EPR PROPERTIES
Consolidated Statements of Changes in Equity
(Unaudited)
(Dollars in thousands except per share data)
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| EPR Properties Shareholders’ Equity | | | | |
| | Common Stock | | Preferred Stock | | Additional
paid-in capital | | Treasury
shares | | Accumulated
other
comprehensive income | | Distributions
in excess of
net income | | | | Total |
| Shares | | Par | | Shares | | Par | | |
| Balance at December 31, 2020 | 81,917,876 | | | $ | 819 | | | 14,841,431 | | | $ | 148 | | | $ | 3,857,632 | | | $ | (261,238) | | | $ | 216 | | | $ | (966,992) | | | | | $ | 2,630,585 | |
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| Issuance of nonvested shares and performance shares, net of cancellations | 246,562 | | | 2 | | | — | | | — | | | 2,899 | | | — | | | — | | | — | | | | | 2,901 | |
| Purchase of common shares for vesting | — | | | — | | | — | | | — | | | — | | | (2,744) | | | — | | | — | | | | | (2,744) | |
| Share-based compensation expense | — | | | — | | | — | | | — | | | 3,784 | | | — | | | — | | | — | | | | | 3,784 | |
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| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 2,300 | | | — | | | | | 2,300 | |
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| Change in unrealized gain on derivatives | — | | | — | | | — | | | — | | | — | | | — | | | 462 | | | — | | | | | 462 | |
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| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,380 | | | | | 3,380 | |
| Issuances of common shares | 2,509 | | | — | | | — | | | — | | | 107 | | | — | | | — | | | — | | | | | 107 | |
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| Dividend equivalents accrued on performance shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (8) | | | | | (8) | |
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Dividends to Series C preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | | (1,939) | |
Dividends to Series E preferred shareholders ($0.5625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | | (1,939) | |
Dividends to Series G preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,156) | | | | | (2,156) | |
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| Balance at March 31, 2021 | 82,166,947 | | | $ | 821 | | | 14,841,431 | | | $ | 148 | | | $ | 3,864,422 | | | $ | (263,982) | | | $ | 2,978 | | | $ | (969,654) | | | | | $ | 2,634,733 | |
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| Restricted share units issued to Trustees | 43,306 | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | 1 | |
| Cancellations of nonvested shares | — | | | — | | | — | | | — | | | 484 | | | (484) | | | — | | | — | | | | | — | |
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| Share-based compensation expense | — | | | — | | | — | | | — | | | 3,675 | | | — | | | — | | | — | | | | | 3,675 | |
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| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 2,674 | | | — | | | | | 2,674 | |
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| Change in unrealized loss on derivatives | — | | | — | | | — | | | — | | | — | | | — | | | (387) | | | — | | | | | (387) | |
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| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 18,552 | | | | | 18,552 | |
| Issuances of common shares | 1,826 | | | — | | | — | | | — | | | 90 | | | — | | | — | | | — | | | | | 90 | |
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| Conversion of Series C Convertible Preferred shares to common shares | 330 | | | — | | | (800) | | | — | | | — | | | — | | | — | | | — | | | | | — | |
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| Stock option exercises, net | 4,065 | | | — | | | — | | | — | | | 194 | | | (194) | | | — | | | — | | | | | — | |
| Dividend equivalents accrued on performance shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (10) | | | | | (10) | |
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Dividends to Series C preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,938) | | | | | (1,938) | |
Dividends to Series E preferred shareholders ($0.5625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | | (1,939) | |
Dividends to Series G preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,156) | | | | | (2,156) | |
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| Balance at June 30, 2021 | 82,216,474 | | | $ | 822 | | | 14,840,631 | | | $ | 148 | | | $ | 3,868,865 | | | $ | (264,660) | | | $ | 5,265 | | | $ | (957,145) | | | | | $ | 2,653,295 | |
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| | EPR Properties Shareholders’ Equity | | | | |
| | Common Stock | | Preferred Stock | | Additional
paid-in capital | | Treasury shares | | Accumulated
other
comprehensive income | | Distributions
in excess of
net income | | | | Total |
