EPR PROPERTIES
Consolidated Statements of Changes in Equity
(Unaudited)
(Dollars in thousands, except per share data)
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EPR Properties Shareholders’ Equity
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Common Stock
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Preferred Stock
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Additional
paid-in capital
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Treasury
shares
|
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Accumulated
other
comprehensive (loss) income
|
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Distributions
in excess of
net income
|
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|
|
Total
|
|
Shares
|
|
Par
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|
Shares
|
|
Par
|
|
|
Balance at December 31, 2018
|
77,226,443
|
|
|
$
|
772
|
|
|
14,841,431
|
|
|
$
|
148
|
|
|
$
|
3,504,494
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|
$
|
(130,728)
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|
$
|
12,085
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|
$
|
(521,748)
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$
|
2,865,023
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Restricted share units issued to Trustees
|
1,156
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|
—
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—
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|
—
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|
—
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|
|
—
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|
—
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—
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—
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Issuance of nonvested shares, net of cancellations
|
197,755
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|
2
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|
—
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|
—
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|
|
4,831
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(403)
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|
—
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—
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|
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|
4,430
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Purchase of common shares for vesting
|
—
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|
|
—
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|
|
—
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|
—
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|
—
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|
(9,499)
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|
—
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—
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|
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|
(9,499)
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Share-based compensation expense
|
—
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|
|
—
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|
|
—
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|
|
—
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|
|
3,177
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|
—
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|
|
—
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|
|
—
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|
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|
3,177
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|
Share-based compensation included in severance expense
|
—
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|
|
—
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|
|
—
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|
|
—
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|
|
103
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|
—
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|
—
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|
—
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|
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|
103
|
|
Foreign currency translation adjustment
|
—
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|
|
—
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—
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|
—
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—
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—
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|
3,810
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—
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|
3,810
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Change in unrealized loss on derivatives
|
—
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—
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—
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|
—
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—
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—
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(7,498)
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—
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(7,498)
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Net income
|
—
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|
—
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|
—
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|
—
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|
|
—
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|
|
—
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|
—
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|
|
65,349
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|
65,349
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Issuances of common shares
|
1,064,600
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|
11
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|
|
—
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|
—
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|
78,982
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—
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—
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—
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|
78,993
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Stock option exercises, net
|
111,815
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|
1
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|
|
—
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|
—
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|
5,543
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|
(6,276)
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|
—
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|
—
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|
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(732)
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Dividends to common shareholders ($1.125 per share)
|
—
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|
|
—
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|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
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|
|
—
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|
|
(84,343)
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|
|
(84,343)
|
|
Dividends to Series C preferred shareholders ($0.359375 per share)
|
—
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|
|
—
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|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
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|
|
—
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|
|
(1,939)
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|
(1,939)
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|
Dividends to Series E preferred shareholders ($0.5625 per share)
|
—
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|
|
—
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|
—
|
|
|
—
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|
|
—
|
|
|
—
|
|
|
—
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|
|
(1,939)
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|
(1,939)
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|
Dividends to Series G preferred shareholders ($0.359375 per share)
|
—
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|
|
—
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|
|
—
|
|
|
—
|
|
|
—
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|
|
—
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|
|
—
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|
|
(2,156)
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|
(2,156)
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Balance at March 31, 2019
|
78,601,769
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|
$
|
786
|
|
|
14,841,431
|
|
|
$
|
148
|
|
|
$
|
3,597,130
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|
$
|
(146,906)
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|
$
|
8,397
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|
$
|
(546,776)
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$
|
2,912,779
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Restricted share units issued to Trustees
|
26,236
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|
—
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|
|
—
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|
—
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|
—
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|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Issuance of nonvested shares, net of cancellations
|
11,000
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|
|
—
|
|
|
—
|
|
|
—
|
|
|
95
|
|
|
(95)
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|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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Continued on next page.
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|
EPR Properties Shareholders’ Equity
|
|
|
|
|
|
Common Stock
|
|
Preferred Stock
|
|
Additional
paid-in capital
|
|
Treasury
shares
|
|
Accumulated
other
comprehensive (loss) income
|
|
Distributions
in excess of
net income
|
|
|
|
Total
|
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Continued from previous page.
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|
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|
|
|
|
|
|
|
|
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
|
|
Purchase of common shares for vesting
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(192)
|
|
|
—
|
|
|
—
|
|
|
|
|
(192)
|
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,372
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
3,372
|
|
Share-based compensation included in severance expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
418
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
418
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,267)
|
|
|
—
|
|
|
|
|
(2,267)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain on derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,752
|
|
|
—
|
|
|
|
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
34,003
|
|
|
|
|
34,003
|
|
Issuances of common shares
|
685,588
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
52,350
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
52,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises, net
|
1,773
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100
|
|
|
(100)
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Dividends to common shareholders ($1.125 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(87,507)
|
|
|
|
|
(87,507)
|
|
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 September 30, 2019
|
81,365,094
|
|
|
$
|
813
|
|
|
14,841,431
|
|
|
$
|
148
|
|
|
$
|
3,814,465
|
|
|
$
|
(147,435)
|
|
|
$
|
4,659
|
|
|
$
|
(631,851)
|
|
|
|
|
$
|
3,040,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued on next page.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPR Properties Shareholders’ Equity
|
|
|
|
|
|
Common Stock
|
|
Preferred Stock
|
|
Additional
paid-in capital
|
|
Treasury
shares
|
|
Accumulated
other
comprehensive
(loss) income
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued on next page.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPR Properties Shareholders’ Equity
|
|
|
|
|
|
Common Stock
|
|
Preferred Stock
|
|
Additional
paid-in capital
|
|
Treasury
shares
|
|
Accumulated
other
comprehensive
(loss) income
|
|
Distributions
in excess of
net income
|
|
|
|
Total
|
Continued from previous page.
