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epr:properties iso4217:CAD iso4217:USD
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-13561
 
EPR PROPERTIES
(Exact name of registrant as specified in its charter)
Maryland
 
43-1790877
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
909 Walnut Street,
Suite 200
 
 
Kansas City,
Missouri
 
64106
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(816)
472-1700

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common shares, par value $0.01 per share
 
EPR
 
New York Stock Exchange
 
 
 
 
 
5.75% Series C cumulative convertible preferred shares, par value $0.01 per share
 
EPR PrC
 
New York Stock Exchange
 
 
 
 
 
9.00% Series E cumulative convertible preferred shares, par value $0.01 per share
 
EPR PrE
 
New York Stock Exchange
 
 
 
 
 
5.75% Series G cumulative redeemable preferred shares, par value $0.01 per share
 
EPR PrG
 
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act.

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

At August 5, 2020, there were 74,611,864 common shares outstanding.



CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of historical information, certain statements contained or incorporated by reference herein may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as those pertaining to the uncertain financial impact of COVID-19, our capital resources and liquidity, expected liquidity and performance of our customers, including AMC, our expected dividend payments and share repurchases and our results of operations and financial condition. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of actual events. There is no assurance the events or circumstances reflected in the forward-looking statements will occur. You can identify forward-looking statements by use of words such as “will be,” “intend,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “pipeline,” “estimates,” “offers,” “plans,” “would,” or other similar expressions or other comparable terms or discussions of strategy, plans or intentions in this Quarterly Report on Form 10-Q. In addition, references to our budgeted amounts and guidance are forward-looking statements.

Factors that could materially and adversely affect us include, but are not limited to, the factors listed below:
Risks associated with the current outbreak of the novel coronavirus, or COVID-19, or the future outbreak of any other highly infectious or contagious diseases;
Global economic uncertainty and disruptions in financial markets;
Reduction in discretionary spending by consumers;
Adverse changes in our credit ratings;
Fluctuations in interest rates;
Defaults in the performance of lease terms by our tenants;
Defaults by our customers and counterparties on their obligations owed to us;
A borrower's bankruptcy or default;
Our ability to renew maturing leases on terms comparable to prior leases and/or our ability to locate substitute lessees for these properties on economically favorable terms;
Risks of operating in the experiential real estate industry;
Our ability to compete effectively;
Risks associated with three tenants representing a substantial portion of our lease revenues;
The ability of our build-to-suit tenants to achieve sufficient operating results within expected time-frames and therefore have capacity to pay their agreed upon rent;
Risks associated with our dependence on third-party managers to operate certain of our experiential lodging properties;
Risks associated with our level of indebtedness;
Risks associated with use of leverage to acquire properties;
Financing arrangements that require lump-sum payments;
Our ability to raise capital;
Covenants in our debt instruments that limit our ability to take certain actions;
The concentration and lack of diversification of our investment portfolio;
Our continued qualification as a real estate investment trust for U.S. federal income tax purposes and related tax matters;
The ability of our subsidiaries to satisfy their obligations;
Financing arrangements that expose us to funding and completion risks;
Our reliance on a limited number of employees, the loss of which could harm operations;
Risks associated with the employment of personnel by managers of our experiential lodging properties;
Risks associated with the gaming industry;
Risks associated with gaming and other regulatory authorities;
Delays or prohibitions of transfers of gaming properties due to required regulatory approvals;
Risks associated with security breaches and other disruptions;
Changes in accounting standards that may adversely affect our financial statements;
Fluctuations in the value of real estate income and investments;
Risks relating to real estate ownership, leasing and development, including local conditions such as an

i


oversupply of space or a reduction in demand for real estate in the area, competition from other available space, whether tenants and users such as customers of our tenants consider a property attractive, changes in real estate taxes and other expenses, changes in market rental rates, the timing and costs associated with property improvements and rentals, changes in taxation or zoning laws or other governmental regulation, whether we are able to pass some or all of any increased operating costs through to tenants or other customers, and how well we manage our properties;
Our ability to secure adequate insurance and risk of potential uninsured losses, including from natural disasters;
Risks involved in joint ventures;
Risks in leasing multi-tenant properties;
A failure to comply with the Americans with Disabilities Act or other laws;
Risks of environmental liability;
Risks associated with the relatively illiquid nature of our real estate investments;
Risks with owning assets in foreign countries;
Risks associated with owning, operating or financing properties for which the tenants', mortgagors' or our operations may be impacted by weather conditions, climate change and natural disasters;
Risks associated with the development, redevelopment and expansion of properties and the acquisition of other real estate related companies;
Our ability to pay dividends in cash or at current rates;
Fluctuations in the market prices for our shares;
Certain limits on changes in control imposed under law and by our Declaration of Trust and Bylaws;
Policy changes obtained without the approval of our shareholders;
Equity issuances that could dilute the value of our shares;
Future offerings of debt or equity securities, which may rank senior to our common shares;
Risks associated with changes in foreign exchange rates; and
Changes in laws and regulations, including tax laws and regulations.

