e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the transition period from                      to                     
Commission File Number: 1-13561
ENTERTAINMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
     
Maryland   43-1790877
(State or other jurisdiction   (I.R.S. Employer Identification No.)
of incorporation or organization)    
     
30 West Pershing Road, Suite 201    
Kansas City, Missouri   64108
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (816) 472-1700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ      No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o      No þ
At October 30, 2007, there were 28,084,091 Common Shares of beneficial interest outstanding.
 
 

 


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FORWARD LOOKING STATEMENTS
Certain statements contained or incorporated by reference herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements may refer to financial condition, results of operations, plans, objectives, future financial performance and business of the Company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans” “would,” “may” or other similar expressions in this Quarterly Report on Form 10-Q. In addition, references to our budgeted amounts are forward looking statements. These forward-looking statements represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. For further discussion of these factors see “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on February 28, 2007 and, to the extent applicable, our Quarterly Reports on Form 10-Q.
 
For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of any document incorporated by reference. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.

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TABLE OF CONTENTS
                 
            Page
PART I         4  
 
               
 
  Item 1.   Financial Statements     4  
 
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     26  
 
  Item 3.   Quantitative and Qualitative Disclosures About Market Risk     43  
 
  Item 4.   Controls and Procedures     44  
 
               
PART II         45  
 
               
 
  Item 1.   Legal Proceedings     45  
 
  Item 1A.   Risk Factors     45  
 
  Item 2.   Unregistered Sale of Equity Securities and Use of Proceeds     46  
 
  Item 3.   Defaults Upon Senior Securities     46  
 
  Item 4.   Submission of Matter to a Vote of Security Holders     46  
 
  Item 5.   Other Information     46  
 
  Item 6.   Exhibits     46  
 Certification
 Certification
 Certification
 Certification

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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
ENTERTAINMENT PROPERTIES TRUST
Consolidated Balance Sheets
(Dollars in thousands, except share data)
                 
    September 30, 2007     December 31, 2006  
    (Unaudited)          
Assets
               
 
               
Rental properties, net of accumulated depreciation of $168.2 million and $141.6 million at September 30, 2007 and December 31, 2006, respectively
  $ 1,643,446     $ 1,395,903  
Property under development
    27,366       19,272  
Mortgage notes and related accrued interest receivable
    277,447       76,093  
Investment in joint ventures
    2,312       2,182  
Cash and cash equivalents
    10,758       9,414  
Restricted cash
    10,571       7,365  
Intangible assets, net
    17,058       9,366  
Deferred financing costs, net
    10,000       10,491  
Accounts and notes receivable
    49,629       30,043  
Other assets
    13,768       11,150  
 
           
Total assets
  $ 2,062,355     $ 1,571,279  
 
           
 
               
Liabilities and Shareholders’ Equity
               
 
               
Liabilities:
               
Accounts payable and accrued liabilities
  $ 23,271     $ 16,480  
Common dividends payable
    20,279       18,204  
Preferred dividends payable
    5,611       3,110  
Unearned rents and interest
    4,358       1,024  
Long-term debt
    1,060,607       675,305  
 
           
Total liabilities
    1,114,126       714,123  
Minority interests
    18,584       4,474  
Shareholders’ equity:
               
Common Shares, $.01 par value; 50,000,000 shares authorized; and 27,477,084 and 27,153,411 shares issued at September 30, 2007 and December 31, 2006, respectively
    275       272  
Preferred Shares, $.01 par value; 25,000,000 shares authorized:
               
2,300,000 Series A shares issued at December 31, 2006; liquidation preference of $57,500,000
          23  
3,200,000 Series B shares issued at September 30, 2007 and December 31, 2006; liquidation preference of $80,000,000
    32       32  
5,400,000 Series C convertible shares issued at September 30, 2007 and December 31, 2006; liquidation preference of $135,000,000
    54       54  
4,600,000 Series D shares issued at September 30, 2007; liquidation preference of $115,000,000
    46        
Additional paid-in-capital
    948,888       883,639  
Treasury shares at cost: 793,676 and 675,487 common shares at September 30, 2007 and December 31, 2006, respectively
    (22,889 )     (15,500 )
Loans to shareholders
    (3,525 )     (3,525 )
Accumulated other comprehensive income
    32,644       12,501  
Distributions in excess of net income
    (25,880 )     (24,814 )
 
           
Shareholders’ equity
    929,645       852,682  
 
           
Total liabilities and shareholders’ equity
  $ 2,062,355     $ 1,571,279  
 
           
See accompanying notes to consolidated financial statements.

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ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except share data)
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2007     2006     2007     2006  
Rental revenue
  $ 48,148     $ 41,362     $ 136,703     $ 125,442  
Tenant reimbursements
    4,704       3,782       12,621       10,721  
Other income
    506       737       1,780       2,663  
Mortgage financing interest
    7,651       2,629       17,300       6,808  
 
                       
Total revenue
    61,009       48,510       168,404       145,634  
 
Property operating expense
    5,810       4,799       15,860       14,262  
Other expense
    1,048       897       2,590       2,903  
General and administrative expense
    3,023       2,253       9,083       10,030  
Costs associated with loan refinancing
                      673  
Interest expense, net
    16,085       12,234       41,669       35,179  
Depreciation and amortization
    9,881       7,855       27,269       23,092  
 
                       
 
                               
Income before gain on sale of land, equity in income from joint ventures, minority interest and discontinued operations
    25,162       20,472       71,933       59,495  
 
                               
Gain on sale of land
                      345  
Equity in income from joint ventures
    200       191       597       566  
Minority interest
    988             988        
 
                       
 
                               
Income from continuing operations
  $ 26,350     $ 20,663     $ 73,518     $ 60,406  
 
                               
Discontinued operations:
                               
Income from discontinued operations
          53       777       488  
Gain on sale of real estate
                3,240        
 
                       
 
                               
Net income
    26,350       20,716       77,535       60,894  
 
                               
Preferred dividend requirements
    (5,611 )     (2,916 )     (15,701 )     (8,747 )
Series A preferred share redemption costs
                (2,101 )      
 
                       
Net income available to common shareholders
  $ 20,739     $ 17,800     $ 59,733     $ 52,147  
 
                       
 
                               
Per share data:
                               
Basic earnings per share data:
                               
Income from continuing operations available to common shareholders
  $ 0.78     $ 0.67     $ 2.11     $ 1.98  
Income from discontinued operations
          0.01       0.15       0.02  
 
                       
Net income available to common shareholders
  $ 0.78     $ 0.68     $ 2.26     $ 2.00  
 
                       
 
                               
Diluted earnings per share data:
                               
Income from continuing operations available to common shareholders
  $ 0.77     $ 0.66     $ 2.07     $ 1.95  
Income from discontinued operations
                0.15       0.02  
 
                       
Net income available to common shareholders
  $ 0.77     $ 0.66     $ 2.22     $ 1.97  
 
                       
 
                               
Shares used for computation (in thousands):
                               
Basic
    26,432       26,298       26,378       26,093  
Diluted
    26,824       26,769       26,858       26,511  
 
                               
Dividends per common share
  $ 0.7600     $ 0.6875     $ 2.2800     $ 2.0625  
 
                       
See accompanying notes to consolidated financial statements.

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ENTERTAINMENT PROPERTIES TRUST
Consolidated Statement of Changes in Shareholders’ Equity
Nine Months Ended September 30, 2007
(Unaudited)
(Dollars in thousands, except share data)
                                                                                 
                                                            Accumulated              
                                    Additional                     other     Distributions        
    Common Stock     Preferred Stock     paid-in     Treasury     Loans to     comprehensive     in excess of        
    Shares     Par     Shares     Par     capital     shares     shareholders     income     net income     Total  
Balance at December 31, 2006
    27,153     $ 272       10,900     $ 109     $ 883,639     $ (15,500 )   $ (3,525 )   $ 12,501     $ (24,814 )   $ 852,682  
 
                                                                               
Shares issued to Trustees
    6                         354                               354  
Issuance of restricted shares, including restricted shares issued for payment of bonuses
    129       1                   1,334                               1,335  
Amortization of restricted shares
                            1,902                               1,902  
Share option expense
                            319                               319  
Foreign currency translation adjustment
                                              29,730             29,730  
Change in unrealized loss on derivatives
                                              (9,587 )           (9,587 )
Net income
                                                    77,535       77,535  
Purchase of 24,740 common shares for treasury in conjunction with vesting of employees’ restricted stock
                                  (1,448 )                       (1,448 )
Issuances of common shares in Dividend Reinvestment Plan
    8                         465                               465  
Issuance of preferred shares, net of costs of $3.9 million
                4,600       46       111,079                               111,125  
Redemption of Series A preferred shares
                (2,300 )     (23 )     (55,412 )                       (2,101 )     (57,536 )
Stock option exercises, net
    181       2                   5,208       (5,941 )                       (731 )
Dividends to common shareholders ($2.28 per share)
                                                    (60,799 )     (60,799 )
Dividends to Series A preferred shareholders ($0.9830 per share)
                                                    (2,261 )     (2,261 )
Dividends to Series B preferred shareholders ($1.4531 per share)
                                                    (4,650 )     (4,650 )
Dividends to Series C preferred shareholders ($1.0781 per share)
                                                    (5,822 )     (5,822 )
Dividends to Series D preferred shareholders ($0.6452 per share)
                                                    (2,968 )     (2,968 )
 
                                                           
 
                                                                               
Balance at September 30, 2007
    27,477     $ 275       13,200     $ 132     $ 948,888     $ (22,889 )   $ (3,525 )   $ 32,644     $ (25,880 )   $ 929,645  
 
                                                           
See accompanying notes to consolidated financial statements.

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ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2007     2006     2007     2006  
Net income
  $ 26,350     $ 20,716     $ 77,535     $ 60,894  
Other comprehensive income (loss):
                               
Foreign currency translation adjustment
    13,988       (221 )     29,730       5,819  
Change in unrealized loss on derivatives
    (7,802 )           (9,587 )      
 
                       
Comprehensive income
  $ 32,536     $ 20,495     $ 97,678     $ 66,713  
 
                       
See accompanying notes to consolidated financial statements.

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ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
                 
    Nine Months Ended September 30,  
    2007     2006  
Operating activities:
               
Net income
  $ 77,535     $ 60,894  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Minority interest in net income
    (988 )      
Gain on sale of land
          (345 )
Income from discontinued operations
    (4,017 )     (488 )
Costs associated with loan refinancing (non-cash portion)
          673  
Equity in income from joint ventures
    (597 )     (566 )
Distributions from joint ventures
    675       652  
Depreciation and amortization
    27,269       23,092  
Amortization of deferred financing costs
    2,125       2,049  
Share-based compensation expense to management and trustees
    2,423       4,456  
Increase in mortgage notes accrued interest receivable
    (10,392 )     (6,350 )
Increase in accounts receivable
    (2,377 )     (3,135 )
Increase in other assets
    (841 )     (2,050 )
Increase in accounts payable and accrued liabilities
    2,424       994  
Decrease in unearned rents
    (614 )     (864 )
 
           
Net operating cash provided by continuing operations
    92,625       79,012  
Net operating cash provided by discontinued operations
    835       587  
 
           
Net cash provided by operating activities
    93,460       79,599  
 
           
 
               
Investing activities:
               
Acquisition of rental properties and other assets
    (72,750 )     (63,282 )
Investment in consolidated joint ventures
    (31,291 )      
Net proceeds from sale of land
          591  
Additions to properties under development
    (28,755 )     (32,940 )
Investment in promissory note receivable
    (16,036 )     (3,500 )
Investment in mortgage notes receivable
    (177,621 )     (15,332 )
 
           
Net cash used in investing activities of continuing operations
    (326,453 )     (114,463 )
Net proceeds from sale of real estate from discontinued operations
    7,008        
 
           
Net cash used in investing activities
    (319,445 )     (114,463 )
 
           
 
               
Financing activities:
               
Proceeds from long-term debt facilities
    543,344       290,286  
Principal payments on long-term debt
    (295,067 )     (236,114 )
Deferred financing fees paid
    (1,417 )     (2,842 )
Net proceeds from issuance of common shares
    465       46,824  
Net proceeds from issuance of preferred shares
    111,125        
Redemption of preferred shares
    (57,536 )      
Impact of stock option exercises, net
    (731 )     75  
Purchase of common shares for treasury in conjunction with vesting of employees’ restricted stock
    (1,448 )     (919 )
Distributions paid to minority interests
    (144 )     (467 )
Dividends paid to shareholders
    (71,924 )     (60,889 )
 
           
Net cash provided by financing activities
    226,667       35,954  
Effect of exchange rate changes on cash
    662       39  
 
           
 
               
Net increase in cash and cash equivalents
    1,344       1,129  
Cash and cash equivalents at beginning of the period
    9,414       6,546  
 
           
Cash and cash equivalents at end of the period
  $ 10,758     $ 7,675  
 
           
Supplemental information continued on page 9.

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ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Continued from page 8.
                 
    Nine Months Ended September 30,
    2007   2006
Supplemental schedule of non-cash activity:
               
Acquisition of interest in joint venture assets in exchange for assumption of debt and other liabilities at fair value
  $ 136,029     $  
Transfer of property under development to rental property
  $ 21,203     $ 24,112  
Issuance of restricted shares, including restricted shares issued for payment of bonuses
  $ 8,756     $ 3,601  
 
               
Supplemental disclosure of cash flow information:
               
Cash paid during the period for interest
  $ 40,476     $ 34,121  
Cash paid during the period for income taxes
  $ 71     $ 150  
 
See accompanying notes to consolidated financial statements.
               