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellations of nonvested shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
220
|
|
|
(220)
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Purchase of common shares for vesting
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23)
|
|
|
—
|
|
|
—
|
|
|
|
|
(23)
|
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,410
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
3,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,148
|
|
|
—
|
|
|
|
|
4,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized loss on derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,923)
|
|
|
—
|
|
|
|
|
(1,923)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(85,904)
|
|
|
|
|
(85,904)
|
|
Issuances of common shares
|
4,544
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
148
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend equivalents accrued on performance shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10)
|
|
|
|
|
(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2020
|
81,908,330
|
|
|
$
|
819
|
|
|
14,841,431
|
|
|
$
|
148
|
|
|
$
|
3,852,762
|
|
|
$
|
(260,594)
|
|
|
$
|
(2,106)
|
|
|
$
|
(940,960)
|
|
|
|
|
$
|
2,650,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
EPR PROPERTIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
Operating activities:
|
|
|
|
Net (loss) income
|
$
|
(111,751)
|
|
|
$
|
165,946
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Impairment charges
|
62,825
|
|
|
—
|
|
Impairment charges on joint ventures
|
3,247
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate
|
(242)
|
|
|
(30,405)
|
|
|
|
|
|
Deferred income tax expense
|
15,246
|
|
|
(3,268)
|
|
|
|
|
|
Costs associated with loan refinancing or payoff
|
820
|
|
|
38,407
|
|
Equity in loss (income) from joint ventures
|
3,188
|
|
|
(524)
|
|
Distributions from joint ventures
|
—
|
|
|
112
|
|
Credit loss expense
|
10,383
|
|
|
—
|
|
Depreciation and amortization
|
128,319
|
|
|
127,232
|
|
Amortization of deferred financing costs
|
4,783
|
|
|
4,571
|
|
Amortization of above/below market leases and tenant allowances, net
|
(384)
|
|
|
(224)
|
|
Share-based compensation expense to management and Trustees
|
10,382
|
|
|
9,832
|
|
Share-based compensation expense included in severance expense
|
—
|
|
|
521
|
|
Change in assets and liabilities:
|
|
|
|
Operating lease assets and liabilities
|
574
|
|
|
1,033
|
|
Mortgage notes accrued interest receivable
|
(4,279)
|
|
|
(389)
|
|
Accounts receivable
|
(42,961)
|
|
|
12,935
|
|
Direct financing leases receivable
|
—
|
|
|
(169)
|
|
Other assets
|
(3,065)
|
|
|
(3,189)
|
|
Accounts payable and accrued liabilities
|
(15,724)
|
|
|
5,689
|
|
Unearned rents and interest
|
(1,883)
|
|
|
9,152
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
59,478
|
|
|
337,262
|
|
Investing activities:
|
|
|
|
Acquisition of and investments in real estate and other assets
|
(37,128)
|
|
|
(443,561)
|
|
Proceeds from sale of real estate
|
3,839
|
|
|
182,719
|
|
Investment in unconsolidated joint ventures
|
(1,690)
|
|
|
(325)
|
|
|
|
|
|
Investment in mortgage notes receivable
|
(6,438)
|
|
|
(98,071)
|
|
Proceeds from mortgage notes receivable paydowns
|
414
|
|
|
207,125
|
|
Investment in promissory notes receivable
|
—
|
|
|
(10,639)
|
|
Proceeds from promissory note receivable paydowns
|
69
|
|
|
3,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties under development
|
(29,963)
|
|
|
(125,635)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
(70,897)
|
|
|
(284,750)
|
|
Financing activities:
|
|
|
|
Proceeds from debt facilities and senior unsecured notes
|
750,000
|
|
|
962,000
|
|
Principal payments on debt
|
—
|
|
|
(866,735)
|
|
Deferred financing fees paid
|
(2,944)
|
|
|
(9,343)
|
|
Costs associated with loan refinancing or payoff
|
(820)
|
|
|
(36,918)
|
|
Net proceeds from issuance of common shares
|
861
|
|
|
285,269
|
|
|
|
|
|
Impact of stock option exercises, net
|
—
|
|
|
(732)
|
|
|
|
|
|
Purchase of common shares for treasury for vesting
|
(6,792)
|
|
|
(9,691)
|
|
Purchase of common shares under share repurchase program
|
(105,994)
|
|
|
—
|
|
|
|
|
|
Dividends paid to shareholders
|
(166,426)
|
|
|
(273,187)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
467,885
|
|
|
50,663
|
|
Effect of exchange rate changes on cash
|
(110)
|
|
|
86
|
|
Net change in cash and cash equivalents and restricted cash
|
456,356
|
|
|
103,261
|
|
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
|
$
|
987,796
|
|
|
$
|
121,768
|
|
Supplemental information continued on next page.
|
|
|
|
EPR PROPERTIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Continued from previous page
|
|
|
|
|
Nine Months Ended September 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
|
$
|
985,372
|
|
|
$
|
115,839
|
|
Restricted cash at end of the period
|
2,424
|
|
|
5,929
|
|
Cash and cash equivalents and restricted cash at end of the period
|
$
|
987,796
|
|
|
$
|
121,768
|
|
|
|
|
|
Supplemental schedule of non-cash activity:
|
|
|
|
Transfer of property under development to real estate investments
|
$
|
20,547
|
|
|
$
|
353,947
|
|
|
|
|
|
|
|
|
|
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
|
$
|
—
|
|
|
$
|
229,620
|
|
Operating lease liabilities
|
$
|
—
|
|
|
$
|
253,486
|
|
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
|
$
|
105,141
|
|
|
$
|
101,982
|
|
Cash paid during the period for income taxes
|
$
|
995
|
|
|
$
|
1,332
|
|
Interest cost capitalized
|
$
|
829
|
|
|
$
|
5,053
|
|
Change in accrued capital expenditures
|
$
|
(12,232)
|
|
|
$
|
(2,247)
|
|
See accompanying notes to consolidated financial statements.
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 nine month period ended September 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 September 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 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 non-theatre locations and many of the Company's theatre locations have re-opened as of September 30, 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 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, the extent and severity of the impact on consumers and our customers and the responses taken by states and local governments, 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 nine months ended September 30, 2020. The following were adverse impacts to its financial statements during the nine months ended September 30, 2020:
•The Company wrote-off receivables from tenants and straight-line rent receivables totaling $62.6 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 represented $36.9 million of this write-off and was comprised of $25.4 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 $6.8 million due to contractual rent abatements.
•The Company deferred approximately $75.4 million of amounts due from tenants and $3.6 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 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 some are still being negotiated.
•The Company recognized $62.8 million in impairment charges during the nine months ended September 30, 2020, which was comprised of $47.8 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 $10.4 million from its implementation estimate of $2.2 million. This increase was primarily due to credit loss expense related to one note receivable to fully reserve the outstanding principal balance of $6.5 million 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 on the Company's 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.
•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 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 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. On November 3, 2020, the Company further amended its Consolidated Credit Agreement to extend the covenant waivers through December 31, 2021, in light of the continuing impact of the COVID-19 pandemic. The Company can elect to terminate the covenant relief period early, subject to certain conditions. The Company is also currently negotiating a similar covenant waiver extension related to its Note Purchase Agreement. See Note 8 and Note 18 for additional details.
On June 29, 2020, the effective date of the amendments, the Company suspended its share repurchase plan. Prior to the effective date, during the nine months ended September 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 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).
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). The Company agreed to the deferral of all fixed rent due under the prior leases of the Master Lease Properties for the months of April, May and June 2020. This total amount deferred is included in the calculation of the fixed rent under the Master Lease and is amortized 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.
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). The Company agreed to the deferral of all fixed rent due under the Transitional Leases for the months of April, May and June 2020. This total amount deferred under each Transitional Lease is included in the calculation of the fixed rent under the Transitional Lease and amortized over the remaining current term of the Transitional Lease. The Transitional Leases have expiration dates occurring between November 2026 and March 2029.
Pursuant to the Master Lease 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 sales/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 will be 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 or over the remaining current term in the case of Transitional Leases.
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.
The Company may 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 has 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. On July 31, 2020, the Company terminated one Transitional Lease with AMC and on October 19, 2020, the Company provided a 60-day notice to terminate one additional Transitional Lease with AMC. The Company terminated both of these Transitional Leases in advance of selling the properties.
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 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 $35.1 million and $37.2 million as of September 30, 2020 and December 31, 2019, respectively, are shown as a reduction of debt. The deferred financing costs of $3.7 million and $3.5 million as of September 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 nine months ended September 30, 2020, the Company recognized straight-line write-offs totaling $36.9 million, which were comprised of $25.4 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 $25.4 million for the nine months ended September 30, 2020. For the nine months ended September 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 $10.0 million (of which $2.4 million has been classified within discontinued operations).