Our forward-looking statements represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. For further discussion of these factors see Item 1A - "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 filed with the Securities and Exchange Commission ("SEC") on May 11, 2020.

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference herein. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except as required by law, we do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.



ii


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

iii


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EPR PROPERTIES
Consolidated Balance Sheets
(Dollars in thousands except share data)
 
June 30, 2020
 
December 31, 2019
 
(unaudited)
 
 
Assets
 
 
 
Real estate investments, net of accumulated depreciation of $1,034,771 and $989,254 at June 30, 2020 and December 31, 2019, respectively
$
5,110,059

 
$
5,197,308

Land held for development
26,244

 
28,080

Property under development
39,039

 
36,756

Operating lease right-of-use assets
189,058

 
211,187

Mortgage notes and related accrued interest receivable
357,668

 
357,391

Investment in joint ventures
28,925

 
34,317

Cash and cash equivalents
1,006,981

 
528,763

Restricted cash
2,615

 
2,677

Accounts receivable
134,774

 
86,858

Other assets
107,615

 
94,174

Total assets
$
7,002,978

 
$
6,577,511

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$
96,454

 
$
122,939

Operating lease liabilities
229,030

 
235,650

Common dividends payable
19

 
29,424

Preferred dividends payable
6,034

 
6,034

Unearned rents and interest
81,096

 
74,829

Debt
3,854,088

 
3,102,830

Total liabilities
4,266,721

 
3,571,706

Equity:
 
 
 
Common Shares, $.01 par value; 100,000,000 shares authorized; and 81,903,786 and 81,588,489 shares issued at June 30, 2020 and December 31, 2019, respectively
819

 
816

Preferred Shares, $.01 par value; 25,000,000 shares authorized:
 
 
 
5,394,050 Series C convertible shares issued at June 30, 2020 and December 31, 2019; liquidation preference of $134,851,250
54

 
54

3,447,381 Series E convertible shares issued at June 30, 2020 and December 31, 2019; liquidation preference of $86,184,525
34

 
34

6,000,000 Series G shares issued at June 30, 2020 and December 31, 2019; liquidation preference of $150,000,000
60

 
60

Additional paid-in-capital
3,848,984

 
3,834,858

Treasury shares at cost: 7,290,948 and 3,125,569 common shares at June 30, 2020 and December 31, 2019, respectively
(260,351
)
 
(147,435
)
Accumulated other comprehensive income
(4,331
)
 
7,275

Distributions in excess of net income
(849,012
)
 
(689,857
)
Total equity
$
2,736,257

 
$
3,005,805

Total liabilities and equity
$
7,002,978

 
$
6,577,511

See accompanying notes to consolidated financial statements.

1


EPR PROPERTIES
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
(Unaudited)
(Dollars in thousands except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Rental revenue
$
97,531

 
$
147,003

 
$
232,574

 
$
287,295

Other income
416

 
5,726

 
7,989

 
6,070

Mortgage and other financing income
8,413

 
9,011

 
16,809

 
18,902

Total revenue
106,360

 
161,740

 
257,372

 
312,267

Property operating expense
15,329

 
14,597

 
28,422

 
30,148

Other expense
2,798

 
8,091

 
12,332

 
8,091

General and administrative expense
10,432

 
12,230

 
21,420

 
23,940

Severance expense

 

 

 
420

Costs associated with loan refinancing or payoff
820

 

 
820

 

Interest expense, net
38,340

 
36,458

 
73,093

 
70,421

Transaction costs
771

 
6,923

 
1,846

 
12,046

Credit loss expense
3,484

 

 
4,676

 

Impairment charges
51,264

 

 
51,264

 

Depreciation and amortization
42,450

 
38,790

 
86,260

 
74,792

(Loss) income before equity in (loss) income from joint ventures, other items and discontinued operations
(59,328
)
 
44,651

 
(22,761
)
 
92,409

Equity in (loss) income from joint ventures
(1,724
)
 
470

 
(2,144
)
 
959

Impairment charges on joint ventures
(3,247
)
 

 
(3,247
)
 

Gain (loss) on sale of real estate
22

 

 
242

 
(388
)
(Loss) income before income taxes
(64,277
)
 
45,121

 
(27,910
)
 
92,980

Income tax benefit
1,312

 
1,300

 
2,063

 
1,905

(Loss) income from continuing operations
$
(62,965
)
 
$
46,421

 
$
(25,847
)
 
$
94,885

Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations before other items

 
10,399

 

 
20,568

Gain on sale of real estate from discontinued operations

 
9,774

 

 
16,490

Income from discontinued operations

 
20,173

 

 
37,058

Net (loss) income
(62,965
)
 
66,594

 
(25,847
)
 
131,943

Preferred dividend requirements
(6,034
)
 
(6,034
)
 
(12,068
)
 
(12,068
)
Net (loss) income available to common shareholders of EPR Properties
$
(68,999
)
 