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ENTERTAINMENT PROPERTIES TRUST
Notes to Consolidated Financial Statements (Unaudited)
1. Organization
Description of Business
Entertainment Properties Trust (the Company) is a Maryland real estate investment trust (REIT) organized on August 29, 1997. The Company was formed to acquire and develop megaplex theatres, entertainment retail centers (centers generally anchored by an entertainment component such as a megaplex theatre and containing other entertainment-related properties), and destination recreational and specialty properties. The Company’s properties are located in the United States and Canada.
2. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. In addition, operating results for the nine-month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.
The Company consolidates certain entities if it is deemed to be the primary beneficiary in a variable interest entity (“VIE”), as defined in FIN No. 46(R), “Consolidation of Variable Interest Entities” (“FIN 46R”). The equity method of accounting is applied to entities in which the Company is not the primary beneficiary as defined in FIN46R, or does not have effective control, but can exercise influence over the entity with respect to its operations and major decisions.
The consolidated balance sheet as of December 31, 2006 has been derived from the audited consolidated balance sheet at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on February 28, 2007.
Revenue Recognition
Rents that are fixed and determinable are recognized on a straight-line basis over the minimum terms of the leases. Base rent escalation on leases that are dependent upon increases in the Consumer Price Index (CPI) is recognized when known. Straight-line rent receivable is included in accounts receivable and was $20.2 million and $16.4 million at September 30, 2007 and December 31, 2006, respectively. In addition, most of the Company’s tenants are subject to additional rents if gross revenues of the properties exceed certain thresholds defined in the lease agreements (percentage rents). Percentage rents are recognized at the time when specific triggering events occur as provided

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by the lease agreements. Percentage rents of $1.6 million and $1.3 million were recognized during the nine months ended September 30, 2007 and 2006, respectively. Lease termination fees are recognized when the related leases are canceled and the Company has no obligation to provide services to such former tenants. Termination fees of $4.1 million were recognized during the nine months ended September 30, 2006.
Concentrations of Risk
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (51%) of the megaplex theatre rental properties held by the Company (including joint venture properties) at September 30, 2007 as a result of a series of sale leaseback transactions pertaining to a number of AMC megaplex theatres. A substantial portion of the Company’s rental revenues (approximately $71.3 million, or 52%, and $70.0 million, or 56%, for the nine months ended September 30, 2007 and 2006, respectively) result from the rental payments by AMC under the leases, or its parent, AMC Entertainment, Inc. (AMCE), as the guarantor of AMC’s obligations under the leases. AMCE has publicly held debt and accordingly, its consolidated financial information is publicly available.
For the nine months ended September 30, 2007 and 2006, respectively, approximately $25.5 million, or 15%, and $24.2 million, or 17%, of total revenue was derived from the Company’s four entertainment retail centers in Ontario, Canada. For the nine months ended September 30, 2007 and 2006, respectively, approximately $34.0 million, or 20%, and $30.5 million, or 21%, of our total revenue was derived from the Company’s four entertainment retail centers in Ontario, Canada combined with the mortgage financing interest related to the Company’s mortgage note receivable held in Canada and initially funded on June 1, 2005. The Company’s wholly owned subsidiaries that hold the Canadian entertainment retail centers, third party debt and mortgage note receivable represent approximately $214.0 million or 23% and $161.0 million or 19% of the Company’s net assets as of September 30, 2007 and December 31, 2006, respectively.
Share-Based Compensation
Share-based compensation is issued to employees of the Company pursuant to the Annual Incentive Program and the Long-Term Incentive Plan, and to Trustees for their service to the Company. Prior to May 9, 2007, all common shares and options to purchase common shares were issued under the 1997 Share Incentive Plan. The 2007 Equity Incentive Plan was approved by shareholders at the May 9, 2007 annual meeting and this plan replaces the 1997 Share Incentive Plan. Accordingly, all common shares and options to purchase common shares granted on or after May 9, 2007 are issued under the 2007 Equity Incentive Plan.
The Company accounts for share based compensation under the Financial Accounting Standard (SFAS) No. 123R “Share-Based Payment.” Share based compensation expense consists of share option expense, amortization of restricted share grants and shares issued to Trustees for payment of their annual retainers. Share based compensation is included in general and administrative expense in the accompanying consolidated statements of income, and totaled $2.4 million and $4.5 million for the nine months ended September 30, 2007 and 2006, respectively.
Share Options
Share options are granted to employees pursuant to the Long-Term Incentive Plan and to Trustees for their service to the Company. The fair value of share options granted is estimated at the date of grant using the Black-Scholes option pricing model and vest either immediately or up to a period of 5 years. Share option expense for all options is recognized on a straight-line basis over the vesting period, except for those unvested options held by a retired executive which were fully expensed as of June 30, 2006.

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The expense related to share options included in the determination of net income for the nine months ended September 30, 2007 and 2006 was $319 thousand and $750 thousand (including $522 thousand in expense recognized related to unvested share options held by a retired executive at the time of his retirement), respectively. The following assumptions were used in applying the Black-Scholes option pricing model at the grant dates: risk-free interest rate of 4.8% and 4.8% to 5.0% for the nine months ended September 30, 2007 and 2006, respectively, dividend yield of 5.2% to 5.4% and 5.8% for the nine months ended September 30, 2007 and 2006, respectively, volatility factors in the expected market price of the Company’s common shares of 19.5% to 19.8% and 21.1% for the nine months ended September 30, 2007 and 2006, respectively, no expected forfeitures and an expected life of eight years.
Restricted Shares Issued to Employees
The Company grants restricted shares to employees pursuant to both the Annual Incentive Program and the Long-Term Incentive Plan. The Company amortizes the expense related to the restricted shares awarded to employees under the Long-Term Incentive Plan and the premium awarded under the restricted share alternative of the Annual Incentive Program on a straight-line basis over the future vesting period (usually three to five years), except for those unvested shares held by a retired executive which were fully expensed as of June 30, 2006.
Total expense recognized related to all restricted shares was $1.9 million and $3.6 million for the nine months ended September 30, 2007 and 2006, respectively. The expense of $3.6 million for the nine months ended September 30, 2006 includes $852 thousand in expense related to unvested shares held by a retired executive at the time of his retirement, and $1.7 million in expense related to unvested shares from prior years related to the Annual Incentive Program.
Shares Issued to Trustees
The Company issues shares to Trustees for payment of their annual retainers. This expense is amortized by the Company on a straight-line basis over the year of service by the Trustees. Total expense recognized related to shares issued to Trustees was $201 thousand and $121 thousand for the nine months ended September 30, 2007 and 2006, respectively.
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform to the current period presentation.
3. Rental Properties
The following table summarizes the carrying amounts of rental properties as of September 30, 2007 and December 31, 2006 (in thousands):
                 
    September 30, 2007     December 31, 2006  
Buildings and improvements
  $ 1,394,207     $ 1,189,676  
Furniture, fixtures & equipment
    20,956       8,147  
Land
    396,473       339,716  
 
           
 
    1,811,636       1,537,539  
 
               
Accumulated depreciation
    (168,190 )     (141,636 )
 
           
Total
  $ 1,643,446     $ 1,395,903  
 
           

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Depreciation expense on rental properties was $25.4 million and $21.5 million for the nine months ended September 30, 2007 and 2006, respectively.
4. Unconsolidated Real Estate Joint Ventures
At September 30, 2007, the Company had a 20.3% and 21.2% investment interest in two unconsolidated real estate joint ventures, Atlantic-EPR I and Atlantic-EPR II, respectively. The Company accounts for its investment in these joint ventures under the equity method of accounting.
The Company recognized income of $369 and $346 (in thousands) from its investment in the Atlantic-EPR I joint venture during the first nine months of 2007 and 2006, respectively. The Company also received distributions from Atlantic-EPR I of $417 and $398 (in thousands) during the first nine months of 2007 and 2006, respectively. Unaudited condensed financial information for Atlantic-EPR I is as follows as of and for the nine months ended September 30, 2007 and 2006 (in thousands):
                 
    2007   2006
Rental properties, net
  $ 28,762       29,406  
Cash
    141       141  
Long-term debt
    15,886       16,231  
Partners’ equity
    12,917       13,214  
Rental revenue
    3,237       3,174  
Net income
    1,717       1,619  
The Company recognized income of $228 and $220 (in thousands) from its investment in the Atlantic-EPR II joint venture during the first nine months of 2007 and 2006, respectively. The Company also received distributions from Atlantic-EPR II of $258 and $254 (in thousands) during the first nine months of 2007 and 2006, respectively. Unaudited condensed financial information for Atlantic-EPR II is as follows as of and for the nine months ended September 30, 2007 and 2006 (in thousands):
                 
    2007   2006
Rental properties, net
  $ 22,534       22,995  
Cash
    100       116  
Long-term debt
    13,662       13,947  
Note payable to Entertainment Properties Trust
    117       117  
Partners’ equity
    8,657       8,838  
Rental revenue
    2,083       2,083  
Net income
    985       960  
The joint venture agreements for Atlantic-EPR I and Atlantic-EPR II allow the Company’s partner, Atlantic of Hamburg, Germany (Atlantic), to exchange up to a maximum of 10% of its ownership interest per year in each of the joint ventures for common shares of the Company or, at the discretion of the Company, the cash value of those shares as defined in each of the joint venture agreements. Atlantic gave the Company notice that effective September 28, 2007 they wanted to exchange a portion of their ownership in Atlantic-EPR I and Atlantic-EPR II. In October of 2007, the Company paid Atlantic cash of $71 and $137 (in thousands) in exchange for additional ownership of .3% and 1.2 % for Atlantic-EPR I and Atlantic-EPR II, respectively. This exchange did not impact partners’ equity in either Atlantic-EPR I or Atlantic-EPR II.

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5. Equity Incentive Plans
All grants of common shares and options to purchase common shares were issued under the 1997 Share Incentive Plan prior to May 9, 2007, and under the 2007 Equity Incentive Plan on and after May 9, 2007. Under the 2007 Equity Incentive Plan, an aggregate of 950,000 common shares and options to purchase common shares, subject to adjustment in the event of certain capital events, may be granted. At September 30, 2007, there were 934,240 shares available for grant under the 2007 Equity Incentive Plan.
Share Options
Share options granted under both the 1997 Share Incentive Plan and the 2007 Equity Incentive Plan have exercise prices equal to the fair market value of a common share at the date of grant. The options may be granted for any reasonable term, not to exceed 10 years, and for employees typically become exercisable at a rate of 20% per year over a five—year period. For Trustees, share options become exercisable upon issuance, however, the underlying shares cannot be sold within a one year period subsequent to exercise. 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:
                         
                    Weighted
                    Average
    Number of   Option Price   Exercise
    Shares   Per Share   Price
Outstanding at December 31, 2006
    981,673     $ 14.00 - $43.75     $ 28.33  
Exercised
    (181,620 )     16.05 -   43.75       28.68  
Granted
    106,945       60.03 -   65.50       64.15  
 
                       
Outstanding at September 30, 2007
    906,998       14.00 -   65.50       32.49  
 
                       
The weighted average fair value of options granted was $7.91 and $5.19 during the nine months ended September 30, 2007 and 2006, respectively. At September 30, 2007 and December 31, 2006, stock-option expense to be recognized in future periods was $1.2 million and $648 thousand, respectively. During the nine months ended September 30, 2007, the intrinsic value of stock options exercised was $6.1 million.
The following table summarizes outstanding options at September 30, 2007:
                                 
Exercise   Options   Weighted avg.   Weighted avg.   Aggregate intrinsic
price range   outstanding   life remaining   exercise price   value (in thousands)
$14.00 - 19.99
    190,141       2.9                  
20.00 - 29.99
    310,377       5.2                  
30.00 - 39.99
    96,628       6.5                  
40.00 - 49.99
    202,907       8.2                  
50.00 - 59.99
                           
60.00 - 65.50
    106,945       9.3                  
 
                               
 
    906,998       6.0     $ 32.49     $ 18,037  
 
                               

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The following table summarizes exercisable options at September 30, 2007:
                                 
Exercise   Options   Weighted avg.   Weighted avg.   Aggregate intrinsic
price range   outstanding   life remaining   exercise price   value (in thousands)
$14.00 - 19.99
    190,141       2.9                  
20.00 - 29.99
    244,837       5.2                  
30.00 - 39.99
    55,195       6.5                  
40.00 - 49.99
    50,237       8.2                  
 
                               
 
    540,410       4.8     $ 24.01     $ 14,476  
 
                               
Restricted Shares
A summary of the Company’s restricted share activity and related information is as follows:
                         
            Weighted   Weighted
            Average   Average
    Number of   Grant Date   Life
    Shares   Fair Value   Remaining
Outstanding at December 31, 2006
    169,554     $ 39.50          
Granted
    128,563       65.17          
Vested
    (59,564 )     37.61          
 
                       
Outstanding at September 30, 2007
    238,553       53.80       1.58  
 
                       
The holders of restricted shares have voting rights and receive dividends from the date of grant. These shares vest ratably over a period of three to five years. At September 30, 2007 and December 31, 2006, unamortized share-based compensation expense related to non-vested restricted shares was $8.1 million and $2.9 million, respectively. The fair value of the restricted shares that vested during the nine months ended September 30, 2007 was $3.5 million.
6. City Center at White Plains Transaction
On May 8, 2007, the Company acquired Class A shares in both LC White Plains Retail LLC and LC White Plains Recreation LLC in exchange for $10.5 million of which $10.2 million was paid at closing. These two entities (together “the White Plains LLCs”) own City Center at White Plains, a 390 thousand square foot entertainment retail center in White Plains, New York that is anchored by a 15 screen megaplex theatre operated by National Amusements. The Class A shares have an initial capital account balance of $10.5 million, a 66.67% voting interest and a 10% preferred return, as further described below.
Cappelli Group, LLC holds the Class B shares in the White Plains LLCs. The Class B shares have an initial capital account balance of $25 million and a 9% preferred return as further described below. City Center Group LLC holds the Class C and Class D shares in the White Plains LLCs. The Class C and Class D shares each have an initial capital account balance of $5 million, the Class C shares have a 33.33% voting interest and preferred returns for each of these classes are further described below.
As detailed in the operating agreements of the White Plains LLCs, cash flow is distributed as follows: first to the Company to allow for a preferred return of 10% on the original capital account of its Class A shares, or $1.05 million, second to Cappelli Group to allow for a preferred return of 9% on the