Substantially all the Company's customers' operations were temporarily closed for a portion of the nine months ended September 30, 2020 as a result of the COVID-19 pandemic. Many of the Company's non-theatre locations have re-opened as of September 30, 2020. 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. In reliance upon a FASB Staff Q&A, the Company intends to not treat 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 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 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. 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 nine months ended September 30, 2020 and 2019, the Company recognized $1.4 million and $5.8 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 nine months ended September 30, 2020 and 2019, the non-lease components included in rental revenue totaled $8.9 million and $11.3 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 parameters have been met as provided by the lease agreement. Rental revenue included percentage rents of $5.5 million and $8.5 million for the nine months ended September 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.
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. During the nine months ended September 30, 2020, the Company wrote off approximately $0.3 million of accrued interest income against interest income related to one note receivable. As of September 30, 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 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 September 30, 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 parameters have been met as provided by the mortgage agreement. Mortgage and other financing income included participating interest income of $0.6 million for the nine months ended September 30, 2019. There was no participating interest income for the nine months ended September 30, 2020. For the nine months ended September 30, 2019, mortgage and other financing income included $2.7 million (of which $1.8 million has been classified within discontinued operations) in prepayment fees related to mortgage notes that were paid fully in advance of their maturity date. There were no prepayment fees recognized during the nine months ended September 30, 2020.
Concentrations of Risk
Topgolf USA (Topgolf), AMC and Regal represented a significant portion of the Company's total revenue for the nine months ended September 30, 2020 and 2019. The Company began recognizing revenue on a cash basis for AMC at the end of the first quarter of 2020 and for Regal at the end of the third quarter of 2020 and cash payments have been reduced due to the impact of COVID-19. The following is a summary of the Company's total revenue (including revenue from discontinued operations) derived from rental or interest payments from Topgolf, AMC and Regal (dollars in thousands):
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Nine Months Ended September 30,
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2020
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2019
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Total Revenue
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% of Company's Total Revenue
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Total Revenue
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% of Company's Total Revenue
|
Topgolf
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$
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60,330
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18.8
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%
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$
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57,592
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11.0
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%
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AMC
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26,226
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|
8.2
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%
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92,409
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17.6
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%
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Regal
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12,259
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3.8
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%
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53,807
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10.2
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%
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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 non-vested 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 $9 thousand and $7 thousand for the nine months ended September 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 $8.0 million and $8.5 million for the nine months ended September 30, 2020 and 2019, respectively. Expense recognized related to nonvested shares and included in severance expense in the accompanying consolidated statement of income was $0.5 million for the nine months ended September 30, 2019.
Nonvested Performance Shares Issued to Employees
During the nine months ended September 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 $0.7 million for the nine months ended September 30, 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 $1.6 million and $1.4 million for the nine months ended September 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 nine months ended September 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.
3. Real Estate Investments
The following table summarizes the carrying amounts of real estate investments as of September 30, 2020 and December 31, 2019 (in thousands):
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September 30, 2020
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December 31, 2019
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Buildings and improvements
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$
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4,705,575
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$
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4,747,101
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Furniture, fixtures & equipment
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122,612
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123,239
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Land
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1,285,621
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1,290,181
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Leasehold interests
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26,050
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26,041
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6,139,858
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6,186,562
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Accumulated depreciation
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(1,072,201)
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(989,254)
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Total
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$
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5,067,657
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$
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5,197,308
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Depreciation expense on real estate investments from continuing operations was $122.1 million and $112.3 million for the nine months ended September 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 have just recently re-opened or 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 eight properties. Two of these eight properties have operating ground lease arrangements with right-of-use assets. During the nine months ended September 30, 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 $45.6 million and the operating lease right-of-use assets to $13.0 million. The Company recognized impairment charges of $47.8 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 nine months ended September 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 nine months ended September 30, 2020 totaled $62.3 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 nine months ended September 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 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 September 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 nine months ended September 30, 2020, the Company increased its expected credit losses by $10.4 million from its implementation estimate of $2.2 million. This increase was due to a credit loss expense related to one note receivable for its outstanding principal balance of $6.5 million 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 September 30, 2020.
Investment in mortgage notes, including related accrued interest receivable, at September 30, 2020 and December 31, 2019 consists of the following (in thousands):
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Outstanding principal amount of mortgage
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Carrying amount as of
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Unfunded commitments
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Description
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Year of Origination
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Interest Rate
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Maturity Date
|
September 30, 2020
|
December 31, 2019 (1)
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September 30, 2020
|
Attraction property Powells Point, North Carolina
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2019
|
7.75
|
%
|
6/30/2025
|
$
|
27,423
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|
$
|
27,631
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|
$
|
27,423
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|
$
|
—
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Fitness & wellness property Omaha, Nebraska
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2017
|
7.85
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%
|
1/3/2027
|
10,905
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|
11,201
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|
10,977
|
|
—
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Fitness & wellness property Merriam, Kansas
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2019
|
7.55
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%
|
7/31/2029
|
8,673
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|
8,931
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|
5,985
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|
417
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Ski property Girdwood, Alaska
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2019
|
8.25
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%
|
12/31/2029
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38,106
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37,895
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|
37,000
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|
18,894
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|
Fitness & wellness property Omaha, Nebraska
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2016
|
7.85
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%
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6/30/2030
|
6,551
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|
6,755
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|
5,803
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|
4,367
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Experiential lodging property Nashville, Tennessee
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2019
|
7.01
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%
|
9/30/2031
|
71,223
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|
68,605
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|
70,396
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|
—
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Eat & play property Austin, Texas
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2012
|
11.31
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%
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6/1/2033
|
11,428
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|
11,883
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|
11,582
|
|
—
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Ski property West Dover and Wilmington, Vermont
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2007
|
11.78
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%
|
12/1/2034
|
51,050
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|
51,028
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|
51,050
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|
—
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Four ski properties Ohio and Pennsylvania
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2007
|
10.75
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%
|
12/1/2034
|
37,562
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|
37,420
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|
37,562
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|
—
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Ski property Chesterland, Ohio
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2012
|
11.21
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%
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12/1/2034
|
4,550
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|
4,401
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|
4,550
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|
—
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Ski property Hunter, New York
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2016
|
8.57
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%
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1/5/2036
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21,000
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|
21,000
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|
21,000
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|
—
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Eat & play property Midvale, Utah
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2015
|
10.25
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%
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5/31/2036
|
17,505
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|
18,131
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|
17,505
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|
—
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Eat & play property West Chester, Ohio
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2015
|
9.75
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%
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8/1/2036
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18,068
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|
18,676
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|
18,068
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|
—
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Private school property Mableton, Georgia
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2017
|
9.02
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%
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4/30/2037
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5,012
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|
5,186
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|
5,048
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|
—
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Fitness & wellness property Fort Collins, Colorado
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2018
|
7.85
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%
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1/31/2038
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10,292
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|
10,404
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|
10,360
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|
—
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Early childhood education center Lake Mary, Florida
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2019
|
7.87
|
%
|
5/9/2039
|
4,200
|
|
4,339
|
|
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
|
|
3,726
|
|
4,024
|
|
—
|
|
|
|
|
|
$
|
362,207
|
|
$
|
362,011
|
|
$
|
357,391
|
|
$
|
23,678
|
|
(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 $7.4 million and $14.0 million at September 30, 2020 and December 31, 2019, respectively, and is included in Other assets in the accompanying consolidated balance sheets. During the nine months ended September 30, 2020, the Company recognized credit loss expense totaling $6.7 million for notes receivable, of which $6.5 million related to reserving the outstanding principal balance of one note receivable due to recent changes in the borrower's financial status as a result of the COVID-19 pandemic. Additionally, accrued interest income for this note receivable was reserved against interest income of approximately $0.3 million.
