
|
Gain on sale of real estate
|
|
|
4,174
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
3,035
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
Income from discontinued operations before other items
|
|
|
37,241
|
|
|
Impairment on public charter school portfolio sale
|
|
|
(21,433)
|
|
|
Gain on sale of real estate from discontinued operations
|
|
|
31,879
|
|
|
|
|
|
|
|
Net income
|
|
|
202,243
|
|
|
|
|
|
|
|
|
|
Preferred dividend requirements
|
|
(24,136)
|
|
|
|
|
|
|
|
Net income available to common shareholders of EPR Properties
|
|
$
|
178,107
|
|
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
Experiential
|
Education
|
Corporate/Unallocated
|
Consolidated
|
|
Rental revenue
|
|
$
|
453,721
|
|
$
|
55,365
|
|
$
|
—
|
|
$
|
509,086
|
|
|
|
|
|
|
|
|
|
Other income
|
|
332
|
|
—
|
|
1,744
|
|
2,076
|
|
|
Mortgage and other financing income
|
|
117,171
|
|
11,588
|
|
—
|
|
128,759
|
|
|
Total revenue
|
|
571,224
|
|
66,953
|
|
1,744
|
|
639,921
|
|
|
|
|
|
|
|
|
|
Property operating expense
|
|
26,168
|
|
2,831
|
|
655
|
|
29,654
|
|
|
Other expense
|
|
—
|
|
—
|
|
443
|
|
443
|
|
|
Total investment expenses
|
|
26,168
|
|
2,831
|
|
1,098
|
|
30,097
|
|
|
Net operating income - before unallocated items
|
|
545,056
|
|
64,122
|
|
646
|
|
609,824
|
|
|
|
|
|
|
|
|
|
Reconciliation to Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income:
|
|
General and administrative expense
|
|
|
(48,889)
|
|
|
Severance expense
|
|
(5,938)
|
|
|
Litigation settlement expense
|
|
|
|
|
(2,090)
|
|
|
Costs associated with loan refinancing or payoff
|
|
(31,958)
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
(135,870)
|
|
|
Transaction costs
|
|
|
|
|
(3,698)
|
|
|
Impairment charges
|
|
|
|
|
(27,283)
|
|
|
Depreciation and amortization
|
|
|
(138,395)
|
|
|
Equity in loss from joint ventures
|
|
|
(22)
|
|
|
Gain on sale of real estate
|
|
|
3,037
|
|
|
Gain on sale of investment in a direct financing lease
|
|
5,514
|
|
|
Income tax expense
|
|
|
(2,285)
|
|
|
Discontinued operations:
|
|
|
|
|
Income from discontinued operations before other items
|
|
|
45,036
|
|
|
|
|
|
|
|
Net income
|
|
|
266,983
|
|
|
Preferred dividend requirements
|
|
|
(24,142)
|
|
|
|
|
|
|
Net income available to common shareholders of EPR Properties
|
|
$
|
242,841
|
|
20. Supplemental Guarantor Financial Information
As of December 31, 2020, the Company had outstanding $2.4 billion in aggregate principal amount of unsecured senior notes (excluding the Company's private placement notes), which were registered under the Securities Act of 1933, as amended (the Registered Notes). All of the Registered Notes were issued by the Company and are guaranteed on a joint and several basis by all of the Company's domestic subsidiaries that guarantee the Company's indebtedness under its combined unsecured revolving credit facility and term loan facility and private placement notes (the Guarantor Subsidiaries). See Note 8 for additional information regarding the terms of the Registered Notes. The Company owns, directly or indirectly, 100% of the Guarantor Subsidiaries. The guarantees are senior unsecured obligations of each Guarantor Subsidiary, have equal rank with all existing and future senior debt of each such Guarantor Subsidiary, and are senior to all subordinated debt of such Guarantor Subsidiary. The guarantees are effectively subordinated to any secured debt of each such Guarantor Subsidiary to the extent of the assets securing such debt. Each guarantee is limited so that it does not constitute a fraudulent conveyance under applicable law, which may reduce the Guarantor Subsidiaries' obligations under the guarantees. The guarantees are subject to customary release provisions, including a release upon a sale or other disposition of all the capital stock or all or substantially all of the assets of a Guarantor Subsidiary, the designation of a Guarantor Subsidiary as an unrestricted subsidiary in accordance with the applicable indenture governing the Registered Notes or the release of a Guarantor Subsidiary's guarantee under the Company's combined unsecured revolving credit facility and term loan facility (or replacement thereof), private placement notes and the other then outstanding Registered Notes.
EPR PROPERTIES
Notes to Consolidated Financial Statements
December 31, 2020, 2019 and 2018
The following tables present summarized financial information for the Company and Guarantor Subsidiaries on a combined basis after transactions and balances within the combined entities have been eliminated and excludes investments in and equity earnings in the Company's subsidiaries that do not guarantee the Registered Notes (the Non-Guarantor Subsidiaries).
Summarized Financial Information:
|
|
|
|
|
|
|
|
|
|
|
Summarized Balance Sheet
|
|
As of December 31, 2020
|
|
(Dollars in thousands)
|
|
|
|
|
|
Real estate investments, net of accumulated depreciation of $979,269
|
|
$
|
4,666,835
|
|
|
Total assets
|
|
6,488,007
|
|
|
Total liabilities
|
|
4,038,101
|
|
Excluded from total assets in the table above is $173.7 million of intercompany notes receivable due to the Company and the Guarantor Subsidiaries from the Non-Guarantor Subsidiaries as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
Summarized Statement of Loss
|
|
Year Ended December 31, 2020
|
|
(Dollars in thousands)
|
|
|
|
|
|
Total revenue
|
|
$
|
382,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(93,257)
|
|
|
Net loss
|
|
(93,257)
|
|
|
Net loss available to common shareholders of EPR Properties
|
|
(117,393)
|
|
Excluded from total revenue in the table above is $2.9 million in intercompany fee income and $9.3 million in intercompany interest income due to the Company and the Guarantor Subsidiaries from the Non-Guarantor Subsidiaries for the year ended December 31, 2020.