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original capital account of its Class B shares, or $2.25 million, third to City Center Group LLC to allow for a preferred return of 10% on the original capital account of its Class C shares, or $0.5 million, fourth to City Center Group LLC to allow for a preferred return of 10% on the original capital account of its Class D shares, or $0.5 million. The operating agreements provide several other priorities of cash flow related to return on and return of subsequent capital contributions that rank below the above four preferred returns. The final priority calls for the remaining cash flow to be distributed 66.67% to the Company’s Class A shares and 33.33% to City Center Group LLC’s Class C shares. If the cash flow of the White Plains LLCs is not sufficient to pay any of the preferred returns described above, the preferred returns remain undistributed, but are due upon a liquidation or refinancing event. Upon liquidation or refinancing, after all undistributed preferred returns and return of capital accounts are paid, any remaining cash is distributed 66.67% to the Company and 33.33% to City Center Group LLC.
Additionally, the Company loaned $20 million to Cappelli Group, LLC which is secured by the Cappelli Group, LLC’s Class B shares of the White Plains LLCs. The note has a stated maturity of May 8, 2027 and bears interest at the rate of 10%. Cappelli Group, LLC is only required to make cash interest payments on the $20 million note payable to the extent that they have received cash distributions on their Class B shares of the White Plains LLCs. The White Plains LLC’s are required to pay Cappelli Group, LLC’s Class B distributions directly to the Company to the extent there is accrued interest receivable on the $20 million note.
The Cappelli Group, LLC as well as the White Plains LLCs are VIEs and the Company has been determined to be the primary beneficiary of each of these VIEs. As further discussed below, the financial statements of these VIEs have been consolidated into the Company’s September 30, 2007 financial statements. The $20 million note between the Company and Cappelli Group, LLC and the related interest income and expense have been eliminated. Cappelli Group’s income statement for the nine months ended September 30, 2007 is presented below (in thousands):
         
Equity in losses of White Plains LLCs
  $ 177  
Interest expense
    811  
 
     
Net loss
  $ 988  
 
     
Pursuant to FIN 46R, the Company consolidated Cappelli Group LLC’s net loss of $988 thousand and recognized a corresponding amount of minority interest income for the nine months ended September 30, 2007 since the Company’s only variable interest in Cappelli Group LLC is debt and Cappelli Group LLC has sufficient equity to cover its cumulative net loss subsequent to the May 8, 2007 loan transaction with the Company. The Cappelli Group LLC’s equity, after the current year loss allocation, is $4.0 million and is reflected as minority interest in the Company’s consolidated balance sheet at September 30, 2007.
The Company also consolidated the net loss of the White Plains LLCs of $267 thousand for the nine months ended September 30, 2007 of which $90 thousand and $177 thousand was allocated to the Company and to Cappelli Group, LLC, respectively, based on relative cash distributions received from the White Plains LLCs. The $177 thousand of net loss allocated to Cappelli Group LLC has been eliminated in consolidation against Cappelli Group LLC’s corresponding equity in losses of the White Plains LLCs.
The following table shows the details of the Company’s investment and a detail of the net assets recorded in the consolidated balance sheet as of the May 8, 2007 acquisition date:

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Cash paid for Class A Shares of the White Plains LLCs
  $ 10,475  
Cash advanced to Capelli Group, LLC
    20,000  
Other cash acquistion related costs
    816  
 
     
 
       
Total investment
  $ 31,291  
 
     
 
       
Rental properties
  $ 158,221  
In-place leases
    7,595  
Other assets
    1,504  
Mortgage notes payable
    (119,740 )
Unearned rents
    (1,032 )
Accounts payable and accrued liabilities
    (14 )
Minority interest
    (15,243 )
 
     
 
       
Total net assets acquired
  $ 31,291  
 
     
As of the May 8, 2007 acquisition date, the White Plains LLCs had real estate assets with a fair value of approximately $166.0 million (per a third party appraisal) which included $7.6 million of in-place leases and $0.5 million of net other assets. Amortization expense related to these in-place leases is computed using the straight-line method and was $247 thousand and $412 thousand for the three and nine months ended September 30, 2007, respectively. The weighted average remaining life of these in-place leases at September 30, 2007 was 10.0 years.
The outstanding mortgage debt on the property at the date of the acquisition totaled $119.7 million and consisted of two mortgage notes payable which approximated their fair values. The mortgage note payable to Union Labor Life Insurance Company had a balance of $114.7 million at the date of the acquisition. This note bears interest at 5.6% and requires monthly principal payments of $42 thousand plus interest through October 2009, and $83 thousand plus interest from November 2009 through the maturity date, with a final principal payment due at maturity on October 7, 2010 of $113.5 million. This note can be extended for an additional two to four years at the option of the borrower upon meeting certain conditions outlined in the loan agreement. The mortgage note payable to Empire State Department Corporation (ESDC) had a balance of $5.0 million at the date of the acquisition. This note bears interest at 5.0%, requires monthly payments of interest only and provides for the conversion from construction loan to a ten year permanent loan upon completion of construction. However, as of September 30, 2007, ESDC had not yet completed such conversion.
The Company has also committed to provide a $10.0 million revolving line of credit to City Center Group LLC. This note bears interest at 10%, requires monthly interest payments, and matures on May 8, 2017. The note is secured by rights to the economic interest of the Class C and Class D interests in the White Plains LLCs, and is personally guaranteed by the two shareholders of City Center Group LLC. The Company had advanced $6.0 million against this note at September 30, 2007.

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7. Earnings Per Share
The following table summarizes the Company’s common shares used for computation of basic and diluted earnings per share for the three and nine months ended September 30, 2007 and 2006 (in thousands except per share information):
                                                 
    Three Months Ended September 30, 2007     Nine Months Ended September 30, 2007  
    Income     Shares     Per Share     Income     Shares     Per Share  
    (numerator)     (denominator)     Amount     (numerator)     (denominator)     Amount  
Basic earnings:
                                               
Income from continuing operations
  $ 26,350       26,432     $ 1.00     $ 73,518       26,378     $ 2.79  
Preferred dividend requirements
    (5,611 )           (0.22 )     (15,701 )           (0.60 )
Series A preferred share redemption costs
                      (2,101 )           (0.08 )
 
                                   
Income from continuing operations available to common shareholders
    20,739       26,432       0.78       55,716       26,378       2.11  
Effect of dilutive securities:
                                               
Share options
          317       (0.01 )           383       (0.03 )
Non-vested common share grants
          75                   97       (0.01 )
 
                                   
Diluted earnings: Income from continuing operations
  $ 20,739       26,824     $ 0.77     $ 55,716       26,858     $ 2.07  
 
                                   
 
                                               
Income from continuing operations available to common shareholders
  $ 20,739       26,432     $ 0.78     $ 55,716       26,378       2.11  
Income from discontinued operations
                      4,017             0.15  
 
                                   
Income available to common shareholders
  $ 20,739       26,432     $ 0.78     $ 59,733       26,378       2.26  
Effect of dilutive securities:
                                               
Share options
          317       (0.01 )           383       (0.03 )
Non-vested common share grants
          75                   97       (0.01 )
 
                                   
Diluted earnings
  $ 20,739       26,824     $ 0.77     $ 59,733       26,858     $ 2.22  
 
                                   

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    Three Months Ended September 30, 2006     Nine Months Ended September 30, 2006  
    Income     Shares     Per Share     Income     Shares     Per Share  
    (numerator)     (denominator)     Amount     (numerator)     (denominator)     Amount  
Basic earnings:
                                               
Income from continuing operations
  $ 20,663       26,298     $ 0.79     $ 60,406       26,093     $ 2.32  
Preferred dividend requirements
    (2,916 )           (0.12 )     (8,747 )           (0.34 )
Series A preferred share redemption costs
                                   
 
                                   
Income from continuing operations available to common shareholders
    17,747       26,298       0.67       51,659       26,093       1.98  
Effect of dilutive securities:
                                               
Share options
          369                   322       (0.02 )
Non-vested common share grants
          102       (0.01 )           96       (0.01 )
 
                                   
Diluted earnings: Income from continuing operations
  $ 17,747       26,769     $ 0.66     $ 51,659       26,511     $ 1.95  
 
                                   
 
                                               
Income from continuing operations available to common shareholders
  $ 17,747       26,298     $ 0.67     $ 51,659       26,093       1.98  
Income from discontinued operations
    53             0.01       488             0.02  
 
                                   
Income available to common shareholders
  $ 17,800       26,298     $ 0.68     $ 52,147       26,093       2.00  
Effect of dilutive securities:
                                               
Share options
          369       (0.01 )           322       (0.02 )
Non-vested common share grants
          102       (0.01 )           96       (0.01 )
 
                                   
Diluted earnings
  $ 17,800       26,769     $ 0.66     $ 52,147       26,511     $ 1.97  
 
                                   
The additional 1.9 million common shares that would result from the conversion of the Company’s Series C convertible preferred shares and the corresponding add-back of the preferred dividends declared on those shares are not included in the calculation of diluted earnings per share for the three and nine months ended September 30, 2007 because the effect is antidilutive.
8. Investments in Mortgage Notes
On March 13, 2007, a wholly-owned subsidiary of the Company entered into a secured mortgage loan agreement for $93.0 million with SVV I, LLC for the development of a water-park anchored entertainment village. The Company advanced $85.6 million during the nine months ended September 30, 2007 under this agreement. The secured property is approximately 368 acres of development land located in Kansas City, Kansas. The carrying value of this mortgage note receivable at September 30, 2007 was $86.2 million, including related accrued interest receivable of $661 thousand. This loan is guaranteed by the Schlitterbahn New Braunfels Group (Bad-Schloss, Inc., Waterpark Management, Inc., Golden Seal Investments, Inc., Liberty Partnership, Ltd., Henry Condo I, Ltd., and Henry-Walnut, Ltd.) and has a maturity date of March 12, 2008. Monthly interest payments are made to the Company and the unpaid principal balance bears interest at LIBOR plus 3.5%. SVV I, LLC is a VIE, but it was determined that the Company was not the primary beneficiary

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of this VIE. The Company’s maximum exposure to loss associated with SVVI, LLC is limited to the Company’s outstanding mortgage note and related accrued interest receivable.
On April 4, 2007, a wholly-owned subsidiary of the Company entered into two secured first mortgage loan agreements totaling $73.5 million with Peak Resorts, Inc. (“Peak”). The Company advanced $56.6 million during the nine months ended September 30, 2007 under these agreements. The loans are secured by two ski resorts located in Vermont and New Hampshire. Mount Snow is approximately 2,378 acres and is located in both West Dover and Wilmington, Vermont. Mount Attitash is approximately 1,250 acres and is located in Bartlett, New Hampshire. The carrying value of these mortgage notes at September 30, 2007 was $56.6 million with no related accrued interest receivable. The loans have a maturity date of April 3, 2027 and the unpaid principal balance initially bears interest at 10%. These notes currently require Peak to fund debt service reserves annually by April 30th for the amount of the upcoming year’s debt service. Monthly interest payments are transferred to the Company from these debt service reserves which had a balance of $2.9 million at September 30, 2007.
Additionally, on April 4, 2007, a wholly-owned subsidiary of the Company entered into a third secured first mortgage loan agreement for $25.0 million with Peak for the further development of Mount Snow. The loan is secured by approximately 696 acres of development land. The Company advanced the full amount of the loan during April of 2007. The carrying value of this mortgage note receivable at September 30, 2007 was $26.3 million, including related accrued interest receivable of $1.3 million. The loan has a maturity date of April 2, 2010 at which time the unpaid principal balance and all accrued interest is due. The unpaid principal balance bears interest at 10%.
During the three months ended September 30, 2007, a wholly-owned subsidiary of the Company invested an additional $3.4 million Canadian ($3.2 million U.S.) in the mortgage note receivable from Metropolis Limited Partnership (the Partnership) related to the construction of Toronto Life Square, a 13 level entertainment retail center in downtown Toronto. On October 19, 2007, the Company advanced $6.2 million Canadian ($6.4 million U.S.) to the Partnership and the Company anticipates advancing an additional $7 to $12 million Canadian prior to the end of 2008. Consistent with the previous advances on this project, each advance will have a five year stated term and bear interest at 15%. A bank has agreed to provide the Partnership first mortgage construction financing of up to $122 million Canadian, and it is anticipated that the project will be completed in 2008 at a total cost of approximately $315 million Canadian.
Additionally, during the three months ended September 30, 2007, a wholly-owned subsidiary of the Company posted additional irrevocable stand-by letters of credit related to the Toronto Life Square project. As of October 31, 2007, the letters of credit related to this project totaled $13.2 million, of which at least $5 million is expected to be drawn upon and added to the Company’s mortgage note receivable by May 31, 2008. The remaining letters of credit are expected to be cancelled or drawn upon during 2008 in conjunction with the completion and permanent financing of the Toronto Life Square project. Interest accrues on these outstanding letters of credit at a rate of 12% (15% if drawn upon). The Company also received an origination fee of $250 thousand Canadian ($237 thousand U.S.) in connection with this financing activity, and the fee is being amortized over the remaining term of the loan.
9. Mortgage Notes Payable
On February 21, 2007, a wholly-owned subsidiary of the Company obtained a non-recourse mortgage loan of $11.6 million. This mortgage is secured by a theatre property located in Biloxi, Mississippi.