$
60,560

 
$
(37,915
)
 
$
119,875

Net (loss) income available to common shareholders of EPR Properties per share:
 
 
 
 
 
 
 
Continuing operations
$
(0.90
)
 
$
0.53

 
$
(0.49
)
 
$
1.10

Discontinued operations

 
0.27

 

 
0.49

Basic
$
(0.90
)
 
$
0.80

 
$
(0.49
)
 
$
1.59

 
 
 
 
 
 
 
 
Continuing operations
$
(0.90
)
 
$
0.53

 
$
(0.49
)
 
$
1.10

Discontinued operations

 
0.26

 

 
0.49

Diluted
$
(0.90
)
 
$
0.79

 
$
(0.49
)
 
$
1.59

Shares used for computation (in thousands):
 
 
 
 
 
 
 
Basic
76,310

 
76,164

 
77,388

 
75,426

Diluted
76,310

 
76,199

 
77,388

 
75,467

 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Net (loss) income
$
(62,965
)
 
$
66,594

 
$
(25,847
)
 
$
131,943

Foreign currency translation adjustment
7,284

 
3,972

 
(9,211
)
 
7,782

Change in net unrealized loss on derivatives
(6,326
)
 
(7,195
)
 
(2,395
)
 
(14,693
)
Comprehensive (loss) income attributable to EPR Properties
$
(62,007
)
 
$
63,371

 
$
(37,453
)
 
$
125,032

See accompanying notes to consolidated financial statements.

2



EPR PROPERTIES
Consolidated Statements of Changes in Equity
(Unaudited)
(Dollars in thousands, except per share data)
 
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
 
Total
 
Shares
 
Par
 
Shares
 
Par
 
 
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
1,156

 

 

 

 

 

 

 

 

Issuance of nonvested shares, net of cancellations
197,755

 
2

 

 

 
4,831

 
(403
)
 

 

 
4,430

Purchase of common shares for vesting

 

 

 

 

 
(9,499
)
 

 

 
(9,499
)
Share-based compensation expense

 

 

 

 
3,177

 

 

 

 
3,177

Share-based compensation included in severance expense

 

 

 

 
103

 

 

 

 
103

Foreign currency translation adjustment

 

 

 

 

 

 
3,810

 

 
3,810

Change in unrealized gain on derivatives

 

 

 

 

 

 
(7,498
)
 

 
(7,498
)
Net income

 

 

 

 

 

 

 
65,349

 
65,349

Issuances of common shares
1,064,600

 
11

 

 

 
78,982

 

 

 

 
78,993

Stock option exercises, net
111,815

 
1

 

 

 
5,543

 
(6,276
)
 

 

 
(732
)
Dividends to common shareholders ($1.125 per share)

 

 

 

 

 

 

 
(84,343
)
 
(84,343
)
Dividends to Series C preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series E preferred shareholders ($0.5625 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series G preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(2,156
)
 
(2,156
)
Balance at March 31, 2019
78,601,769

 
$
786

 
14,841,431

 
$
148

 
$
3,597,130

 
$
(146,906
)
 
$
8,397

 
$
(546,776
)
 
$
2,912,779

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted share units issued to Trustees
26,236

 

 

 

 

 

 

 

 

Issuance of nonvested shares, net of cancellations
11,000

 

 

 

 
95

 
(95
)
 

 

 

Share-based compensation expense

 

 

 

 
3,283

 

 

 

 
3,283

Foreign currency translation adjustment

 

 

 

 

 

 
3,972

 

 
3,972

Change in unrealized loss on derivatives

 

 

 

 

 

 
(7,195
)
 

 
(7,195
)
Net income

 

 

 

 

 

 

 
66,594

 
66,594

Issuances of common shares
2,033,530

 
21

 

 

 
157,575

 

 

 

 
157,596

Stock option exercises, net
5,198

 

 

 

 
142

 
(142
)
 

 

 

Dividends to common shareholders ($1.125 per share)

 

 

 

 

 

 

 
(86,097
)
 
(86,097
)
Dividends to Series C preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series E preferred shareholders ($0.5625 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series G preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(2,156
)
 
(2,156
)
Balance at June 30, 2019
80,677,733

 
$
807

 
14,841,431

 
$
148

 
$
3,758,225

 
$
(147,143
)
 
$
5,174

 
$
(572,313
)
 
$
3,044,898

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continued on next page.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3


 
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
 
Total
Continued from previous page.
Shares
 
Par
 
Shares
 
Par
 
 
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

Issuance of nonvested shares, net of cancellations
211,549

 
2

 

 

 
6,221

 
(90
)
 

 

 
6,133

Purchase of common shares for vesting

 

 

 

 

 
(6,769
)
 

 

 
(6,769
)
Share-based compensation expense

 

 

 

 
3,509

 

 

 

 
3,509

Foreign currency translation adjustment

 

 

 

 

 

 
(16,495
)
 

 
(16,495
)
Change in unrealized loss on derivatives

 