The following summarizes the activity within the allowance for credit losses related to mortgage notes, unfunded commitments and notes receivable for the nine months ended September 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
|
3,684
|
|
30
|
|
6,669
|
|
10,383
|
|
Charge-offs
|
—
|
|
—
|
|
—
|
|
—
|
|
Recoveries
|
—
|
|
—
|
|
—
|
|
—
|
|
Allowance for credit losses
|
$
|
5,684
|
|
$
|
144
|
|
$
|
6,718
|
|
$
|
12,546
|
|
7. Accounts Receivable
The following table summarizes the carrying amounts of accounts receivable as of September 30, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Receivable from tenants
|
$
|
77,192
|
|
|
$
|
11,373
|
|
Receivable from non-tenants
|
597
|
|
|
2,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Straight-line rent receivable
|
51,925
|
|
|
73,382
|
|
|
|
|
|
Total
|
$
|
129,714
|
|
|
$
|
86,858
|
|
During the nine months ended September 30, 2020, the Company wrote-off receivables from tenants totaling $25.7 million and straight-line rent receivables totaling $36.9 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 $36.9 million in write-offs of straight-line rent receivables were comprised of $25.4 million of straight-line rent receivable and $11.5 million of sub-lessor ground lease straight-line rent receivable.
As of September 30, 2020, receivable from tenants includes fixed rent payments of approximately $75.4 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 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 2020 totaling $1.5150 per common share. 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.
During the three and nine months ended September 30, 2020, the Board also declared cash dividends of $0.359375 and $1.078125 per share, respectively, on both its 5.75% Series C cumulative convertible preferred shares and its 5.75% Series G cumulative redeemable preferred shares and $0.5625 and $1.6875 per share, respectively, on its 9.00% Series E cumulative convertible 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 Company further amended its Consolidated Credit Agreement on November 3, 2020, as discussed below. The modifications, prior to being further amended, were generally effective during the covenant relief period, which was 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 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%. Subsequent to September 30, 2020, the Company's unsecured debt rating was downgraded to BB+ by both Fitch and Standard & Poor's. 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.
During the covenant relief period, the interest rates for the private placement notes were set at 5.00% and 5.21% for the Series A notes due 2024 and the Series B notes due 2026, respectively. Subsequent to September 30, 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 0.60% during the covenant relief period. 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.
On November 3, 2020, the Company further amended its Consolidated Credit Agreement. The amendment modified certain provisions and extended the waiver of the Company's obligation to comply with the covenants discussed below under this agreement through December 31, 2021 in light of the continuing financial and operational impacts of the COVID-19 pandemic on the Company and its tenants and borrowers. The Company can still elect to terminate the covenant relief period early, subject to certain conditions. The loans subject to the modifications continue to bear interest at the same higher rates during the covenant relief period as specified in the previous waiver described above, and will return to the original pre-waiver levels discussed above 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 amendment also continues to impose the additional restrictions on the Company discussed below during the covenant relief period. The Company is currently in process of negotiating a similar covenant waiver extension relating to its $340.0 million of private placement notes.
The June 29, 2020 and November 3, 2020 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 all or a portion of the covenant relief period, as follows: (i) a new minimum liquidity financial covenant during the covenant relief period was added in the initial amendment and increased in the subsequent amendment; (ii) compliance with the total-debt-to-total-asset-value and the maximum-unsecured-debt-to-unencumbered-asset-value financial covenants was suspended during the covenant relief period; (iii) compliance with the minimum unsecured interest coverage ratio and the minimum fixed charge ratio financial covenants was suspended for the period beginning on June 29, 2020 and ending on the earlier to occur of December 31, 2021 or the earlier termination of the covenant relief period; (iv) permanent amendments to the unsecured-debt-to-unencumbered-asset-value financial covenant 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 (v) permanent amendments to financial covenants to allow 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, payment of dividends or other distributions and stock repurchases, and maintenance of a minimum liquidity amount, in each case subject to certain exceptions. In addition, the amendments require the Company to cause certain of its key subsidiaries to guarantee the Company's obligations and pledge the equity interests of certain of those subsidiary guarantors upon the occurrence of certain events during the covenant relief period.
Subsequent to September 30, 2020, the Company's unsecured debt rating was downgraded to BB+ by both Fitch and Standard & Poor's. As a result of these downgrades, the Company is in the process of causing certain of its key subsidiaries to 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. If the Company's unsecured debt rating is further downgraded by Moody's, the Company will also be required to cause the equity owners of certain of those guarantor subsidiaries to pledge their equity interests in such guarantor subsidiaries to secure the Company's obligations under its bank credit facilities and its private placement notes.
In connection with the amendments on June 20, 2020, $0.8 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 three and nine months ended September 30, 2020. In addition, the Company paid $2.6 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 $1.6 million related to the unsecured revolving credit facility and included in other assets and $1.0 million related to the term loan and private placement notes and shown as a reduction of debt. In connection with the amendments on November 3, 2020, the Company expects to pay approximately $3.0 million in fees to existing lenders and third parties which will primarily be capitalized in deferred financing costs and amortized as part of the effective yield.
9. Unconsolidated Real Estate Joint Ventures
As of September 30, 2020 and December 31, 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 September 30, 2020 and December 31, 2019, the Company had equity investments of $28.9 million and $29.7 million, respectively, in these joint ventures.
The joint venture that holds the real property has a secured mortgage loan due April 1, 2022 with an initial balance of $61.2 million and a maximum availability of $85.0 million. The note can be extended for two additional one year periods upon the satisfaction of certain conditions. As of September 30, 2020, the joint venture had $62.3 million outstanding and total availability of $22.7 million to fund upcoming property renovations. Additionally, the Company has guaranteed the completion of the renovations in the amount of approximately $29.1 million, with $23.3 million remaining to fund at September 30, 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 a loss of $2.5 million and income of $0.7 million during the nine months ended September 30, 2020 and 2019, respectively, and received no distributions during the nine months ended September 30, 2020 and 2019 related to the equity investments in these joint ventures.
As of September 30, 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 important to the joint ventures and accordingly these investments are not consolidated. The Company's maximum exposure to loss at September 30, 2020, is its investment in the joint ventures of $28.9 million as well as the Company's guarantee of the estimated costs to complete renovations of approximately $23.3 million.
In addition, as of September 30, 2020 and December 31, 2019, the Company had equity investments of $0.7 million and $4.6 million, respectively, in unconsolidated joint ventures for three theatre projects located in China. During the nine months ended September 30, 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 using Level 3 inputs, based primarily on discounted cash flow projections. The Company recognized losses of $649 thousand and $140 thousand during the nine months ended September 30, 2020 and 2019, respectively, and received distributions of $112 thousand from its investment in these joint ventures for the nine months ended September 30, 2019. No distributions were received during the nine months ended September 30, 2020.