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The mortgage loan bears interest at 6.06%, matures on March 1, 2017 and requires monthly principal and interest payments of $75 thousand with a final principal payment at maturity of $9.0 million.
On March 23, 2007, a wholly-owned subsidiary of the Company obtained a non-recourse mortgage loan of $11.9 million. This mortgage is secured by a theatre property located in Fresno, California. The mortgage loan bears interest at 6.07%, matures on April 6, 2017 and requires monthly principal and interest payments of $77 thousand with a final principal payment at maturity of $9.2 million.
On April 18, 2007, a wholly-owned subsidiary of the Company obtained three non-recourse mortgage loans totaling $20.3 million. Each of these mortgages are secured by a theatre property, bear interest at a rate of 5.95% per year, and mature on May 1, 2017. These mortgages require monthly principal and interest payments totaling $130 thousand with final principal payments at maturity totaling $15.8 million.
On April 19, 2007, a wholly-owned subsidiary of the Company obtained two non-recourse mortgage loans totaling $34.7 million. Each of these mortgages are secured by a theatre property, bear interest at a rate of 5.73% per year, and mature on May 1, 2017. These mortgages require monthly principal and interest payments totaling $218 thousand with final principal payments at maturity totaling $26.7 million.
On July 30, 2007, a wholly-owned subsidiary of the Company obtained two non-recourse mortgage loans totaling $28.0 million. Each of these mortgages are secured by a theatre property located in Chattanooga, Tennessee and Leawood, Kansas, bear interest at a rate of 5.86% per year, and mature on August 1, 2017. These mortgages require monthly principal and interest payments totaling $178 thousand with final principal payments at maturity totaling $21.7 million.
On September 19, 2007, a wholly-owned subsidiary of the Company obtained a non-recourse mortgage loan of $26.2 million. This mortgage is secured by a theatre property located in Houston, Texas. The mortgage loan bears interest at 6.57%, matures on October 1, 2012, and requires monthly principal and interest payments of $196 thousand with a final principal payment at maturity of $22.7 million.
On September 24, 2007, a wholly-owned subsidiary of the Company obtained a non-recourse mortgage loan of $22.2 million. This mortgage is secured by a theatre property located in Dallas, Texas. The mortgage loan bears interest at 6.73%, matures on October 1, 2012, and requires monthly principal and interest payments of $169 thousand with a final principal payment at maturity of $19.3 million.
The net proceeds from all of the above mortgage loans were used to pay down the Company’s unsecured revolving credit facility.
10. Amendment of Unsecured Revolving Credit Facility
On April 18, 2007, the Company amended its unsecured revolving credit facility. The amendment allows additional assets, subject to certain limitations, to be included in the Company’s borrowing base, and provides a more favorable valuation of the Company’s megaplex theatres and entertainment related retail assets in the calculation of the borrowing base and the leverage ratio. Additionally, the amendment relaxes the covenants that limit the Company’s investment in certain types of assets, raises its capacity to issue letters of credit and provides the Company with the flexibility to incur other unsecured recourse indebtedness, subject to certain limitations, beyond the unsecured revolving

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credit facility. The size, term and pricing of the unsecured revolving credit facility were not impacted by the amendment.
11. Property Acquisitions and Disposition
On April 30, 2007, a wholly-owned subsidiary of the Company purchased a 35 acre vineyard and winery facility in Hopland, California, and simultaneously leased this property to Rb Wine Associates, LLC. The acquisition price for the property was approximately $5.9 million and it is leased under a long-term triple-net lease. Subsequent to the initial acquisition, the Company has invested an additional $3.7 million in this project.
During the three months ended June 30, 2007, a wholly-owned subsidiary of the Company completed development of a megaplex theatre property located in Panama City, Florida. The Grand 16 Theatre at Pier Park is operated by Southern Theatres and was completed for a total development cost (including land and building) of approximately $17.6 million. This theatre is leased under a long-term triple-net lease.
On June 7, 2007, a wholly-owned subsidiary of the Company sold a parcel that included two leased properties adjacent to the Company’s megaplex theatre in Pompano, Florida and the related development rights to a developer group for $7.7 million. Accordingly, the Company recognized a gain on sale of real estate of $3.2 million and recognized development fees of $0.7 million during the three months ended June 30, 2007. For further detail on this disposition, see Note 15 to the consolidated financial statements in this Form 10-Q.
On August 1, 2007, a wholly-owned subsidiary of the Company purchased a 60 acre vineyard and winery facility in Paso Robles, California, and simultaneously leased this property to Sapphire Wines, LLC. The acquisition price for the property was approximately $21.0 million and it is leased under a long-term triple-net lease. Additionally, on August 1, 2007, a wholly-owned subsidiary of the Company entered into a loan agreement for $5.0 million with Sapphire Wines, LLC. The loan has a maturity date of February 1, 2008 at which time the unpaid principal balance is due. The unpaid principal balance bears interest at 9% and is payable monthly.
On August 14, 2007, a wholly-owned subsidiary of the Company purchased the land and winery facilities associated with three vineyards. The total purchase price consisted of approximately 225 acres of land and 72 thousand square feet of winery facilities located in Pope Valley, Lockeford, and Clements, California. The properties were simultaneously leased to CE2V Winery, LLC, Lockeford Winery, LLC, Crystal Valley Cellars, LLC and Cosentino Winery LLC. The acquisition price for the property was approximately $20.5 million and it is leased under a long-term triple-net lease.
During the three months ended September 30, 2007, a wholly-owned subsidiary of the Company completed development of a megaplex theatre property located in Kalispell, Montana. The Stadium 14 Cinema is operated by Signature Theatres and was completed for a total development cost (including land and building) of approximately $9.8 million. This theatre is leased under a long-term triple-net lease.
12. Issuance of Series D Preferred Shares
On May 25, 2007, the Company issued 4.6 million 7.375% Series D Cumulative Redeemable Preferred Shares (“Series D Preferred Shares”) in a registered public offering for net proceeds of approximately $111.1 million, after expenses. The Company will pay cumulative dividends on the

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Series D Preferred Shares from the date of original issuance in the amount of $1.844 per share each year, which is equivalent to 7.375% of the $25 liquidation preference per share. Dividends on the Series D Preferred Shares are payable quarterly in arrears, and were first payable on July 16, 2007 with a pro-rated quarterly payment of $0.1844 per share. The Company may not redeem the Series D Preferred Shares before May 25, 2012, except in limited circumstances to preserve the Company’s REIT status. On or after May 25, 2012, the Company may, at its option, redeem the Series D Preferred Shares in whole at any time or in part from time to time, by paying $25 per share, plus any accrued and unpaid dividends up to and including the date of redemption. The Series D Preferred Shares generally have no stated maturity, will not be subject to any sinking fund or mandatory redemption, and are not convertible into any of the Company’s other securities. Owners of the Series D Preferred Shares generally have no voting rights, except under certain dividend defaults. The net proceeds from this offering were used to redeem the Company’s 9.50% Series A Cumulative Redeemable Preferred Shares and to pay down the Company’s unsecured revolving credit facility.
13. Redemption of Series A Preferred Shares
On May 29, 2007, the Company completed the redemption of all 2.3 million outstanding 9.50% Series A Cumulative Redeemable Preferred Shares. The shares were redeemed at a redemption price of $25.39 per share. This price is the sum of the $25.00 per share liquidation preference and a quarterly dividend per share of $0.59375 prorated through the redemption date. In conjunction with the redemption, the Company recognized both a non-cash charge representing the original issuance costs that were paid in 2002 and also other redemption related expenses. The aggregate reduction to net income available to common shareholders was approximately $2.1 million ($0.08 per fully diluted common share) for the nine months ended September 30, 2007.
14. Derivative Instruments
On June 1, 2007, the Company entered into a cross currency swap with a notional value of $76.0 million Canadian dollars (CAD) and $71.5 million U.S. The swap calls for monthly exchanges from January 2008 through February 2014 with the Company paying CAD based on an annual rate of 17.16% of the notional amount and receiving U.S. dollars based on an annual rate of 17.4% of the notional amount. There is no initial or final exchange of the notional amounts. The net effect of this swap is to lock in an exchange rate of $1.05 CAD per U.S. dollar on approximately $13 million of annual CAD denominated cash flows. The Company had previously entered into forward contracts with monthly settlement dates ranging from October 2007 through March 2007. These contracts have a notional value of $7.6 million CAD and an average exchange rate of 1.15 CAD per U.S. dollar. The Company designated both the cross currency swap and the forward contracts as cash flow hedges.
Additionally, on June 1, 2007, the Company entered into a forward contract with a notional amount of $100 million CAD and a February 2014 settlement date. The exchange rate of this forward contract is approximately $1.04 CAD per U.S. dollar. The Company designated this forward contract as a net investment hedge.
Other expense for the three and nine months ended September 30, 2007 includes $543 thousand and $874 thousand of net realized losses, respectively, resulting from regular monthly settlements of foreign currency forward contracts.

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15. Discontinued Operations
Included in discontinued operations for the three and nine months ended September 30, 2007 and 2006 is one parcel including two leased properties sold in 2007, aggregating 107 thousand square feet.
The operating results relating to assets sold are as follows (in thousands):
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2007     2006     2007     2006  
Rental revenue
  $     $ 98     $ 186     $ 314  
Tenant reimbursements
          75       64       111  
Other income
                700       357  
 
                       
Total revenue
          173       950       782  
 
                               
Property operating expense
          85       115       195  
 
                               
Depreciation and amortization
          35       58       99  
 
                       
 
                               
Income before gain on sale of real estate
          53       777       488  
 
                               
Gain on sale of real estate
                3,240        
 
                       
 
                               
Net income
  $     $ 53     $ 4,017     $ 488  
 
                       
For further detail on this disposition, see Note 11 to the consolidated financial statements in this Form 10-Q.
16. Staff Accounting Bulletin No. 108 (SAB 108)
In September 2006, the SEC released SAB 108. SAB 108 permitted the Company to adjust for the cumulative effect of errors relating to prior years previously considered to be immaterial by adjusting the opening balance of retained earnings in the year of adoption. SAB 108 also required the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. Such adjustments did not require previously filed reports with the SEC to be amended.
Effective January 1, 2006, the Company adopted SAB 108. In accordance with SAB 108, the Company increased distributions in excess of net income as of January 1, 2006, and its rental revenue and net income for the year ended December 31, 2006 for the recognition of straight-line rental revenues and net receivables as further described below. SFAS No. 13 “Accounting for Leases” requires rental income that is fixed and determinable to be recognized on a straight-line basis over the minimum term of the lease. Certain leases executed or acquired between 1998 and 2003 contain rental income provisions that are fixed and determinable yet straight line revenue recognition in accordance with SFAS No. 13 was not applied. Accordingly, the implementation of SAB 108 corrects the revenue recognition related to such leases. The impact of this adjustment for the three and nine months ended September 30, 2006 is summarized below (dollars in thousands, except per share data):

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    Previously        
    Reported   Adjustment   As Adjusted
For the three months ended September 30, 2006
                       
Rental revenue
    41,019  *     343       41,362  
Net income
    20,373       343       20,716  
Net income available to common shareholders
    17,457       343       17,800  
Diluted net income per common share
    0.65       0.01       0.66  
 
For the nine months ended September 30, 2006
                       
Rental revenue
    124,413  *     1,029       125,442  
Net income
    59,865       1,029       60,894  
Net income available to common shareholders
    51,118       1,029       52,147  
Diluted net income per common share
    1.93       0.04       1.97  
 
*   Previously reported rental revenue has been reduced by rental revenue related to discontinued operations. See Note 15 to the consolidated financial statements
in this Form 10-Q.
17. Other Commitments and Contingencies
As of September 30, 2007, the Company had two theatre development projects under construction for which it has agreed to finance the development costs. These theatres are expected to have a total of 30 screens and their development costs are expected to be approximately $25.6 million. Through September 30, 2007, the Company has invested $7.6 million in these projects, and has commitments to fund approximately $18.0 million of additional improvements. 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, the Company can discontinue funding construction draws. The Company has agreed to lease the theatres to the operators at pre-determined rates.
18. Subsequent Events
On October 3, 2007, a wholly-owned subsidiary of the Company obtained a non-recourse mortgage loan of $27.0 million. This mortgage is secured by a theatre property located in Chicago, Illinois. The mortgage loan bears interest at 6.63%, matures on November 1, 2012, and requires monthly principal and interest payments of $203 thousand with a final principal payment at maturity of $23.4 million. The net proceeds from this loan were used to pay down the Company’s unsecured revolving credit facility.
On October 15, 2007, the Company closed on a public offering of 1,400,000 common shares at $54.00 per share. Total net proceeds to the Company after expenses were approximately $73.9 million and were used to pay down the Company’s unsecured revolving credit facility.
On October 26, 2007, a wholly-owned subsidiary of the Company obtained a term loan of $120 million. This loan is secured by a borrowing base that currently contains primarily non-theatre assets and is recourse to the Company. This loan bears interest at LIBOR plus 175 basis points and has a four year term expiring in 2011 with a one year extension available at the Company’s option. Interest is payable monthly and principal payments of $300 thousand are required quarterly with a final principal payment at maturity of $115.2 million. The net proceeds from this loan were used to pay down the Company’s unsecured revolving credit facility and the balance was invested in interest bearing money market accounts consistent with the Company’s qualification as a REIT under the Internal Revenue Code.