 

 

 

 

 
3,931

 

 
3,931

Credit loss expense for implementation of Current Expected Credit Loss standard

 

 

 

 

 

 

 
(2,163
)
 
(2,163
)
Net income

 

 

 

 

 

 

 
37,118

 
37,118

Issuances of common shares
10,368

 

 

 

 
442

 

 

 

 
442

Stock option exercises, net
1,410

 

 

 

 
63

 
(63
)
 

 

 

Dividends to common shareholders ($1.1325 per share)

 

 

 

 

 

 

 
(88,996
)
 
(88,996
)
Dividends to Series C preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series E preferred shareholders ($0.5625 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series G preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(2,156
)
 
(2,156
)
Balance at March 31, 2020
81,811,816

 
$
818

 
14,841,431

 
$
148

 
$
3,845,093

 
$
(154,357
)
 
$
(5,289
)
 
$
(749,932
)
 
$
2,936,481

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted share units issued to Trustees
74,767

 
1

 

 

 

 

 

 

 
1

Share-based compensation expense

 

 

 

 
3,463

 

 

 

 
3,463

Foreign currency translation adjustment

 

 

 

 

 

 
7,284

 

 
7,284

Change in unrealized loss on derivatives

 

 

 

 

 

 
(6,326
)
 

 
(6,326
)
Net loss

 

 

 

 

 

 

 
(62,965
)
 
(62,965
)
Issuances of common shares
17,203

 

 

 

 
428

 

 

 

 
428

Repurchase of common shares

 

 

 

 

 
(105,994
)
 

 

 
(105,994
)
Dividend equivalents accrued on performance shares

 

 

 

 

 

 

 
(19
)
 
(19
)
Dividends to common shareholders ($0.3825 per share)

 

 

 

 

 

 

 
(30,062
)
 
(30,062
)
Dividends to Series C preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series E preferred shareholders ($0.5625 per share)

 

 

 

 

 

 

 
(1,939
)
 
(1,939
)
Dividends to Series G preferred shareholders ($0.359375 per share)

 

 

 

 

 

 

 
(2,156
)
 
(2,156
)
Balance at June 30, 2020
81,903,786

 
$
819

 
14,841,431

 
$
148

 
$
3,848,984

 
$
(260,351
)
 
$
(4,331
)
 
$
(849,012
)
 
$
2,736,257


See accompanying notes to consolidated financial statements.

4


EPR PROPERTIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 
Six Months Ended June 30,
 
2020
 
2019
Operating activities:
 
 
 
Net (loss) income
$
(25,847
)
 
$
131,943

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Impairment charges
51,264

 

Impairment charges on joint ventures
3,247

 

Gain on sale of real estate
(242
)
 
(16,102
)
Deferred income tax benefit
(2,789
)
 
(2,284
)
Costs associated with loan refinancing or payoff
820

 

Equity in loss (income) from joint ventures
2,144

 
(959
)
Distributions from joint ventures

 
112

Credit loss expense
4,676

 

Depreciation and amortization
86,260

 
82,098

Amortization of deferred financing costs
3,285

 
3,019

Amortization of above/below market leases and tenant allowances, net
(260
)
 
(117
)
Share-based compensation expense to management and Trustees
6,972

 
6,563

Change in assets and liabilities:
 
 
 
Operating lease assets and liabilities
560

 
(290
)
Mortgage notes accrued interest receivable
(3,125
)
 
(1,544
)
Accounts receivable
(48,014
)
 
12,435

Direct financing leases receivable

 
(117
)
Other assets
(5,273
)
 
(5,434
)
Accounts payable and accrued liabilities
(20,072
)
 
50

Unearned rents and interest
3,807

 
383

Net cash provided by operating activities
57,413

 
209,756

Investing activities:
 
 
 
Acquisition of and investments in real estate and other assets
(28,585
)
 
(418,114
)
Proceeds from sale of real estate
3,839

 
95,958

Investment in unconsolidated joint ventures

 
(325
)
Investment in mortgage notes receivable
(3,667
)
 
(33,074
)
Proceeds from mortgage notes receivable paydowns
94

 
1,954

Investment in promissory notes receivable

 
(9,068
)
Proceeds from promissory note receivable paydown
69

 
3,574

Additions to properties under development
(24,728
)
 
(102,101
)
Net cash used by investing activities
(52,978
)
 
(461,196
)
Financing activities:
 
 
 
Proceeds from debt facilities and senior unsecured notes
750,000

 
422,000

Principal payments on debt

 
(218,150
)
Deferred financing fees paid
(2,859
)
 
(276
)
Costs associated with loan refinancing or payoff
(820
)
 

Net proceeds from issuance of common shares
713

 
231,407

Impact of stock option exercises, net

 
(732
)
Purchase of common shares for treasury for vesting
(6,769
)
 
(9,499
)
Purchase of common shares under share repurchase program
(105,994
)
 

Dividends paid to shareholders
(160,392
)
 
(179,989
)
Net cash provided by financing activities
473,879

 
244,761

Effect of exchange rate changes on cash
(158
)
 
109

Net change in cash and cash equivalents and restricted cash
478,156

 
(6,570
)
Cash and cash equivalents and restricted cash at beginning of the period
531,440

 
18,507

Cash and cash equivalents and restricted cash at end of the period
$
1,009,596

 
$
11,937

Supplemental information continued on next page.
 