10. 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 $4.0 million and $1.1 million at September 30, 2020 and December 31, 2019, respectively, and derivative liabilities of $11.7 million and $4.5 million derivative liabilities at September 30, 2020 and December 31, 2019, respectively. The Company has not posted or received collateral with its derivative counterparties as of September 30, 2020 or December 31, 2019. See Note 11 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 September 30, 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 September 30, 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 as of September 30, 2020 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
Notional Amount (in millions)
|
|
Index
|
|
Maturity
|
4.0450%
|
(1)
|
$
|
116.7
|
|
|
USD LIBOR
|
|
February 7, 2022
|
4.0575%
|
(1)
|
116.7
|
|
|
USD LIBOR
|
|
February 7, 2022
|
4.0580%
|
(1)
|
116.6
|
|
|
USD LIBOR
|
|
February 7, 2022
|
4.2450%
|
(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 the Company amended its Consolidated Credit Agreement. The above fixed rates increased by 0.90% during the covenant relief period and subsequent to the Company's unsecured debt ratings being downgraded by one rating agency. The rates are scheduled to return to previous levels at the end of this period, subject to certain conditions.
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.
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 September 30, 2020, the Company estimates that during the twelve months ending September 30, 2021, $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 nine months ended September 30, 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 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.
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 September 30, 2020, the Company estimates that during the twelve months ending September 30, 2021, $0.1 million of gains will be reclassified from AOCI to other income.
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 September 30, 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.
Below is a summary of the effect of derivative instruments on the consolidated statements of changes in equity and income for the three and nine months ended September 30, 2020 and 2019.
Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2020 and 2019
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Description
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in AOCI on Derivative
|
$
|
123
|
|
|
$
|
(1,106)
|
|
|
$
|
(11,550)
|
|
|
$
|
(8,958)
|
|
Amount of (Expense) Income Reclassified from AOCI into Earnings (1)
|
(2,037)
|
|
|
174
|
|
|
(4,103)
|
|
|
1,352
|
|
Cross-Currency Swaps
|
|
|
|
|
|
|
|
Amount of (Loss) Gain Recognized in AOCI on Derivative
|
(243)
|
|
|
134
|
|
|
424
|
|
|
(342)
|
|
Amount of Income Reclassified from AOCI into Earnings (2)
|
13
|
|
|
135
|
|
|
455
|
|
|
426
|
|
|
|
|
|
|
|
|
|
Net Investment Hedges
|
|
|
|
|
|
|
|
Cross-Currency Swaps
|
|
|
|
|
|
|
|
Amount of (Loss) Gain Recognized in AOCI on Derivative
|
(3,827)
|
|
|
3,033
|
|
|
3,160
|
|
|
(1,863)
|
|
Amount of Income Recognized in Earnings (2) (3)
|
141
|
|
|
139
|
|
|
475
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Amount of (Loss) Gain Recognized in AOCI on Derivatives
|
$
|
(3,947)
|
|
|
$
|
2,061
|
|
|
$
|
(7,966)
|
|
|
$
|
(11,163)
|
|
Amount of (Expense) Income Reclassified from AOCI into Earnings
|
(2,024)
|
|
|
309
|
|
|
(3,648)
|
|
|
1,778
|
|
Amount of Income Recognized in Earnings
|
141
|
|
|
139
|
|
|
475
|
|
|
423
|
|
|
|
|
|
|
|
|
|
Interest expense, net in accompanying consolidated statements of (loss) income and comprehensive (loss) income
|
$
|
41,744
|
|
|
$
|
36,667
|
|
|
$
|
114,837
|
|
|
$
|
107,088
|
|
Other income in accompanying consolidated statements of (loss) income and comprehensive (loss) income
|
$
|
182
|
|
|
$
|
11,464
|
|
|
$
|
8,171
|
|
|
$
|
17,534
|
|
(1) Included in "Interest expense, net" in the accompanying consolidated statements of (loss) income and comprehensive (loss) income for the three and nine months ended September 30, 2020 and 2019.
(2) Included in "Other income" in the accompanying consolidated statements of (loss) income and comprehensive (loss) income for the three and nine months ended September 30, 2020 and 2019.
(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 September 30, 2020, the fair value of the Company's derivatives in a liability position related to these agreements was $11.7 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, after considering the right of offset of $10.8 million. As of September 30, 2020, the Company had not posted any collateral related to these agreements and was not in breach of any provisions in these agreements.
11. 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 values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the FASB's Fair Value Measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Although the Company 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 September 30, 2020, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives and therefore, classified its derivatives as Level 2 within the fair value reporting hierarchy.
The table below presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 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
September 30, 2020 and December 31, 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
|
September 30, 2020
|
|
|
|
|
|
|
|
|
Cross-Currency Swaps*
|
|
$
|
—
|
|
|
$
|
3,958
|
|
|
$
|
—
|
|
|
$
|
3,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Agreements**
|
|
$
|
—
|
|
|
$
|
(11,717)
|
|
|
$
|
—
|
|
|
$
|
(11,717)
|
|
December 31, 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 sheets.
** 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 nine months ended September 30, 2020, 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 Nine Months Ended September 30, 2020
(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
|
|
$
|
—
|
|
|
$
|
7,108
|
|
|
$
|
38,520
|
|
|
$
|
45,628
|
|
Operating lease right-of-use assets
|
|
—
|
|
|
—
|
|
|
12,953
|
|
|
12,953
|
|
Investment in joint ventures
|
|
—
|
|
|
—
|
|
|
771
|
|
|
771
|
|
As discussed further in Note 4, during the nine months ended September 30, 2020, the Company recorded impairment charges of $62.8 million, of which $47.8 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 two of its properties with purchase offers were classified as Level 2 of the fair value hierarchy and were measured at fair value as of September 30, 2020. Six properties, two of which included operating lease right-of-use assets, were measured at fair value as of June 30, 2020 and 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 9, during the nine months ended September 30, 2020, the Company recorded impairment charges $3.2 million related to its investment in joint ventures. Management estimated the fair value of these investments as of June 30, 2020, 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.
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 September 30, 2020 and December 31, 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 September 30, 2020, the Company had a carrying value of $362.0 million in fixed rate mortgage notes receivable outstanding, including related accrued interest and allowance for credit losses, with a weighted average interest rate of approximately 9.02%. 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 9.25%, management estimates the fair value of the fixed rate mortgage notes receivable to be approximately $393.2 million with an estimated weighted average market rate of 8.03% at September 30, 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 is estimated by discounting the future cash flows of each instrument using current market rates. At September 30, 2020, the Company had a carrying value of $1.2 billion in variable rate debt outstanding with a weighted average interest rate of approximately 2.22%. The carrying value of the variable rate debt outstanding approximated the fair value at September 30, 2020.
At December 31, 2019, the Company had a carrying value of $425.0 million in variable rate debt outstanding with a weighted average interest rate of approximately 2.75%. The carrying value of the variable rate debt outstanding approximated the fair value at December 31, 2019.
At September 30, 2020 and December 31, 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 10 for additional information related to the Company's interest rate swap agreements.