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On October 30, 2007, a wholly-owned subsidiary of the Company entered into a secured first mortgage loan agreement for $31.0 million with Peak. The loan is secured by seven ski resorts located in Missouri, Indiana, Ohio and Pennsylvania with a total of approximately 506 acres. The loan has a maturity date of October 30, 2027 and initially bears interest at 9.25%.
On October 30, 2007, a wholly owned subsidiary of the Company acquired a 50% ownership interest in JERIT CS Fund I (CS Fund I), a Delaware limited liability company, in exchange for $39.2 million. CS Fund I currently owns 12 charter public school properties located in Nevada, Arizona, Ohio, Georgia, Missouri, Michigan, Florida and Washington D.C. and leases them under a long-term triple net master lease. Imagine Schools, Inc. operates the charter public schools and guarantees the lease payments. The Company’s partner in CS Fund I is JERIT CS Fund I Member, and it will serve as the managing member. JERIT CS Fund I Member is a wholly-owned subsidiary of JER Investors Trust Inc., a publicly traded real estate investment trust. Cash distributions will be made to the partners of CS Fund I based on their respective ownership interests. As of the October 30, 2007 purchase date, the CS Fund I had no significant liabilities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in this Quarterly Report on Form 10-Q. The forward-looking statements included in this discussion and elsewhere in this Quarterly Report on Form 10-Q involve risks and uncertainties, including anticipated financial performance, business prospects, industry trends, shareholder returns, performance of leases by tenants and other matters, which reflect management’s best judgment based on factors currently known. See “Forward Looking Statements.” Actual results and experience could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in this Item and Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on February 28, 2007, and, to the extent applicable, our Quarterly Reports on Form 10-Q.
Overview
Our principal business objective is to be the nation’s leading destination entertainment, entertainment-related, recreation and specialty real estate company by continuing to develop, acquire or finance high-quality properties. As of September 30, 2007, we had invested approximately $1.8 billion (before accumulated depreciation) in 78 megaplex theatre properties and various restaurant, retail, entertainment, destination recreational and specialty properties located in 26 states and Ontario, Canada. As of September 30, 2007, we had invested approximately $27.4 million in development land and construction in progress for real-estate development. Also, as of September 30, 2007, we had invested approximately US $277.5 million (including accrued interest) in mortgage financing for entertainment, recreation and specialty properties.
Substantially all of our single-tenant properties are leased pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of a property, including, but not limited to, all real estate taxes, assessments and other governmental charges, insurance, utilities, repairs and maintenance. A majority of our revenues are derived from rents received or accrued under long-term, triple-net leases. Tenants at our multi-tenant properties are required to pay common area maintenance charges to reimburse us for their pro rata portion of these costs.

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We incur general and administrative expenses including compensation expense for our executive officers and other employees, professional fees and various expenses incurred in the process of identifying, evaluating, acquiring and financing additional properties and mortgage notes. We are self-administered and managed by our Trustees and executive officers. Our primary non-cash expense is the depreciation of our properties. We depreciate buildings and improvements on our properties over a five-year to 40-year period for tax purposes and financial reporting purposes.
Our property acquisitions and development financing commitments are financed by cash from operations, borrowings under our unsecured revolving credit facility and our term loan, long-term mortgage debt and the sale of equity securities. It has been our strategy to structure leases and financings to ensure a positive spread between our cost of capital and the rentals paid by our tenants. We have primarily acquired or developed new properties that are pre-leased to a single tenant or multi-tenant properties that have a high occupancy rate. We do not typically develop or acquire properties on a speculative basis or that are not significantly pre-leased. As of September 30, 2007, we have also entered into four joint ventures formed to own and lease single properties, and have provided mortgage note financing as described above. We intend to continue entering into some or all of these types of arrangements in the foreseeable future.
Our primary challenges have been locating suitable properties, negotiating favorable lease and financing terms, and managing our portfolio as we have continued to grow. Because of our emphasis on the entertainment and entertainment-related sector of the real estate industry and the knowledge and industry relationships of our management, we have enjoyed favorable opportunities to acquire, finance and lease properties. We believe those opportunities will continue during the remainder of 2007.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, management has made its best estimates and assumptions that affect the reported assets and liabilities. The most significant assumptions and estimates relate to consolidation, revenue recognition, depreciable lives of the real estate, the valuation of real estate, accounting for real estate acquisitions and estimating reserves for uncollectible receivables and mortgage notes receivable. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.
Consolidation
We consolidate certain entities if we are deemed to be the primary beneficiary in a variable interest entity (VIE), as defined in FIN No. 46(R), “Consolidation of Variable Interest Entities” (FIN46R). The equity method of accounting is applied to entities in which we are not the primary beneficiary as defined in FIN46R, or do not have effective control, but can exercise influence over the entity with respect to its operations and major decisions.
Revenue Recognition
Rents that are fixed and determinable are recognized on a straight-line basis over the minimum terms of the leases. Base rent escalation in other leases is dependent upon increases in the Consumer Price Index (CPI) and accordingly, management does not include any future base rent escalation amounts on these leases in current revenue. Most of our leases provide for percentage rents based upon the

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level of sales achieved by the tenant. These percentage rents are recognized once the required sales level is achieved. Lease termination fees are recognized when the related leases are canceled and we have no continuing obligation to provide services to such former tenants.
Real Estate Useful Lives
We are required to make subjective assessments as to the useful lives of our properties for the purpose of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on our net income. Depreciation and amortization are provided on the straight-line method over the useful lives of the assets, as follows:
     
Buildings
  40 years
Tenant improvements
  Base term of
 
  lease or useful
 
  life, whichever
 
  is shorter
Furniture, fixtures and equipment
  3 to 25 years
Impairment of Real Estate Values
We are required to make subjective assessments as to whether there are impairments in the value of our rental properties. These estimates of impairment may have a direct impact on our consolidated financial statements.
We apply the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We assess the carrying value of our rental properties whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable. Certain factors that may occur and indicate that impairments may exist include, but are not limited to: underperformance relative to projected future operating results, tenant difficulties and significant adverse industry or market economic trends. No such indicators existed during the first nine months of 2007. If an indicator of possible impairment exists, a property is evaluated for impairment by comparing the carrying amount of the property to the estimated undiscounted future cash flows expected to be generated by the property. If the carrying amount of a property exceeds its estimated future cash flows on an undiscounted basis, an impairment charge is recognized in the amount by which the carrying amount of the property exceeds the fair value of the property. Management estimates fair value of our rental properties based on projected discounted cash flows using a discount rate determined by management to be commensurate with the risk inherent in the Company. Management did not record any impairment charges for the first nine months of 2007.
Real Estate Acquisitions
Upon acquisitions of real estate properties, we make subjective estimates of the fair value of acquired tangible assets (consisting of land, building, tenant improvements, and furniture, fixtures and equipment) and identified intangible assets and liabilities (consisting of above and below market leases, in-place leases, tenant relationships and assumed financing that is determined to be above or below market terms) in accordance with SFAS No.141, Business Combinations. We utilize methods similar to those used by independent appraisers in making these estimates. Based on these estimates, we allocate the purchase price to the applicable assets and liabilities. These estimates have a direct impact on our net income.
Allowance for Doubtful Accounts
Management makes quarterly estimates of the collectibility of its accounts and notes receivable

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related to base rents, tenant escalations (straight-line rents) and reimbursements, interest income, note principal and other revenue or income. Management specifically analyzes trends in accounts and notes receivable, historical bad debts, customer credit worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of its allowance for doubtful accounts. In addition, when customers are in bankruptcy, management makes estimates of the expected recovery of pre-petition administrative and damage claims. These estimates have a direct impact on our net income.
Mortgage Notes and Related Accrued Interest Receivable
Mortgage notes and related accrued interest receivable consists solely of loans that we originated and the related accrued and unpaid interest income as of the balance sheet date. Mortgage notes receivable are initially recorded at the amount advanced to the borrower and we defer certain loan origination and commitment fees, net of certain origination costs, and amortize them over the term of the related loan. We evaluate the collectibility of both interest and principal for each loan to determine whether it is impaired. A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount of loss is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the loan’s effective interest rate or to the value of the underlying collateral if the loan is collateralized. Interest income on performing loans is accrued as earned. Interest income on impaired loans is recognized on a cash basis.
Recent Developments
Debt Financing
On February 21, 2007, we obtained a non-recourse mortgage loan of $11.6 million. This mortgage is secured by a theatre property located in Biloxi, Mississippi. The mortgage loan bears interest at 6.06%, matures on March 1, 2017 and requires monthly principal and interest payments of $75 thousand with a final principal payment at maturity of $9.0 million.
On March 23, 2007, we obtained a non-recourse mortgage loan of $11.9 million. This mortgage is secured by a theatre property located in Fresno, California. The mortgage loan bears interest at 6.07%, matures on April 6, 2017 and requires monthly principal and interest payments of $77 thousand with a final principal payment at maturity of $9.2 million.
On April 18, 2007, we obtained three non-recourse mortgage loans totaling $20.3 million. Each of these mortgages are secured by a theatre property, bear interest at an interest rate of 5.95% per year, and mature on May 1, 2017. These mortgages require monthly principal and interest payments totaling $130 thousand with final principal payments at maturity totaling $15.8 million.
On April 19, 2007, we obtained two non-recourse mortgage loans totaling $34.7 million. Each of these mortgages are secured by a theatre property, bear interest at an interest rate of 5.73% per year, and mature on May 1, 2017. These mortgages require monthly principal and interest payments totaling $218 thousand with final principal payments at maturity totaling $26.7 million.
On July 30, 2007, we obtained two non-recourse mortgage loans totaling $28.0 million. Each of these mortgages is secured by a theatre property located in Chattanooga, Tennessee and Leawood, Kansas, bear interest at a rate of 5.86% per year, and mature on August 1, 2017. These mortgages require monthly principal and interest payments totaling $178 thousand with final principal payments at maturity totaling $21.7 million.

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On September 19, 2007, we obtained a non-recourse mortgage loan of $26.2 million. This mortgage is secured by a theatre property located in Houston, Texas. The mortgage loan bears interest at 6.57%, matures on October 1, 2012, and requires monthly principal and interest payments of $196 thousand with a final principal payment at maturity of $22.7 million.
On September 24, 2007, we obtained a non-recourse mortgage loan of $22.2 million. This mortgage is secured by a theatre property located in Dallas, Texas. The mortgage loan bears interest at 6.73%, matures on October 1, 2012, and requires monthly principal and interest payments of $169 thousand with a final principal payment at maturity of $19.3 million.
On October 3, 2007, we obtained a non-recourse mortgage loan of $27.0 million. This mortgage is secured by a theatre property located in Chicago, Illinois. The mortgage loan bears interest at 6.63%, matures on November 1, 2012, and requires monthly principal and interest payments of $203 thousand with a final principal payment at maturity of $23.4 million.
On October 26, 2007, we obtained a term loan of $120 million. This loan is secured by a borrowing base that currently contains primarily non-theatre assets and is recourse to us. This loan bears interest at LIBOR plus 175 basis points and has a four year term expiring in 2011 with a one year extension available at our option. Interest is payable monthly and principal payments of $300 thousand are required quarterly with a final principal payment at maturity of $115.2 million.
The net proceeds from all of the above loans were used to pay down our unsecured revolving credit facility or were invested in interest bearing money market accounts consistent with the Company’s qualification as a REIT under the Internal Revenue Code.
Credit Facility
On April 18, 2007 we amended our unsecured revolving credit facility. The amendment allows additional assets, subject to certain limitations, to be included in our borrowing base, and provides a more favorable valuation of our megaplex theatres and entertainment related retail assets in the calculation of the borrowing base and the leverage ratio. Additionally, the amendment relaxes the covenants that limit our investment in certain types of assets, raises our capacity to issue letters of credit and provides us with the flexibility to incur other unsecured recourse indebtedness, subject to certain limitations, beyond the unsecured revolving credit facility. The size, term and pricing of the unsecured revolving credit facility were not impacted by the amendment.
Issuance of Series D Preferred Shares
On May 25, 2007, we issued 4.6 million 7.375% Series D Cumulative Redeemable Preferred Shares (“Series D Preferred Shares”) in a registered public offering for net proceeds of approximately $111.1 million, after expenses. We will pay cumulative dividends on the Series D Preferred Shares from the date of original issuance in the amount of $1.844 per share each year, which is equivalent to 7.375% of the $25 liquidation preference per share. Dividends on the Series D Preferred Shares are payable quarterly in arrears, and were first payable on July 16, 2007 with a pro-rated quarterly payment of $0.1844 per share. We may not redeem the Series D Preferred Shares before May 25, 2012, except in limited circumstances to preserve our REIT status. On or after May 25, 2012, we may, at our option, redeem the Series D Preferred Shares in whole at any time or in part from time to time, by paying $25 per share, plus any accrued and unpaid dividends up to and including the date of redemption. The Series D Preferred Shares generally have no stated maturity, will not be subject to any sinking fund or mandatory redemption, and are not convertible into any of our other securities. Owners of the Series D Preferred Shares generally have no voting rights, except under certain dividend defaults.