 
 

5


EPR PROPERTIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Continued from previous page
 
 
 
 
Six Months Ended June 30,
 
2020
 
2019
Reconciliation of cash and cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents at beginning of the period
$
528,763

 
$
5,872

Restricted cash at beginning of the period
2,677

 
12,635

Cash and cash equivalents and restricted cash at beginning of the period
$
531,440

 
$
18,507

 
 
 
 
Cash and cash equivalents at end of the period
$
1,006,981

 
$
6,927

Restricted cash at end of the period
2,615

 
5,010

Cash and cash equivalents and restricted cash at end of the period
$
1,009,596

 
$
11,937

 
 
 
 
Supplemental schedule of non-cash activity:
 
 
 
Transfer of property under development to real estate investments
$
20,089

 
$
282,275

Issuance of nonvested shares and restricted share units at fair value, including nonvested shares issued for payment of bonuses
$
19,956

 
$
17,590

Credit loss expense related to adoption of ASC Topic 326
$
2,163

 
$

Amounts related to adoption of ASC Topic 842:
 
 
 
Operating lease right-of-use assets
$

 
$
227,355

Operating lease liabilities
$

 
$
251,934

Sub-lessor straight-line rent 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 period for interest
$
72,096

 
$
70,954

Cash paid during the period for income taxes
$
497

 
$
1,066

Interest cost capitalized
$
504

 
$
4,667

Change in accrued capital expenditures
$
(9,576
)
 
$
8,854

See accompanying notes to consolidated financial statements.

6



EPR PROPERTIES
Notes to Consolidated Financial Statements (Unaudited)


1. Organization

Description of Business
EPR Properties (the Company) 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 and Recently Issued Accounting Standards

Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. In addition, operating results for the six month period ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. Amounts as of December 31, 2019 have been derived from the audited consolidated financial statements as of that date and should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (SEC) on February 25, 2020.

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 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 June 30, 2020 and December 31, 2019, the Company does not have any investments in consolidated VIEs.

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 COVID-19 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 have reacted by instituting quarantines, mandating business and school closures and restricting travel. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly and is severely impacting experiential real estate properties given that such properties rely on social interaction and discretionary consumer spending. Substantially all the Company's customers' operations were temporarily closed for a portion of or all of the three months ended June 30, 2020. Certain of these customers' operations remain closed, while others have

7


implemented re-opening plans. Specifically, most of the Company's theatre tenants have not reopened their locations. The severity of the impact of COVID-19 on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on consumers and our customers, all of which are uncertain and cannot be predicted. COVID-19 has negatively affected, and COVID-19 (or a future pandemic) could have material and adverse effects on, the Company's ability to successfully operate and on its 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 COVID-19 on the assumptions and estimates used in determining the Company’s financial condition and results of operations for the six months ended June 30, 2020. The following were adverse impacts to its financial statements during the six months ended June 30, 2020:

The Company recognized straight-line write-offs totaling $13.0 million, which were comprised of $5.0 million of straight-line accounts receivable and $8.0 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 $7.5 million for the six months ended June 30, 2020.
The Company increased its expected credit losses by $4.7 million from its implementation estimate of $2.2 million. This increase was primarily the result of increased fundings and the economic uncertainty and the rapidly changing environment surrounding the COVID-19 pandemic.
The Company reduced rental revenue by $4.9 million due to contractual rent abatements and $3.8 million for rent concessions for certain of its tenants due to COVID-19.
The Company deferred approximately $60.0 million of amounts due from tenants and $3.5 million due from borrowers that were booked as receivables and approximately $41.0 million of amounts due from tenants that were not booked as receivables as the full amounts were not deemed probable of collection as a result of 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 and several are still being negotiated.
For the six months ended June 30, 2020, the Company recognized revenue from American-Multi Cinema, Inc. (AMC) as well as several smaller tenants on a cash basis. See Note 18 for additional details on the agreements entered into with AMC on July 31, 2020.
The Company recognized $51.3 million in impairment charges during the three and six months ended June 30, 2020, which was comprised of $36.3 million of impairments of real estate investments, and $15.0 million of impairments of operating lease right-of-use assets.
The Company recognized impairment charges on joint ventures of $3.2 million related to its equity investments in three theatres projects located in China.
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 June 29, 2020, the Company amended its Consolidated Credit Agreement, which governs its unsecured revolving credit facility and its unsecured term loan facility, and 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 in light of the continuing financial and operational impacts of the COVID-19 pandemic on the Company and its tenants and borrowers. The modifications are generally effective during the covenant relief period, which is defined as the period of time beginning June 29, 2020 and ending on the earlier of (i) April 1, 2021 or (ii) the date on which the Company provides notice that it elects to terminate the covenant relief period, subject to certain conditions. See Note 8 for additional details.