At September 30, 2020, the Company had a carrying value of $2.72 billion in fixed rate long-term debt outstanding with a weighted average interest rate of approximately 4.62%. Discounting the future cash flows for fixed rate debt using September 30, 2020 market rates of 5.00% to 5.68%, management estimates the fair value of the fixed rate debt to be approximately $2.58 billion with an estimated weighted average market rate of 5.44% at September 30, 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.
12. Earnings Per Share
The following table summarizes the Company’s computation of basic and diluted earnings per share (EPS) for the three and nine months ended September 30, 2020 and 2019 (amounts in thousands except per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
Nine Months Ended September 30, 2020
|
|
Income
(numerator)
|
|
Shares
(denominator)
|
|
Per Share
Amount
|
|
Income
(numerator)
|
|
Shares
(denominator)
|
|
Per Share
Amount
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(85,904)
|
|
|
|
|
|
|
$
|
(111,751)
|
|
|
|
|
|
Less: preferred dividend requirements
|
(6,034)
|
|
|
|
|
|
|
(18,102)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
$
|
(91,938)
|
|
|
74,613
|
|
|
$
|
(1.23)
|
|
|
$
|
(129,853)
|
|
|
76,456
|
|
|
$
|
(1.70)
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
$
|
(91,938)
|
|
|
74,613
|
|
|
|
|
$
|
(129,853)
|
|
|
76,456
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Share options
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
$
|
(91,938)
|
|
|
74,613
|
|
|
$
|
(1.23)
|
|
|
$
|
(129,853)
|
|
|
76,456
|
|
|
$
|
(1.70)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
|
Income
(numerator)
|
|
Shares
(denominator)
|
|
Per Share
Amount
|
|
Income
(numerator)
|
|
Shares
(denominator)
|
|
Per Share
Amount
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
8,809
|
|
|
|
|
|
|
$
|
103,694
|
|
|
|
|
|
Less: preferred dividend requirements
|
(6,034)
|
|
|
|
|
|
|
(18,102)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to common shareholders
|
$
|
2,775
|
|
|
77,632
|
|
|
$
|
0.04
|
|
|
$
|
85,592
|
|
|
76,169
|
|
|
$
|
1.12
|
|
Income from discontinued operations available to common shareholders
|
$
|
25,194
|
|
|
77,632
|
|
|
$
|
0.32
|
|
|
$
|
62,252
|
|
|
76,169
|
|
|
$
|
0.82
|
|
Net income available to common shareholders
|
$
|
27,969
|
|
|
77,632
|
|
|
$
|
0.36
|
|
|
$
|
147,844
|
|
|
76,169
|
|
|
$
|
1.94
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to common shareholders
|
$
|
2,775
|
|
|
77,632
|
|
|
|
|
$
|
85,592
|
|
|
76,169
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Share options
|
—
|
|
|
32
|
|
|
|
|
—
|
|
|
38
|
|
|
|
Income from continuing operations available to common shareholders
|
$
|
2,775
|
|
|
77,664
|
|
|
$
|
0.04
|
|
|
$
|
85,592
|
|
|
76,207
|
|
|
$
|
1.12
|
|
Income from discontinued operations available to common shareholders
|
$
|
25,194
|
|
|
77,664
|
|
|
$
|
0.32
|
|
|
$
|
62,252
|
|
|
76,207
|
|
|
$
|
0.82
|
|
Net income available to common shareholders
|
$
|
27,969
|
|
|
77,664
|
|
|
$
|
0.36
|
|
|
$
|
147,844
|
|
|
76,207
|
|
|
$
|
1.94
|
|
The additional 2.2 million common shares that would result from the conversion of the Company’s 5.75% Series C cumulative convertible preferred shares for both the three and nine months ended September 30, 2020 and 2019, and
the additional 1.7 million and 1.6 million common shares that would result from the conversion of the Company’s 9.0% Series E cumulative convertible preferred shares for the three and nine months ended September 30, 2020 and 2019, respectively, 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 periods presented. Options to purchase 117 thousand and 4 thousand common shares at per share prices ranging from $44.62 to $76.63 and $73.84 to $76.63 were outstanding for the three and nine months ended September 30, 2020 and 2019, respectively, 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 three and nine months ended September 30, 2020, the Company determined the performance and market conditions were not met, therefore, none of the 62 thousand contingently issuable performance shares were included in the computation of diluted earnings per share.
13. 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 nine months ended September 30, 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 September 30, 2020, there were 745,650 shares available for grant under the 2016 Equity Incentive Plan.
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
options
|
|
Option price
per share
|
|
Weighted avg.
exercise price
|
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 September 30, 2020
|
116,690
|
|
|
$
|
44.62
|
|
|
—
|
|
|
$
|
76.63
|
|
|
$
|
56.36
|
|
The weighted average fair value of options granted was $3.73 and $4.64 during the nine months ended September 30, 2020 and 2019, respectively. The intrinsic value of share options exercised was $22 thousand and $2.8 million for the nine months ended September 30, 2020 and 2019, respectively.
The following table summarizes outstanding and exercisable options at September 30, 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
|
|
1.6
|
|
|
|
27,215
|
|
1.6
|
|
|
50.00 - 59.99
|
|
31,710
|
|
3.8
|
|
|
|
29,793
|
|
3.5
|
|
|
60.00 - 69.99
|
|
53,609
|
|
5.7
|
|
|
|
50,719
|
|
4.4
|
|
|
70.00 - 76.63
|
|
4,156
|
|
7.3
|
|
|
|
2,148
|
|
6.8
|
|
|
|
|
116,690
|
|
4.3
|
$
|
56.36
|
|
$
|
—
|
|
|
109,875
|
|
3.5
|
$
|
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
|
(228,557)
|
|
|
67.76
|
|
|
|
Forfeited
|
(4,591)
|
|
|
67.63
|
|
|
|
Outstanding at September 30, 2020
|
487,739
|
|
|
$
|
68.46
|
|
|
1.06
|
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 $16.0 million and $22.7 million for the nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020, unamortized share-based compensation expense related to nonvested shares was $15.5 million.
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
|
—
|
|
Forfeited
|
—
|
|
Outstanding at September 30, 2020
|
61,615
|
|
The number of common shares issuable upon settlement of the performance shares granted during the nine months ended September 30, 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 September 30, 2020, unamortized share-based compensation expense related to nonvested performance shares was $2.2 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 stock 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 September 30, 2020, achievement of the performance condition for the performance shares granted during the nine months ended September 30, 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 nine months ended September 30, 2020, the Company accrued dividend equivalents expected to be paid on earned awards of $29 thousand.
Restricted Share Units
A summary of the Company’s restricted share unit 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
|
26,236
|
|
|
$
|
77.54
|
|
|
|
Granted
|
74,767
|
|
|
31.57
|
|
|
|
Vested
|
(26,236)
|
|
|
77.54
|
|
|
|
Outstanding at September 30, 2020
|
74,767
|
|
|
$
|
31.57
|
|
|
0.67
|
The holders of restricted share units receive dividend equivalents from the date of grant. At September 30, 2020, unamortized share-based compensation expense related to restricted share units was $1.6 million.
14. 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. 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 the three and nine months ended September 30, 2019.