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The net proceeds from this offering were used to redeem our 9.50% Series A Cumulative Redeemable Preferred Shares and to pay down our unsecured revolving credit facility.
Redemption of Series A Preferred Shares
On May 29, 2007, we completed the redemption of all 2.3 million of our outstanding 9.50% Series A Cumulative Redeemable Preferred Shares. The shares were redeemed at a redemption price of $25.39 per share. This price is the sum of the $25.00 per share liquidation preference and a quarterly dividend per share of $0.59375 prorated through the redemption date. In conjunction with the redemption, we recognized both a non-cash charge representing the original issuance costs that were paid in 2002 and also other redemption related expenses. The aggregate reduction to net income available to common shareholders was approximately $2.1 million ($0.08 per fully diluted common share) for the nine months ended September 30, 2007.
Issuance of Common Shares
On October 15, 2007, we completed a public offering of 1,400,000 common shares at $54.00 per share. Total net proceeds after expenses were approximately $73.9 million and were used to pay down our unsecured revolving credit facility.
Investments
On March 13, 2007, we entered into a secured first mortgage loan agreement for $93.0 million with SVV I, LLC for the development of a water-park anchored entertainment village. The secured property is approximately 368 acres of development land located in Kansas City, Kansas. The carrying value of this mortgage note receivable at September 30, 2007 was $86.2 million, including related accrued interest receivable of $661 thousand. This loan is guaranteed by the Schlitterbahn New Braunfels Group (Bad-Schloss, Inc., Waterpark Management, Inc., Golden Seal Investments, Inc., Liberty Partnership, Ltd., Henry Condo I, Ltd., and Henry-Walnut, Ltd.) and has a maturity date of March 12, 2008. Monthly interest payments are made to us and the unpaid principal balance bears interest at LIBOR plus 3.5%.
On April 4, 2007, we entered into two secured first mortgage loan agreements totaling $73.5 million with Peak Resorts, Inc. (“Peak”). We advanced $56.6 million during the nine months ended September, 30, 2007 under these agreements. The loans are secured by two ski resorts located in Vermont and New Hampshire. Mount Snow is approximately 2,378 acres and is located in both West Dover and Wilmington, Vermont. Mount Attitash is approximately 1,250 acres and is located in Bartlett, New Hampshire. The carrying value of these mortgage notes at September 30, 2007 was $56.6 million with no related accrued interest receivable. The loans have a maturity date of April 3, 2027 and the unpaid principal balance initially bears interest at 10%. These notes currently require Peak to fund debt service reserves annually by April 30th for the amount of the upcoming year’s debt service. Monthly interest payments are transferred to the Company from these debt service reserves.
Additionally, on April 4, 2007, we entered into a third secured first mortgage loan agreement for $25.0 million with Peak for further development of Mount Snow. The loan is secured by approximately 696 acres of development land. We advanced the full amount of the loan during April of 2007. The carrying value of this mortgage note receivable at September 30, 2007 was $26.3 million, including related accrued interest receivable of $1.3 million. The loan has a maturity date of April 2, 2010 at which time the unpaid principal balance and all accrued interest is due. The unpaid principal balance bears interest at 10%.
On April 30, 2007, we purchased a 35 acre vineyard and winery facility in Hopland, California, and simultaneously leased this property to Rb Wine Associates, LLC. The acquisition price for the

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property was approximately $5.9 million and it is leased under a long-term triple-net lease. Subsequent to the initial acquisition, we have invested an additional $3.7 million in this project.
On May 8, 2007, we acquired 66.67% of the voting interests in White Plains Retail, LLC and White Plains Recreational, LLC, the entities which own the 390,000 square foot entertainment retail center known as City Center at White Plains, located in White Plains, New York. The project had existing debt of $119.7 million, and we invested cash of $31.3 million to complete the transaction. For additional description of this transaction and its FIN 46R implications, see Note 6 to the consolidated financial statements in this Form 10-Q.
On August 1, 2007, we purchased a 60 acre vineyard and winery facility in Paso Robles, California, and simultaneously leased this property to Sapphire Wines, LLC. The acquisition price for the property was approximately $21.0 million and it is leased under a long-term triple-net lease. Additionally, on August 1, 2007, we entered into a loan agreement for $5.0 million with Sapphire Wines, LLC. The loan has a maturity date of February 1, 2008 at which time the unpaid principal balance is due. The unpaid principal balance bears interest at 9% and is payable monthly.
On August 14, 2007, we purchased the land and winery facilities associated with three vineyards. The total purchase price consisted of approximately 225 acres of land and 72 thousand square feet of winery facilities located in Pope Valley, Lockeford, and Clements, California. The properties were simultaneously leased to CE2V Winery, LLC, Lockeford Winery, LLC, Crystal Valley Cellars, LLC and Cosentino Winery LLC. The acquisition price for the property was approximately $20.5 million and it is leased under a long-term triple-net lease.
During the three months ended September 30, 2007, we invested an additional $3.4 million Canadian ($3.2 million U.S.) in the mortgage note receivable from Metropolis Limited Partnership (the Partnership) related to the construction of Toronto Life Square, a 13 level entertainment retail center in downtown Toronto. On October 19, 2007, we advanced $6.2 million Canadian ($6.4 million U.S.) to the Partnership and we anticipate advancing an additional $7 to $12 million Canadian prior to the end of 2008. Consistent with the previous advances on this project, each advance will have a five year stated term and bear interest at 15%. A bank has agreed to provide the Partnership first mortgage construction financing of up to $122 million Canadian, and it is anticipated that the project will be completed in 2008 at a total cost of approximately $315 million Canadian.
Additionally, during the three months ended September 30, 2007, we posted additional irrevocable stand-by letters of credit related to the Toronto Life Square project. As of October 31, 2007, the letters of credit related to this project totaled $13.2 million, of which at least $5 million is expected to be drawn upon and added to our mortgage note receivable by May 31, 2008. The remaining letters of credit are expected to be cancelled or drawn upon during 2008 in conjunction with the completion and permanent financing of the Toronto Life Square project. Interest accrues on these outstanding letters of credit at a rate of 12% (15% if drawn upon). We also received an origination fee of $250 thousand Canadian ($237 thousand U.S.) in connection with this financing activity, and the fee is being amortized over the remaining term of the loan.
During the nine months ended September 30, 2007, we completed development of two megaplex theatre properties. The Stadium 14 Cinema in Kalispell, Montana is operated by Signature Theatres and was completed for a total development cost (including land and building) of approximately $9.8 million. The Grand 16 Theatre at Pier Park located in Panama City, Florida is operated by Southern Theatres and was completed for a total development cost (including land and building) of approximately $17.6 million. These theatres are both leased under long-term triple-net leases.

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On October 30, 2007, we entered into a secured first mortgage loan agreement for $31.0 million with Peak. The loan is secured by seven ski resorts located in Missouri, Indiana, Ohio and Pennsylvania with a total of approximately 506 acres. The loan has a maturity date of October 30, 2027 and initially bears interest at 9.25%.
On October 30, 2007, we acquired a 50% ownership interest in JERIT CS Fund I (CS Fund I), a Delaware limited liability company, in exchange for $39.2 million. CS Fund I currently owns 12 charter public school properties located in Nevada, Arizona, Ohio, Georgia, Missouri, Michigan, Florida and Washington D.C. and leases them under a long-term triple net master lease. Imagine Schools, Inc. operates the charter public schools and guarantees the lease payments. Our partner in CS Fund I is JERIT CS Fund I Member, and it will serve as the managing member. JERIT CS Fund I Member is a wholly-owned subsidiary of JER Investors Trust Inc., a publicly traded real estate investment trust. Cash distributions will be made to the partners of CS Fund I based on their respective ownership interests. As of the October 30, 2007 purchase date, the CS Fund I had no significant liabilities.
Sale of Property
On June 7, 2007, we sold a parcel of land adjacent to our megaplex theatre in Pompano, Florida and the related development rights to a developer group for $7.7 million. Accordingly, we recognized a gain on sale of real estate of $3.2 million and recognized development fees of $0.7 million during the nine months ended September 30, 2007. For further detail on this disposition, see Note 11 and 15 to the consolidated financial statements in this Form 10-Q.
Derivative Instruments
As further discussed in Note 14 to the consolidated financial statements in this Form 10-Q, on June 1, 2007, the Company entered into a cross currency swap and a new forward contract. The cross currency swap has a notional amount of $76.0 million Canadian dollars (CAD) and $71.5 million U.S. The net effect of this swap is to lock in an exchange rate of $1.05 CAD per U.S. dollar on approximately $13 million of annual CAD denominated cash flows. The new forward contract has a notional amount of $100 million CAD and a February 2014 settlement date. The exchange rate of this forward contract is approximately $1.04 CAD per U.S. dollar.
Results of Operations
Three months ended September 30, 2007 compared to three months ended September 30, 2006
Rental revenue was $48.1 million for the three months ended September 30, 2007, compared to $41.4 million for the three months ended September 30, 2006. The $6.7 million increase resulted primarily from the acquisitions and developments completed in 2006 and 2007 and base rent increases on existing properties. Percentage rents of $0.6 million and $0.5 million were recognized during the three months ended September 30, 2007 and 2006, respectively. Straight-line rents of $1.2 million and $1.0 million were recognized during the three months ended September 30, 2007 and 2006, respectively.
Tenant reimbursements totaled $4.7 million for the three months ended September 30, 2007 compared to $3.8 million for the three months ended September 30, 2006. These tenant reimbursements arise from the operations of our retail centers. The increase of $0.9 million is primarily due to $1.1 million in tenant reimbursements related to our May 8, 2007 acquisition of a 66.67% interest in the joint ventures that own an entertainment retail center in White Plains, New York.

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Other income was $0.5 million for the three months ended September 30, 2007 compared to $0.7 million for the three months ended September 30, 2006. The decrease of $0.2 million is primarily due to a decrease in revenues from a restaurant in Southfield, Michigan opened in September 2005 and previously operated through a wholly-owned taxable REIT subsidiary. The restaurant in Southfield, Michigan was closed during the third quarter of 2006 and the space was leased to an unrelated restaurant tenant.
Mortgage financing interest for the three months ended September 30, 2007 was $7.7 million compared to $2.6 million for the three months ended September 30, 2006 and relates to the following:
mortgage financing for the development of an entertainment retail center in Canada with an initial funding date in June of 2005
mortgage financing for a ski resort located in New Hampshire provided in March of 2006
mortgage financing for the development of a megaplex theatre in Louisiana provided with an initial funding date in November of 2006
mortgage financing for the development of a water-park entertainment village in Kansas with an initial funding date in March of 2007
mortgage financing for two ski resorts located in Vermont and New Hampshire with initial funding dates in April of 2007
Our property operating expense totaled $5.8 million for the three months ended September 30, 2007 compared to $4.8 million for the three months ended September 30, 2006. These property operating expenses arise from the operations of our retail centers. The increase of $1.0 million is primarily due to $1.2 million in property operating expense related to our May 8, 2007 acquisition of a 66.67% interest in the joint ventures that own an entertainment retail center in White Plains, New York.
Other expense totaled $1.0 million for the three months ended September 30, 2007 compared to $0.9 million for the three months ended September 30, 2006. The $0.1 million increase is due to $0.5 million in expense recognized upon settlement of foreign currency forward contracts during the three months ended September 30, 2007. This increase is partially offset by a decrease in expense related to a restaurant in Southfield, Michigan opened in September of 2005, and previously operated through a wholly-owned taxable REIT subsidiary. The restaurant in Southfield Michigan was closed during the third quarter of 2006 and the space was leased to an unrelated restaurant tenant.
Our general and administrative expense totaled $3.0 million for the three months ended September 30, 2007 compared to $2.3 million for the three months ended September 30, 2006. The increase of $0.7 million is due to increases in costs that primarily resulted from payroll and related expenses attributable to increases in base and incentive compensation, additional employees and amortization resulting from grants of restricted shares to management, as well as increases in franchise taxes and professional fees.
Our net interest expense increased by $3.9 million to $16.1 million for the three months ended September 30, 2007 from $12.2 million for the three months ended September 30, 2006. Approximately $1.7 million of the increase resulted from the acquisition of a 66.67% interest in the joint ventures that own an entertainment retail center in White Plains, New York that had an

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outstanding mortgage debt of $119.7 million as of the May 8, 2007 acquisition date. The remainder of the increase resulted from increases in long-term debt used to finance our real estate acquisitions and fund our new mortgage notes receivable.
Depreciation and amortization expense totaled $9.9 million for the three months ended September 30, 2007 compared to $7.9 million for the three months ended September 30, 2006. The $2.0 million increase resulted primarily from our real estate acquisitions completed in 2006 and 2007.
Minority interest totaled $1.0 million for the three months ended September 30, 2007 and resulted from the consolidation of a VIE in which our only variable interest is debt and the VIE has sufficient equity to cover its cumulative net losses incurred subsequent to our loan transaction. There was no such minority interest for the three months ended September 30, 2006.
Preferred dividend requirements for the three months ended September 30, 2007 were $5.6 million compared to $2.9 million for the same period in 2006. The $2.7 million increase is due to the issuance of 5.4 million Series C preferred shares in December of 2006 and 4.6 million Series D preferred shares in May of 2007, partially offset by the redemption of 2.3 million Series A preferred shares in May of 2007.
Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
Rental revenue was $136.7 million for the nine months ended September 30, 2007 compared to $125.4 million for the nine months ended September 30, 2006. The $11.3 million increase resulted primarily from the acquisitions and developments completed in 2006 and 2007 and base rent increases on existing properties, partially offset by the recognition of a lease termination fee of $4.0 million from our theatre in Hialeah, Florida during the nine months ended September 30, 2006. Percentage rents of $1.6 million and $1.3 million were recognized during the nine months ended September 30, 2007 and 2006, respectively. Straight-line rents of $3.2 million and $2.9 million were recognized during the nine months ended September 30, 2007 and 2006, respectively.
Tenant reimbursements totaled $12.6 million for the nine months ended September 30, 2007 compared to $10.7 million for the nine months ended September 30, 2006. These tenant reimbursements arise from the operations of our retail centers. Of the $1.9 million increase, $1.7 million is due to our May 8, 2007 acquisition of a 66.67% interest in the joint ventures that own an entertainment retail center in White Plains, New York. The remaining increase is due to increases in tenant reimbursements, primarily driven by the expansion and leasing of the gross leasable area at our retail centers in Ontario, Canada.
Other income was $1.8 million for the nine months ended September 30, 2007 compared to $2.7 million for the nine months ended September 30, 2006. The decrease of $0.9 million is primarily due to a decrease in revenues from a restaurant in Southfield, Michigan opened in September 2005 and previously operated through a wholly-owned taxable REIT subsidiary. The restaurant in Southfield, Michigan was closed during the third quarter of 2006 and the space was leased to an unrelated restaurant tenant.
Mortgage financing interest for the nine months ended September 30, 2007 was $17.3 million compared to $6.8 million for the nine months ended September 30, 2006 and relates to the following:
mortgage financing for the development of an entertainment retail center in Canada with an initial funding date in June of 2005