On the effective date of the amendments, June 29, 2020, the Company suspended its share repurchase plan. Prior to the effective date, during the six months ended June 30, 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.

8



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.

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.

Recently Adopted Accounting Pronouncements
On January 1, 2020, Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326) became effective for the Company. 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 disclosures required under the new standard will not be provided for dates and periods before 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). See Note 6 for information related to the Company's measurement of credit losses on its mortgage notes and notes receivable.

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. The purpose of this Staff Q&A was to respond to frequently asked questions about accounting for lease concessions related to the effects of the COVID-19 pandemic. In response to the Staff Q&A, the Company elected to not assess deferrals and rent concessions occurring during the period effected by the COVID-19 pandemic as lease modifications. The Company continues to evaluate the impacts of COVID-19 on the Company's lease accounting and related processes. See Rental Revenue below for further information on the Company's accounting for deferrals and other lease modifications.
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 includes the following property types: early childhood education centers and private schools. See Note 16 for financial information related to these reportable segments.

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. 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 a property 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 and 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

9


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.

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 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.

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 $35.9 million and $37.2 million as of June 30, 2020 and December 31, 2019, respectively, are shown as a reduction of debt. The deferred financing costs of $4.3 million and $3.5 million as of June 30, 2020 and December 31, 2019, respectively, related to the unsecured revolving credit facility are included in other assets.

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 six months ended June 30, 2020, the Company recognized straight-line write-offs totaling $13.0 million, which were comprised of $5.0 million of straight-line accounts receivable and $8.0 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 $7.5 million for the six months ended June 30, 2020. For the six months ended June 30, 2019, the Company recognized $1.4 million (of which $1.2 million has been classified within discontinued operations) of straight-line write-offs and total straight-line rental revenue net of these write-offs was $5.6 million (of which $0.9 million has been classified within discontinued operations).

Substantially all the Company's customers' operations were temporarily closed for a portion of or all of the three months ended June 30, 2020 as a result of the COVID-19 pandemic. Certain of these customers' operations remain closed, while others have implemented re-opening plans. In response, the Company has agreed to defer rent for a substantial portion of its customers. In reliance upon a FASB Staff Q&A, the Company intends to not treat qualifying deferrals or

10


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 will be reflected in the Company's 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. Certain agreements with tenants where remaining lease terms are extended or changes are made to rent outside of the period impacted by COVID-19 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. The Company will continue to evaluate the impacts of COVID-19 on the Company's lease receivables and related accounting processes.

Most of the Company’s lease contracts are triple-net leases, which require the tenants to make payments 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 six months ended June 30, 2020 and 2019, the Company recognized $0.9 million and $4.3 million, respectively, in tenant reimbursements related to the gross up of these reimbursed expenses which are included in rental revenue.

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 combine these non-lease components with the lease components in rental revenue. For the six months ended June 30, 2020 and 2019, the non-lease components included in rental revenue totaled $7.0 million and $7.6 million, respectively.

In addition, most of the Company's tenants are subject to additional rents if gross revenues of the properties exceed certain thresholds defined in the lease agreements (percentage rents). Percentage rents are recognized at the time when specific parameters have been met as provided by the lease agreement. Rental revenue included percentage rents of $4.2 million and $5.5 million for the six months ended June 30, 2020 and 2019, respectively.

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 and/or other debtor, 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.


11


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 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. 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. 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. As of June 30, 2020, the Company believes that all accrued interest is collectible.

In the event the Company has a past due mortgage note or note receivable and foreclosure is probable, 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 June 30, 2020, the Company does not have any mortgage 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 parameters have been met as provided by the mortgage agreement. There was no participating interest income for the six months ended June 30, 2020 and 2019. For the six months ended June 30, 2019, mortgage and other financing income included $0.9 million in prepayment fees related to mortgage notes that were paid fully in advance of their maturity date. There were no prepayment fees recognized during the six months ended June 30, 2020.


12


Concentrations of Risk
Topgolf USA (Topgolf), Regal Entertainment Group (Regal) and American Multi-Cinema, Inc. (AMC) represented a significant portion of the Company's total revenue for the six months ended June 30, 2020 and 2019. The Company began recognizing revenue on a cash basis for AMC in the first quarter of 2020 and cash payments have been reduced due to the impact of COVID-19. The following is a summary of the Company's total revenue (including revenue from discontinued operations) derived from rental or interest payments from Topgolf, Regal and AMC (dollars in thousands):
 
Six Months Ended June 30,
 
2020
 
2019
 
Total Revenue
% of Company's Total Revenue
 
Total Revenue
% of Company's Total Revenue
Topgolf
$
40,129

15.6
%
 
$
37,719

11.1
%
Regal
39,099

15.2
%
 
32,620

9.6
%
AMC
22,144

8.6
%
 
61,364

18.0
%
 
 
 
 
 
 


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 included in general and administrative expense in the accompanying consolidated statements of (loss) income and comprehensive (loss) income.