The operating results relating to discontinued operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
Rental revenue
|
$
|
10,300
|
|
|
$
|
31,058
|
|
Mortgage and other financing income
|
5,206
|
|
|
12,421
|
|
Total revenue
|
15,506
|
|
|
43,479
|
|
Property operating expense
|
169
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs associated with loan refinancing or payoff
|
138
|
|
|
138
|
|
|
|
|
|
Interest expense, net
|
(27)
|
|
|
(344)
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
3,490
|
|
|
10,796
|
|
Income from discontinued operations before other items
|
11,736
|
|
|
32,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate
|
13,458
|
|
|
29,948
|
|
Income from discontinued operations
|
$
|
25,194
|
|
|
$
|
62,252
|
|
The cash flow information relating to discontinued operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
Depreciation and amortization
|
|
$
|
10,796
|
|
Acquisition of and investments in real estate and other assets
|
|
(4,702)
|
|
Proceeds from sale of real estate
|
|
165,014
|
|
|
|
|
Investment in mortgage notes receivable
|
|
(4,966)
|
|
Proceeds from mortgage notes receivable paydowns
|
|
18,419
|
|
Additions to properties under development
|
|
(21,498)
|
|
|
|
|
Non-cash activity:
|
|
|
Transfer of property under development to real estate investments
|
|
$
|
28,099
|
|
|
|
|
|
|
|
Interest cost capitalized
|
|
344
|
|
15. Operating Leases
The Company’s real estate investments are leased under operating leases. As described in Note 2, the Company adopted Topic 842 on January 1, 2019 and elected to not reassess its prior conclusions about lease classification. Accordingly, these lease arrangements continue to be classified as operating leases. In addition to its lessor arrangements on its real estate investments, as of September 30, 2020 and December 31, 2019, the Company was lessee in 57 operating ground leases, 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. In the event the tenant fails to pay the ground lease rent, the Company would be primarily responsible for the payment, assuming the Company does not sell or re-tenant the property.
The following table summarizes rental revenue, including sublease arrangements, and lease costs, including impairment charges on operating lease right-of-use assets, for the three and nine months ended September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
Classification
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Rental revenue
|
|
|
|
|
|
|
|
|
|
|
Operating leases (1)
|
|
Rental revenue
|
|
$
|
54,785
|
|
|
$
|
145,031
|
|
|
$
|
283,891
|
|
|
$
|
420,768
|
|
Sublease income - operating ground leases (2)
|
|
Rental revenue
|
|
$
|
806
|
|
|
$
|
5,931
|
|
|
$
|
4,274
|
|
|
$
|
17,489
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease costs
|
|
|
|
|
|
|
|
|
|
|
Operating ground lease cost
|
|
Property operating expense
|
|
$
|
6,015
|
|
|
$
|
6,407
|
|
|
$
|
18,515
|
|
|
$
|
18,410
|
|
Operating office lease cost
|
|
General and administrative expense
|
|
$
|
226
|
|
|
$
|
226
|
|
|
$
|
678
|
|
|
$
|
682
|
|
Operating lease right-of-use asset impairment charges (3)
|
|
Impairment charges
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,009
|
|
|
$
|
—
|
|
(1) During the three and nine months ended September 30, 2020, the Company wrote-off straight-line rent receivables totaling $20.4 million and $25.4 million, respectively, to straight-line rental revenue classified in rental revenue in the accompanying consolidated statements of (loss) income and comprehensive (loss) income. Additionally, during the three and nine months ended September 30, 2020, the Company wrote-off lease receivables from tenants totaling $22.8 million and $23.0 million, respectively, to minimum rent 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 three and nine months ended September 30, 2020, the Company wrote-off sub-lessor ground lease straight-line rent receivables totaling $3.5 million and $11.5 million, respectively, to straight-line rental revenue
classified in rental revenue in the accompanying consolidated statements of (loss) income and comprehensive (loss) income. Additionally, during both the three and nine months ended September 30, 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 nine months ended September 30, 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.
16. Segment Information
The Company groups its investments into two reportable operating 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 2019 presentation to conform to the current presentation.
The financial information summarized below is presented by reportable operating segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
As of September 30, 2020
|
|
Experiential
|
Education
|
Corporate/Unallocated
|
Consolidated
|
Total Assets
|
$
|
5,179,510
|
|
$
|
726,271
|
|
$
|
1,001,429
|
|
$
|
6,907,210
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
Experiential
|
Education
|
Corporate/Unallocated
|
Consolidated
|
Total Assets
|
$
|
5,307,295
|
|
$
|
730,165
|
|
$
|
540,051
|
|
$
|
6,577,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
Experiential
|
Education
|
Corporate/Unallocated
|
Consolidated
|
Rental revenue
|
$
|
40,270
|
|
$
|
15,321
|
|
$
|
—
|
|
$
|
55,591
|
|
Other income
|
14
|
|
13
|
|
155
|
|
182
|
|
Mortgage and other financing income
|
7,761
|
|
343
|
|
—
|
|
8,104
|
|
Total revenue
|
48,045
|
|
15,677
|
|
155
|
|
63,877
|
|
|
|
|
|
|
Property operating expense
|
13,011
|
|
550
|
|
198
|
|
13,759
|
|
Other expense
|
2,680
|
|
—
|
|
—
|
|
2,680
|
|
Total investment expenses
|
15,691
|
|
550
|
|
198
|
|
16,439
|
|
Net operating income (loss) - before unallocated items
|
32,354
|
|
15,127
|
|
(43)
|
|
47,438
|
|
|
|
|
|
|
Reconciliation to Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income:
|
General and administrative expense
|
|
|
(10,034)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
(41,744)
|
|
Transaction costs
|
|
|
|
(2,776)
|
|
Credit loss expense
|
|
|
|
(5,707)
|
|
Impairment charges
|
|
|
|
(11,561)
|
|
Depreciation and amortization
|
|
|
(42,059)
|
|
Equity in loss from joint ventures
|
|
|
(1,044)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(18,417)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(85,904)
|
|
|
|
|
|
|
Preferred dividend requirements
|
|
|
(6,034)
|
|
Net loss available to common shareholders of EPR Properties
|
$
|
(91,938)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Experiential
|
Education
|
Corporate/Unallocated
|
Consolidated
|
Rental revenue
|
$
|
133,620
|
|
$
|
17,342
|
|
$
|
—
|
|
$
|
150,962
|
|
Other income
|
11,190
|
|
—
|
|
274
|
|
11,464
|
|
Mortgage and other financing income
|
6,620
|
|
310
|
|
—
|
|
6,930
|
|
Total revenue
|
151,430
|
|
17,652
|
|
274
|
|
169,356
|
|
|
|
|
|
|
Property operating expense
|
13,338
|
|
937
|
|
219
|
|
14,494
|
|
Other expense
|
11,403
|
|
—
|
|
—
|
|
11,403
|
|
Total investment expenses
|
24,741
|
|
937
|
|
219
|
|
25,897
|
|
Net operating income - before unallocated items
|
126,689
|
|
16,715
|
|
55
|
|
143,459
|
|
|
|
|
|
|
Reconciliation to Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income:
|
General and administrative expense
|
|
|
(11,600)
|
|
Severance expense
|
|
|
(1,521)
|
|
|
|
|
|
Costs associated with loan refinancing or payoff
|
|
|
(38,269)
|
|
|
|
|
|
Interest expense, net