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mortgage financing for a ski resort located in New Hampshire provided in March of 2006
mortgage financing for the development of a megaplex theatre in Louisiana provided with an initial funding date in November of 2006
mortgage financing for the development of a water-park entertainment village in Kansas with an initial funding date in March of 2007
mortgage financing for two ski resorts located in Vermont and New Hampshire with initial funding dates in April of 2007
Our property operating expense totaled $15.9 million for the nine months ended September 30, 2007 compared to $14.3 million for the nine months ended September 30, 2006. These property operating expenses arise from the operations of our retail centers. The increase of $1.6 million is primarily due to $1.9 million in property operating expense related to our May 8, 2007 acquisition of a 66.67% interest in the joint ventures that own an entertainment retail center in White Plains, New York. This increase was partially offset by a decrease in bad debt expense primarily related to our entertainment retail center in New Rochelle, New York.
Other expense totaled $2.6 million for the nine months ended September 30, 2007 compared to $2.9 million for the nine months ended September 30, 2006. The $0.3 million decrease is primarily due to a $1.2 million decrease in expenses from a restaurant in Southfield, Michigan opened in September of 2005, and previously operated through a wholly-owned taxable REIT subsidiary. The restaurant in Southfield Michigan was closed during the third quarter of 2006 and the space was leased to an unrelated restaurant tenant. This decrease was partially offset by $0.9 million in expense recognized upon settlement of foreign currency forward contracts during the nine months ended September 30, 2007.
Our general and administrative expense totaled $9.1 million for the nine months ended September 30, 2007 compared to $10.0 million for the nine months ended September 30, 2006. The decrease of $0.9 million is primarily due to $1.7 million in expense during the nine months ended September 30, 2006 related to unvested share awards from prior years. Additionally, during the nine months ended September 30, 2006, we recognized expense of $1.4 million related to the retirement of one of our executives. Partially offsetting these decreases were increases in costs that primarily resulted from payroll and related expenses attributable to increases in base and incentive compensation, additional employees and amortization resulting from grants of restricted shares to management, as well as increases in franchise taxes and professional fees.
Costs associated with loan refinancing for the nine months ended September 30, 2006 were $0.7 million. These costs related to the amendment and restatement of our revolving credit facility and consisted of the write-off of $0.7 million of certain unamortized financing costs. No such costs were incurred during the nine months ended September 30, 2007.
Our net interest expense increased by $6.5 million to $41.7 million for the nine months ended September 30, 2007 from $35.2 million for the nine months ended September 30, 2006. Approximately $2.7 million of the increase resulted from the acquisition of a 66.67% interest in the joint ventures that own an entertainment retail center in White Plains, New York that had outstanding mortgage debt of $119.7 million as of the May 8, 2007 acquisition date. The remainder of the

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increase resulted from increases in long-term debt used to finance our real estate acquisitions and fund our new mortgage notes receivable.
Depreciation and amortization expense totaled $27.3 million for the nine months ended September 30, 2007 compared to $23.1 million for the nine months ended September 30, 2006. The $4.2 million increase resulted primarily from real estate acquisitions completed in 2006 and 2007.
The gain on sale of land of $0.3 million for the nine months ended September 30, 2006 was due to the sale of an acre of land that was originally purchased along with one of our megaplex theatres. There was no such gain on sale of land recognized for the nine months ended September 30, 2007.
Minority interest totaled $1.0 million for the nine months ended September 30, 2007 and resulted from the consolidation of a VIE in which our only variable interest is debt and the VIE has sufficient equity to cover its cumulative net losses incurred subsequent to our loan transaction. There was no such minority interest for the nine months ended September 30, 2006.
Income from discontinued operations totaled $0.8 million for the nine months ended September 30, 2007 compared to $0.5 million for the nine months ended September 30, 2006. The $0.3 million increase is due to the recognition of $0.7 million in development fees related to a parcel adjacent to our megaplex theatre in Pompano, Florida. The development rights, along with two income-producing tenancies, were sold to a developer group in June of 2007. This increase was partially offset by a $0.4 million gain for the nine months ended September 30, 2006 resulting from an insurance claim. As a result of the hurricane events of October 2005, one non triple-net retail property in Pompano Beach, Florida suffered significant damage to its roof. The insurance company reimbursed us for the replacement of the roof less our deductible in January 2006.
The gain on sale of real estate from discontinued operations of $3.2 million for the nine months ended September 30, 2007 was due to the sale of a parcel that included two leased properties adjacent to our megaplex theatre in Pompano, Florida. There was no gain on sale of real estate from discontinued operations recognized for the nine months ended September 30, 2006.
Preferred dividend requirements for the nine months ended September 30, 2007 were $15.7 million compared to $8.7 million for the same period in 2006. The $7.0 million increase is due to the issuance of 5.4 million Series C preferred shares in December of 2006 and 4.6 million Series D preferred shares in May of 2007, partially offset by the redemption of 2.3 million Series A preferred shares in May of 2007.
The Series A preferred share redemption costs of $2.1 million for the nine months ended September 30, 2007 was due to the redemption of the Series A preferred shares on May 29, 2007 and primarily consists of a noncash charge for the excess of the redemption value over the carrying value of these shares. There was no such expense incurred during the nine months ended September 30, 2006.
Liquidity and Capital Resources
Cash and cash equivalents were $10.8 million at September 30, 2007. In addition, we had restricted cash of $10.6 million at September 30, 2007. Of the restricted cash at September 30, 2007, $2.9 million relates to cash held for our borrower’s debt service reserve for a mortgage note receivable and the balance represents deposits required in connection with debt service, payment of real estate taxes and capital improvements.

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Mortgage Debt, Credit Facilities and Term Loan
As of September 30, 2007, we had total debt outstanding of $1.1 billion. As of September 30, 2007, $929.1 million of debt outstanding was fixed rate mortgage debt secured by a substantial portion of our rental properties, with a weighted average interest rate of approximately 6.1%.
At September 30, 2007, we had $131.5 million in debt outstanding under our $235.0 million unsecured revolving credit facility, with interest at a floating rate. The unsecured revolving credit facility matures in January of 2009 and was recently amended (described in Note 10 to the consolidated financial statements in this Quarterly Report on Form 10-Q).
Subsequent to September 30, 2007, we obtained a term loan of $120 million. This loan is secured by primarily non-theatre assets and is recourse to us. This loan bears interest at LIBOR plus 175 basis points and has a four year term expiring in 2011 with a one year extension available at our option.
Our principal investing activities are acquiring, developing and financing entertainment, entertainment-related, recreational and specialty properties. These investing activities have generally been financed with mortgage debt and the proceeds from equity offerings. Our unsecured revolving credit facility and our new term loan are also used to finance the acquisition or development of properties, and to provide mortgage financing. Continued growth of our rental property and mortgage financing portfolios will depend in part on our continued ability to access funds through additional borrowings and securities offerings.
Capital Structure and Coverage Ratios
We believe that our shareholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest, fixed charge and debt service coverage ratios. We expect to maintain our leverage ratio (i.e. total-long term debt of the Company as a percentage of shareholders’ equity plus total liabilities) below 55%. However, the timing and size of our equity offerings may cause us to temporarily operate over this threshold. At September 30, 2007, our leverage ratio was 51%. Our long-term debt as a percentage of our total market capitalization at September 30, 2007 was 39%. We do not manage to a ratio based on total market capitalization due to the inherent variability that is driven by changes in the market price of our common shares. We calculate our total market capitalization of $2.8 billion as follows at September 30, 2007:
Common shares outstanding of 26,683,408 multiplied by the last reported sales price of our common shares on the NYSE of $50.80 per
share, or $1.4 billion;
Aggregate liquidation value of our Series B preferred shares of $80 million;
Aggregate liquidation value of our Series C preferred shares of $135 million;
Aggregate liquidation value of our Series D preferred shares of $115 million; and
Total long-term debt of $1.1 billion
Our interest coverage ratio for the nine months ended September 30, 2007 and 2006 was 3.3 times and 3.4 times, respectively. Interest coverage is calculated as the interest coverage amount (as calculated in the following table) divided by interest expense, gross (as calculated in the following table). We consider the interest coverage ratio to be an appropriate supplemental measure of a company’s ability to meet its interest expense obligations. Our calculation of the interest coverage ratio may be different from the calculation used by other companies, and therefore, comparability may be limited. This information should not be considered as an alternative to any Generally

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Accepted Accounting Principals (GAAP) liquidity measures. The following table shows the calculation of our interest coverage ratios (dollars in thousands):
                 
    Nine Months Ended September 30,  
    2007     2006  
Net income
  $ 77,535       60,894  
Interest expense, gross
    43,842       36,334  
Interest cost capitalized
    (353 )     (15 )
Depreciation and amortization
    27,269       23,092  
Share-based compensation expense to management and trustees
    2,423       4,456  
Gain on sale of land
          (345 )
Minority interest
    (988 )      
Costs associated with loan refinancing
          673  
Straight-line rental revenue
    (3,229 )     (2,853 )
Gain on sale of real estate from discontinued operations
    (3,240 )      
Depreciation and amortization of discontinued operations
    58       99  
 
               
 
           
Interest coverage amount
  $ 143,317       122,335  
 
               
Interest expense, net
  $ 41,669       35,179  
Interest income
    1,820       1,140  
Interest cost capitalized
    353       15  
 
               
 
           
Interest expense, gross
  $ 43,842       36,334  
 
               
Interest coverage ratio
    3.3       3.4  
 
           
The interest coverage amount per the above table can be reconciled to net cash provided by operating activities per the consolidated statements of cash flows included in this Quarterly Report on Form 10-Q as follows (in thousands):
                 
    Nine Months Ended September 30,  
    2007     2006  
Net cash provided by operating activities
  $ 93,460       79,599  
 
               
Equity in income from joint ventures
    597       566  
Distributions from joint ventures
    (675 )     (652 )
Amortization of deferred financing costs
    (2,125 )     (2,049 )
Increase in mortgage notes accrued interest receivable
    10,392       6,350  
Increase in accounts receivable
    2,377       3,135  
Increase in other assets
    841       2,050  
Increase in accounts payable and accrued liabilities
    (2,424 )     (994 )
Decrease in unearned rents
    614       864  
Straight-line rental revenue
    (3,229 )     (2,853 )
Interest expense, gross
    43,842       36,334  
Interest cost capitalized
    (353 )     (15 )
 
               
 
           
Interest coverage amount
  $ 143,317       122,335  
 
           
Our fixed charge coverage ratio for the nine months ended September 30, 2007 and 2006 was 2.4 times and 2.7 times, respectively. The fixed charge coverage ratio is calculated in exactly the same manner as the interest coverage ratio, except that preferred share dividends are also added to the denominator. We consider the fixed charge coverage ratio to be an appropriate supplemental

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measure of a company’s ability to make its interest and preferred share dividend payments. Our calculation of the fixed charge coverage ratio may be different from the calculation used by other companies and, therefore, comparability may be limited. This information should not be considered as an alternative to any GAAP liquidity measures. The following table shows the calculation of our fixed charge coverage ratios (dollars in thousands):
                 
    Nine Months Ended September 30,  
    2007     2006  
Interest coverage amount
  $ 143,317       122,335  
 
               
Interest expense, gross
    43,842       36,334  
Preferred share dividends
    15,701       8,747  
 
               
 
           
Fixed charges
  $ 59,543       45,081  
 
               
Fixed charge coverage ratio
    2.4       2.7  
 
           
Our debt service coverage ratio for the nine months ended September 30, 2007 and 2006 was 2.5 times and 2.6 times, respectively. The debt service coverage ratio is calculated in exactly the same manner as the interest coverage ratio, except that recurring principal payments are also added to the denominator. We consider the debt service coverage ratio to be an appropriate supplemental measure of a company’s ability to make its debt service payments. Our calculation of the debt service coverage ratio may be different from the calculation used by other companies and, therefore, comparability may be limited. This information should not be considered as an alternative to any GAAP liquidity measures. The following table shows the calculation of our debt service coverage ratios (dollars in thousands):
                 
    Nine Months Ended September 30,  
    2007     2006  
Interest coverage amount
  $ 143,317       122,335  
 
               
Interest expense, gross
    43,842       36,334  
Recurring principle payments
    13,065       10,882  
 
               
 
           
Debt service
  $ 56,907       47,216  
 
               
Debt service coverage ratio
    2.5       2.6  
 
           
Liquidity Requirements
Short-term liquidity requirements consist primarily of normal recurring corporate operating expenses, debt service requirements and distributions to shareholders. We meet these requirements primarily through cash provided by operating activities. Cash provided by operating activities was $93.5 million for the nine months ended September 30, 2007 and $79.6 million for the nine months ended September 30, 2006. We anticipate that our cash on hand, cash from operations, and funds available under our unsecured revolving credit facility will provide adequate liquidity to fund our operations, make interest and principal payments on our debt, and allow distributions to our shareholders and avoidance of corporate level federal income or excise tax in accordance with Internal Revenue Code requirements for qualification as a REIT.