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 $6 thousand and $5 thousand for the six months ended June 30, 2020 and 2019, 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 or 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 $5.4 million and $5.6 million for the six months ended June 30, 2020 and 2019, respectively. Expense recognized related to nonvested shares and included in severance expense in the accompanying consolidated statement of income was $0.1 million for the six months ended June 30, 2019.

Nonvested Performance Shares Issued to Employees
During the six months ended June 30, 2020, the Compensation and Human Capital Committee of the 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 $0.5 million for the six months ended June 30, 2020.

13


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 $1.0 million and $0.9 million for the six months ended June 30, 2020 and 2019, respectively.

Derivative Instruments
The Company uses derivative instruments to reduce exposure to fluctuations in foreign currency exchange rates and variable interest rates.

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 six months ended June 30, 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.


14


3. Real Estate Investments

The following table summarizes the carrying amounts of real estate investments as of June 30, 2020 and December 31, 2019 (in thousands):
 
June 30, 2020
 
December 31, 2019
Buildings and improvements
$
4,709,211

 
$
4,747,101

Furniture, fixtures & equipment
121,913

 
123,239

Land
1,287,656

 
1,290,181

Leasehold interests
26,050

 
26,041

 
6,144,830

 
6,186,562

Accumulated depreciation
(1,034,771
)
 
(989,254
)
Total
$
5,110,059

 
$
5,197,308

Depreciation expense on real estate investments from continuing operations was $81.6 million and $71.9 million for the six months ended June 30, 2020 and 2019, respectively.

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, many of the Company's properties are temporarily closed and the Company has negotiated and continues to negotiate lease modifications with customers that include rent deferrals, rent reductions or other modifications. As part of this process, the Company reassessed the expected holding periods of such properties, and determined that the estimated cash flows were not sufficient to recover the carrying values of six properties. Two of these six properties have operating ground lease arrangements with right-of-use assets. During the six months ended June 30, 2020, the Company determined the estimated fair value of the real estate investments and right-of-use assets using Level 3 inputs, including independent appraisals of these properties. The Company reduced the carrying value of the real estate investments, net to $49.6 million and the operating lease right-of-use assets to $13.0 million. The Company recognized impairment charges of $36.3 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 three months ended June 30, 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 9 for further details on these impairments.

5. Investments and Dispositions

The Company's investment spending during the six months ended June 30, 2020 totaled $53.6 million of investments in Experiential properties. These investments included spending on the acquisition of two megaplex theatres totaling $22.1 million as well as build-to-suit development and redevelopment projects.

During the six months ended June 30, 2020, the Company completed the sale of three early education properties for net proceeds totaling $3.8 million and recognized a combined gain on sale of $0.2 million.

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

15


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 loan by loan basis. As of June 30, 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 six months ended June 30, 2020, the Company increased its expected credit losses by $4.7 million from its implementation estimate of $2.2 million. This increase was as a result of additional fundings 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 four 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 June 30, 2020.

Investment in mortgage notes, including related accrued interest receivable, at June 30, 2020 and December 31, 2019 consists of the following (in thousands):
 
 
 
 
Outstanding principal amount of mortgage
Carrying amount as of
Unfunded commitments
Description
Year of Origination
Interest Rate
Maturity Date
June 30, 2020
December 31, 2019 (1)
June 30, 2020
Attraction property Powells Point, North Carolina
2019
7.75
%
6/30/2025
$
27,423

$
26,480

$
27,423

$

Fitness & wellness property Omaha, Nebraska
2017
7.85
%
1/3/2027
10,905

11,002

10,977


Fitness & wellness property Merriam, Kansas
2019
7.55
%
7/31/2029
8,384

8,515

5,985

707

Ski property Girdwood, Alaska
2019
8.25
%
12/31/2029
37,000

36,975

37,000

20,000

Fitness & wellness property Omaha, Nebraska
2016
7.85
%
6/30/2030
5,773

5,889

5,803

5,145

Experiential lodging property Nashville, Tennessee
2019
6.99
%
9/30/2031
71,223

68,311

70,396


Eat & play property Austin, Texas
2012
11.31
%
6/1/2033
11,488

11,814

11,582


Ski property West Dover and Wilmington, Vermont
2007
11.78
%
12/1/2034
51,050

51,023

51,050


Four ski properties Ohio and Pennsylvania
2007
10.75
%
12/1/2034
37,562

37,392

37,562


Ski property Chesterland, Ohio
2012
11.21
%
12/1/2034
4,550

4,367

4,550


Ski property Hunter, New York
2016
8.57
%
1/5/2036
21,000

20,999

21,000


Eat & play property Midvale, Utah
2015
10.25
%
5/31/2036
17,505

17,952

17,505


Eat & play property West Chester, Ohio
2015
9.75
%
8/1/2036
18,068

18,498

18,068


Private school property Mableton, Georgia
2017
9.02
%
4/30/2037
4,674

5,055

5,048


Fitness & wellness property Fort Collins, Colorado
2018
7.85
%
1/31/2038
10,292

10,235

10,360


Early childhood education center Lake Mary, Florida
2019
7.87
%
5/9/2039
4,200

4,304

4,258


Eat & play property Eugene, Oregon
2019
8.13
%
6/17/2039
14,700

14,799

14,800


Early childhood education center Lithia, Florida
2017
8.25
%
10/31/2039
3,959

4,058

4,024


 
 