|
|
|
|
(36,667)
|
|
Transaction costs
|
|
|
|
(5,959)
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(41,644)
|
|
Equity in loss from joint ventures
|
|
|
(435)
|
|
Gain on sale of real estate
|
|
|
845
|
|
|
|
|
Income tax benefit
|
|
|
|
600
|
|
Discontinued operations:
|
|
|
|
|
Income from discontinued operations
|
|
|
11,736
|
|
Gain on sale of real estate from discontinued operations
|
|
13,458
|
|
Net income
|
|
|
34,003
|
|
Preferred dividend requirements
|
|
(6,034)
|
|
Net income available to common shareholders of EPR Properties
|
$
|
27,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
Experiential
|
Education
|
Corporate/Unallocated
|
Consolidated
|
Rental revenue
|
$
|
243,134
|
|
$
|
45,031
|
|
$
|
—
|
|
$
|
288,165
|
|
Other income
|
7,227
|
|
13
|
|
931
|
|
8,171
|
|
Mortgage and other financing income
|
23,913
|
|
1,000
|
|
—
|
|
24,913
|
|
Total revenue
|
274,274
|
|
46,044
|
|
931
|
|
321,249
|
|
|
|
|
|
|
Property operating expense
|
39,854
|
|
1,719
|
|
608
|
|
42,181
|
|
Other expense
|
15,012
|
|
—
|
|
—
|
|
15,012
|
|
Total investment expenses
|
54,866
|
|
1,719
|
|
608
|
|
57,193
|
|
Net operating income - before unallocated items
|
219,408
|
|
44,325
|
|
323
|
|
264,056
|
|
|
|
|
|
|
Reconciliation to Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income:
|
General and administrative expense
|
|
|
(31,454)
|
|
|
|
|
|
Costs associated with loan refinancing or payoff
|
|
|
(820)
|
|
|
|
|
|
Interest expense, net
|
|
|
|
(114,837)
|
|
Transaction costs
|
|
|
|
(4,622)
|
|
Credit loss expense
|
|
|
|
(10,383)
|
|
Impairment charges
|
|
|
(62,825)
|
|
Depreciation and amortization
|
|
|
(128,319)
|
|
Equity in loss from joint ventures
|
|
|
(3,188)
|
|
Impairment charges on joint ventures
|
|
|
(3,247)
|
|
Gain on sale of real estate
|
|
|
242
|
|
|
|
|
|
Income tax expense
|
|
|
(16,354)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(111,751)
|
|
Preferred dividend requirements
|
|
|
(18,102)
|
|
Net loss available to common shareholders of EPR Properties
|
$
|
(129,853)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Experiential
|
Education
|
Corporate/Unallocated
|
Consolidated
|
Rental revenue
|
$
|
386,907
|
|
$
|
51,350
|
|
$
|
—
|
|
$
|
438,257
|
|
Other income
|
16,684
|
|
—
|
|
850
|
|
17,534
|
|
Mortgage and other financing income
|
24,749
|
|
1,083
|
|
—
|
|
25,832
|
|
Total revenue
|
428,340
|
|
52,433
|
|
850
|
|
481,623
|
|
|
|
|
|
|
Property operating expense
|
41,274
|
|
2,689
|
|
679
|
|
44,642
|
|
Other expense
|
19,494
|
|
—
|
|
—
|
|
19,494
|
|
Total investment expenses
|
60,768
|
|
2,689
|
|
679
|
|
64,136
|
|
Net operating income - before unallocated items
|
367,572
|
|
49,744
|
|
171
|
|
417,487
|
|
|
|
|
|
|
Reconciliation to Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income:
|
General and administrative expense
|
|
|
(35,540)
|
|
Severance expense
|
|
|
(1,941)
|
|
|
|
|
|
Costs associated with loan refinancing or payoff
|
|
|
(38,269)
|
|
|
|
|
|
Interest expense, net
|
|
|
|
(107,088)
|
|
Transaction costs
|
|
|
|
(18,005)
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(116,436)
|
|
Equity in income from joint ventures
|
|
|
524
|
|
Gain on sale of real estate
|
|
|
457
|
|
|
|
|
Income tax benefit
|
|
|
|
2,505
|
|
Discontinued operations:
|
|
|
|
|
Income from discontinued operations
|
|
|
32,304
|
|
Gain on sale of real estate from discontinued operations
|
|
29,948
|
|
Net income
|
|
|
165,946
|
|
Preferred dividend requirements
|
|
(18,102)
|
|
Net income available to common shareholders of EPR Properties
|
$
|
147,844
|
|
17. Other Commitments and Contingencies
As of September 30, 2020, the Company had 18 development projects with commitments to fund an aggregate of approximately $125.9 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 September 30, 2020, the Company had three mortgage notes and notes receivable with commitments totaling approximately $23.7 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 September 30, 2020, the Company had two surety bonds outstanding totaling $31.6 million.
18. Subsequent Events
On November 3, 2020, the Company further amended its Consolidated Credit Agreement, which governs its unsecured revolving and unsecured term loan facilities. The amendment modified certain provisions and extended the waiver of the Company's obligation to comply with the covenants discussed under Note 8 through December 31, 2021 in light of the continuing financial and operational impacts of the COVID-19 pandemic on the Company and its tenants and borrowers. The Company can still elect to terminate the covenant relief period early, subject to certain conditions. The loans subject to the modifications continue to bear interest at the same higher rates during the covenant relief period as specified in the previous waiver obtained on June 29, 2020, 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 amendment also continues to impose the additional restrictions on the Company discussed under Note 8 during the covenant relief period; provided that (i) the limitation on investments and guarantees of indebtedness from October 1, 2020 to the end of the covenant relief period was set at $175.0 million (the limitation was previously $75.0 million from June 29, 2020 to December 31, 2020 and $50.0 million during the calendar quarter commencing on January 1, 2021); 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 (the limitation was previously $125.0 million from June 29, 2020 to December 31, 2020 and $50.0 million during the calendar quarter commencing on January 1, 2021). 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 unsecured revolving and unsecured term loan facilities and private placement notes was raised from $100.0 million to $150.0 million. The amendment also increased the amount of liquidity the Company and its subsidiaries is required to maintain during the covenant relief period from $250.0 million to $500.0 million. The Company is currently in process of negotiating a similar covenant waiver extension relating to its $340.0 million of private placement notes.
Subsequent to September 30, 2020, Fitch and Standard and Poor's downgraded the credit ratings for the Company's unsecured debt to BB+. As a result, the interest rate payable on the Company's outstanding private placement notes increased by 0.60%. If the Company's unsecured debt rating is further downgraded by Moody's, the interest rate spreads on the Company's outstanding borrowings under its unsecured revolving and unsecured term loan facilities would increase by an additional 0.35%. In addition, as a result of these downgrades, the Company is in the process of causing certain of its key subsidiaries to guarantee the Company's obligations under its unsecured revolving and unsecured term loan facilities, private placement notes and other outstanding senior unsecured notes in accordance with existing agreements with the holders of such indebtedness. If the Company's unsecured debt rating is further downgraded by Moody's, the Company will also be required to cause the equity owners of certain of those guarantor subsidiaries to pledge their equity interests in such guarantor subsidiaries to secure the Company's obligations under its unsecured revolving and unsecured term loan facilities and its private placement notes.