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We had two theatre projects under construction at September 30, 2007. The properties have been pre-leased to the prospective tenants under long-term triple-net leases. The cost of development is paid by us in periodic draws. The related timing and amount of rental payments to be received by us from tenants under the leases correspond to the timing and amount of funding by us of the cost of development. These theatres will have a total of 30 screens and their total development costs will be approximately $25.6 million. Through September 30, 2007, we have invested $7.6 million in these projects and have commitments to fund an additional $18.0 million in improvements. We plan to fund development primarily with funds generated by debt financing and/or equity offerings. If we determine that construction is not being completed in accordance with the terms of the development agreement, we can discontinue funding construction draws.
Off Balance Sheet Arrangements
At September 30, 2007, we had a 20.3% and 21.2% investment interest in two unconsolidated real estate joint ventures, Atlantic-EPR I and Atlantic-EPR II, respectively, which are accounted for under the equity method of accounting. We do not anticipate any material impact on our liquidity as a result of any commitments that may arise involving those joint ventures. We recognized income of $369 and $346 (in thousands) from our investment in the Atlantic-EPR I joint venture during the nine months ended September 30, 2007 and 2006, respectively. We also recognized income of $228 and $220 (in thousands) from our investment in the Atlantic-EPR II joint venture during the nine months ended September 30, 2007 and 2006, respectively. Condensed financial information for Atlantic-EPR I and Atlantic-EPR II joint ventures is included in Note 4 to the consolidated financial statements included in this Quarterly Report on Form 10-Q.
The joint venture agreements for Atlantic-EPR I and Atlantic-EPR II allow our partner, Atlantic of Hamburg, Germany (Atlantic), to exchange up to a maximum of 10% of its ownership interest per year in each of the joint ventures for our common shares or, at our discretion, the cash value of those shares as defined in each of the joint venture agreements. We received notice from Atlantic that effective September 28, 2007 they wanted to exchange a portion of their ownership in Atlantic-EPR I and Atlantic-EPR II. In October of 2007, we paid Atlantic cash of $71 and $137 (in thousands) in exchange for additional ownership of .3% and 1.2 % for Atlantic-EPR I and Atlantic-EPR II, respectively.
On October 30, 2007, we acquired a 50% ownership interest in JERIT CS Fund I (CS Fund I), a Delaware limited liability company. For further detail on this acquisition, see Note 18 to the consolidated financial statements included in this Quarterly Report on Form 10-Q.
Funds From Operations (FFO)
The National Association of Real Estate Investment Trusts (NAREIT) developed FFO as a relative non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. FFO is a widely used measure of the operating performance of real estate companies and is provided here as a supplemental measure to GAAP net income available to common shareholders and earnings per share. FFO, as defined under the revised NAREIT definition and presented by us, is net income available to common shareholders, computed in accordance with GAAP, excluding gains and losses from sales of depreciable operating properties, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships, joint ventures and other affiliates. Adjustments for unconsolidated partnerships, joint ventures and other affiliates are calculated to reflect FFO on the same basis. FFO is a non-GAAP financial measure. FFO does not represent cash flows from

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operations as defined by GAAP and is not indicative that cash flows are adequate to fund all cash needs and is not to be considered an alternative to net income or any other GAAP measure as a measurement of the results of our operations or our cash flows or liquidity as defined by GAAP. It should also be noted that not all REITs calculate FFO the same way so comparisons with other REITs may not be meaningful.
The additional 1.9 million common shares that would result from the conversion of our Series C convertible preferred shares and the corresponding add-back of the preferred dividends declared on those shares are not included in the calculation of diluted earnings per share for the three and nine months ended September 30, 2007 because the effect is anti-dilutive. However, because a conversion would be dilutive to FFO per share, these adjustments have been made in the calculation of diluted FFO per share.
The following table summarizes our FFO, FFO per share and certain other financial information for the three and nine months ended September 30, 2007 and 2006 (in thousands, except per share information):
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2007     2006     2007     2006  
Net income available to common shareholders
  $ 20,739     $ 17,800     $ 59,733     $ 52,147  
Subtract: Gain on sale of real estate from discontinued operations
                (3,240 )      
Subtract: Minority Interest
    (988 )           (988 )      
Add: Real estate depreciation and amortization
    9,751       7,687       26,770       22,584  
Add: Allocated share of joint venture depreciation
    61       61       184       182  
 
                       
FFO available to common shareholders
    29,563       25,548       82,459       74,913  
 
                       
 
                               
FFO available to common shareholders
  $ 29,563     $ 25,548     $ 82,459     $ 74,913  
Add: Preferred dividends for Series C
    1,941             5,822        
 
                       
Diluted FFO available to common shareholders
    31,504       25,548       88,281       74,913  
 
                       
 
                               
FFO per common share:
                               
Basic
  $ 1.12       0.97     $ 3.13     $ 2.87  
Diluted
    1.10       0.95       3.07       2.83  
 
                               
Shares used for computation (in thousands):
                               
Basic
    26,432       26,298       26,378       26,093  
Diluted
    28,724       26,769       28,755       26,511  
 
                               
Weighted average shares outstanding - diluted EPS
    26,824       26,769       26,858       26,511  
Effect of dilutive Series C preferred shares
    1,900             1,897        
 
                       
Adjusted weighted average shares outstanding - diluted
    28,724       26,769       28,755       26,511  
 
                       
 
                               
Other financial information:
                               
Straight-lined rental revenue
  $ 1,178       1,014       3,229       2,853  

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Impact of Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109, Accounting for Income Taxes, and it prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 was effective for us on January 1, 2007. The adoption of FIN 48 did not have a material impact on our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157) which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Where applicable, SFAS No. 157 simplifies and codifies related guidance within GAAP and does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier adoption is encouraged. The Company does not expect the adoption of SFAS No. 157 will have a material impact on its financial position or results of operations.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (SFAS No. 159). SFAS No. 159 allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item are to be reported in current earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes the Company elects for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is required to adopt SFAS No. 159 in the first quarter of 2008. The Company is currently evaluating the impact that SFAS No. 159 will have on its financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, primarily relating to potential losses due to changes in interest rates. We seek to mitigate the effects of fluctuations in interest rates by matching the term of new investments with new long-term fixed rate borrowings whenever possible. We also have a $235 million unsecured revolving credit facility and a $120 million term loan that both bear interest at a floating rate.
We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of such refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings are subject to mortgages or contractual agreements which limit the amount of indebtedness we may incur. Accordingly, if we are unable to raise additional equity or borrow money due to these limitations, our ability to make additional real estate investments may be limited.
We have not engaged extensively in the use of derivatives to manage our interest rate and market risk due to our limited use of variable rate debt.

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We financed the acquisition of our four Canadian properties with non-recourse fixed rate mortgage loans from a Canadian lender in the original aggregate principal amount of approximately U.S. $97 million. The loans were made and are payable by us in Canadian dollars (CAD), and the rents received from tenants of the properties are payable in CAD. We have also provided a secured mortgage construction loan totaling CAD $65.9 million. The loan and the related interest income is payable to us in CAD.
We have partially mitigated the impact of foreign currency exchange risk on our Canadian properties by matching Canadian dollar debt financing with Canadian dollar rents. To further mitigate our foreign currency risk in future periods on the four Canadian properties, we have entered into foreign currency forward contracts with monthly settlement dates ranging from October 2007 through December 2007. These contracts have a notional value of $3.2 million CAD and an average exchange rate of $1.15 CAD per U.S. dollar. Additionally, during the second quarter of 2007, we entered into a cross currency swap with a notional value of $76.0 million CAD and $71.5 million U.S. The swap calls for monthly exchanges from January 2008 through February 2014 with us paying CAD based on an annual rate of 17.16% of the notional amount and receiving U.S. dollars based on an annual rate of 17.4% of the notional amount. There is no initial or final exchange of the notional amounts. The net effect of this swap is to lock in an exchange rate of $1.05 CAD per U.S. dollar on approximately $13 million of annual CAD denominated cash flows. These foreign currency derivatives should hedge a significant portion of our expected CAD denominated FFO of these four Canadian properties through February 2014 as their impact on our reported FFO when settled should move in the opposite direction of the exchange rates utilized to translate revenues and expenses of these properties.
In order to also hedge our net investment on the four Canadian properties, we entered into a forward contract with a notional amount of $100 million CAD and a February 2014 settlement date which coincides with the maturity of our underlying mortgage on these four properties. The exchange rate of this forward contract is approximately $1.04 CAD per U.S. dollar. This forward contract should hedge a significant portion of our CAD denominated net investment in these four centers through February 2014 as the impact on accumulated other comprehensive income from marking the derivative to market should move in the opposite direction of the translation adjustment on the net assets of our four Canadian properties.
To further mitigate our foreign currency risk in future periods on the interest income from the CAD denominated mortgage receivable, we have entered into foreign currency forward contracts with monthly settlement dates ranging from October 2007 through March 2008. These contracts have a notional value of $4.4 million CAD and an average exchange rate of $1.15 CAD per U.S. dollar. We have not yet hedged any of our net investment in the CAD denominated mortgage receivable or its expected CAD denominated interest income beyond March 2008 due to the mortgage note’s maturity in 2008 and our underlying option to buy a 50% interest in the borrower entity.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the

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Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our disclosure controls were designed to provide reasonable assurance that the controls and procedures would meet their objectives. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the designed control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusions of two or more people, or by management override of the control. Because of the inherent limitations in a cost-effective, maturing control system, misstatements due to error or fraud may occur and not be detected.
There have not been any changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter of the fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1 . Legal Proceedings
Other than routine litigation and administrative proceedings arising in the ordinary course of business, we are not presently involved in any litigation nor, to our knowledge, is any litigation threatened against us or our properties, which is reasonably likely to have a material adverse effect on our liquidity or results of operations.
Item 1A. Risk Factors
There were no material changes during the quarter from the risk factors previously discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on February 28, 2007 or, to the extent applicable, our Quarterly Report on Form 10-Q.

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Item 2 . Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
                                 
                            Maximum  
                    Total Number     Number (or  
                    of Shares     Approximate  
                    Purchased     Dollar Value) of  
                    as Part of     Shares that  
    Total             Publicly     May Yet Be  
    Number of     Average     Announced     Purchased  
    Shares     Price Paid     Plans or     Under the Plans  
Period   Purchased     Per Share     Programs     or Programs  
July 1 through July 31, 2007 common stock
        $           $  
August 1 through August 31, 2007 common stock
                       
September 1 through September 30, 2007 common stock
    2,694   (1)     50.16              
 
                       
 
                               
Total
    2,694     $ 50.16           $  
 
                       
 
(1)   The repurchase of equity securities during September of 2007 was completed in conjunction with employee stock option exercises. These repurchases were not made pursuant to a publicly announced plan or program.
Item 3. Defaults upon Senior Securities
There were no reportable events during the quarter ended September 30, 2007.
Item 4. Submission of Matters to a Vote of Security Holders
There were no reportable events during the quarter ended September 30, 2007.
Item 5 . Other information
There were no reportable events during the quarter ended September 30, 2007.
Item 6 . Exhibits
     
4.1
  Master Credit Agreement, dated as of October 26, 2007, among Entertainment Properties Trust, EPT 301, LLC, KeyBank National Association, as administrative agent and a lender, KeyBanc Capital Markets, as sole lead arranger and sole book manager, and the other lenders party thereto and Morgan Stanley Bank, as documentation agent thereto, which is attached as Exhibit 4.1 to the Company’s Form 8-K (Commission File No. 001-13561) filed October 31, 2007, is incorporated by reference as Exhibit 4.1.
 
   
4.2
  Collateral Pledge and Security Agreement, dated as of October 26, 2007, by and between Entertainment Properties Trust and KeyBank National Association, individually and as administrative agent for itself and the lenders under the Master

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  Credit Agreement dated October 26, 2007, which is attached as Exhibit 4.2 to the Company’s Form 8-K (Commission File No. 001-13561) filed October 31, 2007, is incorporated by reference as Exhibit 4.2.
 
   
31.1*
  Certification of David M. Brain, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.2*
  Certification of Mark A. Peterson, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.1*
  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
   
32.2*
  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
*   Filed herewith.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  ENTERTAINMENT PROPERTIES TRUST
 
 
Dated: October 31, 2007  By /s/ David M. Brain    
     
  David M. Brain, President – Chief Executive
Officer (Principal Executive Officer) 
 
 
         
     
Dated: October 31, 2007  By /s/ Mark A. Peterson    
     
  Mark A. Peterson, Vice President – Chief
Financial Officer (Principal Financial Officer
and Chief Accounting Officer) 
 
 

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EXHIBIT INDEX
     
Exhibit No.   Document
 
4.1
  Master Credit Agreement, dated as of October 26, 2007, among Entertainment Properties Trust, EPT 301, LLC, KeyBank National Association, as administrative agent and a lender, KeyBanc Capital Markets, as sole lead arranger and sole book manager, and the other lenders party thereto and Morgan Stanley Bank, as documentation agent thereto, which is attached as Exhibit 4.1 to the Company’s Form 8-K (Commission File No. 001-13561) filed October 31, 2007, is incorporated by reference as Exhibit 4.1.
 
   
4.2
  Collateral Pledge and Security Agreement, dated as of October 26, 2007, by and between Entertainment Properties Trust and KeyBank National Association, individually and as administrative agent for itself and the lenders under the Master Credit Agreement dated October 26, 2007, which is attached as Exhibit 4.2 to the Company’s Form 8-K (Commission File No. 001-13561) filed October 31, 2007, is incorporated by reference as Exhibit 4.2.
 
   
31.1*
  Certification of David M. Brain, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.2*
  Certification of Mark A. Peterson, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.1*
  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
   
32.2*
  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
*   Filed herewith.

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