 
 
$
359,756

$
357,668

$
357,391

$
25,852


(1) Balances as of December 31, 2019 are prior to the adoption of ASC Topic 326.


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Investment in notes receivable, including related accrued interest receivable, was $14.0 million at June 30, 2020 and December 31, 2019, and is included in Other assets in the accompanying consolidated balance sheets.

The following summarizes the activity within the allowance for credit losses related to mortgage notes, unfunded commitments and notes receivable for the six months ended June 30, 2020 (in thousands):
 
Mortgage notes receivable
Unfunded commitments
Notes receivable
Total
Allowance for credit losses at January 1, 2020
$
2,000

$
114

$
49

$
2,163

Credit loss expense
4,422

73

181

4,676

Charge-offs




Recoveries




Allowance for credit losses
$
6,422

$
187

$
230

$
6,839



7. Accounts Receivable
The following table summarizes the carrying amounts of accounts receivable as of June 30, 2020 and December 31, 2019 (in thousands):
 
June 30, 2020
 
December 31, 2019
Receivable from tenants
$
68,254

 
$
11,373

Receivable from non-tenants
816

 
2,103

Straight-line rent receivable
65,704

 
73,382

Total
$
134,774

 
$
86,858



During the six months ended June 30, 2020, the Company wrote-off straight-line receivables totaling $13.0 million, to straight-line rental revenue classified in rental revenue in the accompanying consolidated statements of (loss) income and comprehensive (loss) income. The $13.0 million straight-line write-offs were comprised of $5.0 million of straight-line accounts receivable and $8.0 million of sub-lessor ground lease straight-line accounts receivable.

As of June 30, 2020, receivable from tenants includes fixed rent payments of approximately $60.0 million that were deferred due to the COVID-19 pandemic and determined to be collectible. Additionally, approximately $41.0 million of amounts due from tenants were not booked as receivables as the full amounts were not deemed probable of collection as a result of 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 with certain tenants are still being negotiated.

8. Capital Markets and Dividends

During the six months ended June 30, 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 below. During the six months ended June 30, 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 Board declared regular monthly cash dividends on its common shares during the three and six months ended June 30, 2020 totaling $0.3825 and $1.5150 per common share, 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.


17


During the three and six months ended June 30, 2020, the Board also declared cash dividends of $0.359375 and $0.71875 per share, respectively, on its 5.75% Series C cumulative convertible preferred shares, $0.5625 and $1.125 per share, respectively, on its 9.00% Series E cumulative convertible preferred shares and $0.359375 and $0.71875 per share, respectively, on its 5.75% Series G cumulative redeemable preferred shares.

On June 29, 2020, the Company amended its Consolidated Credit Agreement, which governs its unsecured revolving credit facility and its unsecured term loan facility, and 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 in light of the continuing financial and operational impacts of the COVID-19 pandemic on the Company and its tenants and borrowers. The modifications are generally effective during the covenant relief period, which is defined as the period of time beginning June 29, 2020 and ending on the earlier of (i) April 1, 2021 or (ii) the date on which the Company provides notice that it elects to terminate the covenant relief period, together with evidence that it would have been in compliance with the applicable financial covenants at the end of the most recently ended fiscal quarter even if the covenant relief period had not been in effect for such fiscal quarter.
During the covenant relief period, the initial interest rate for the revolving credit and term loan facility is LIBOR plus 1.375% and LIBOR plus 1.75%, respectively, (with a LIBOR floor of 0.50%) and the facility fee is increased to 0.375%. After the covenant relief period, the interest rates for the revolving credit and term loan facility are scheduled to return to LIBOR plus 1.00% and LIBOR plus 1.10%, respectively, (with a LIBOR floor of zero) and the facility fee will return to 0.20%. These rates are subject to changes, however, if the Company's long-term unsecured debt ratings change as defined in the agreements. During the covenant relief period, the interest rates for the private placement notes are 5.00% and 5.21%, respectively, for the Series A notes due 2024 and the Series B notes due 2026. After the covenant relief period, the interest rates for the private placement notes are scheduled to return to 4.35% and 4.56%, respectively, for the Series A notes due 2024 and the Series B notes due 2026.
The amendments permanently modified certain financial covenants and provided relief from compliance with certain financial covenants during all or a portion of the covenant relief period, as follows: (i) a new minim