| Shares | | Par | | Shares | | Par | | |
| Continued from previous page. | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | 82,225,061 | | | $ | 822 | | | 14,840,297 | | | $ | 148 | | | $ | 3,876,817 | | | $ | (264,817) | | | $ | 9,955 | | | $ | (1,004,886) | | | | | $ | 2,618,039 | |
| Restricted share units issued to Trustees | 2,794 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| Issuance of nonvested shares and performance shares, net of cancellations | 243,286 | | | 3 | | | — | | | — | | | 4,496 | | | (83) | | | — | | | — | | | | | 4,416 | |
| Purchase of common shares for vesting | — | | | — | | | — | | | — | | | — | | | (4,250) | | | — | | | — | | | | | (4,250) | |
| Share-based compensation expense | — | | | — | | | — | | | — | | | 4,245 | | | — | | | — | | | — | | | | | 4,245 | |
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| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | 2,606 | | | — | | | | | 2,606 | |
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| Change in unrealized loss on derivatives | — | | | — | | | — | | | — | | | — | | | — | | | (2,090) | | | — | | | | | (2,090) | |
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| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 42,192 | | | | | 42,192 | |
| Issuances of common shares | 4,730 | | | — | | | — | | | — | | | 228 | | | — | | | — | | | — | | | | | 228 | |
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| Stock option exercises, net | 9,799 | | | — | | | — | | | — | | | 454 | | | (458) | | | — | | | — | | | | | (4) | |
| Dividend equivalents accrued on performance shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (136) | | | | | (136) | |
Dividends to common shareholders ($0.775 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (58,099) | | | | | (58,099) | |
Dividends to Series C preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,938) | | | | | (1,938) | |
Dividends to Series E preferred shareholders ($0.5625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | | (1,939) | |
Dividends to Series G preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,156) | | | | | (2,156) | |
| Balance at March 31, 2022 | 82,485,670 | | | $ | 825 | | | 14,840,297 | | | $ | 148 | | | $ | 3,886,240 | | | $ | (269,608) | | | $ | 10,471 | | | $ | (1,026,962) | | | | | $ | 2,601,114 | |
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| Restricted share units issued to Trustees | 38,605 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
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| Share-based compensation expense | — | | | — | | | — | | | — | | | 4,169 | | | — | | | — | | | — | | | | | 4,169 | |
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| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (4,924) | | | — | | | | | (4,924) | |
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| Change in unrealized gain on derivatives | — | | | — | | | — | | | — | | | — | | | — | | | 5,128 | | | — | | | | | 5,128 | |
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| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 40,909 | | | | | 40,909 | |
| Issuances of common shares | 5,587 | | | — | | | — | | | — | | | 275 | | | — | | | — | | | — | | | | | 275 | |
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| Dividend equivalents accrued on performance shares | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (188) | | | | | (188) | |
Dividends to common shareholders ($0.825 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (61,873) | | | | | (61,873) | |
Dividends to Series C preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,938) | | | | | (1,938) | |
Dividends to Series E preferred shareholders ($0.5625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,939) | | | | | (1,939) | |
Dividends to Series G preferred shareholders ($0.359375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,156) | | | | | (2,156) | |
| Balance at June 30, 2022 | 82,529,862 | | | $ | 825 | | | 14,840,297 | | | $ | 148 | | | $ | 3,890,684 | | | $ | (269,608) | | | $ | 10,675 | | | $ | (1,054,147) | | | | | $ | 2,578,577 | |
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See accompanying notes to consolidated financial statements.
EPR PROPERTIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
| | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2022 | | 2021 |
| Operating activities: | | | |
| Net income | $ | 83,101 | | | $ | 21,932 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
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| Impairment charges | 4,351 | | | — | |
| Impairment charges on joint ventures | 647 | | | — | |
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| Gain on sale of real estate | — | | | (712) | |
| Gain on insurance recovery | (552) | | | (30) | |
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| Costs associated with loan refinancing or payoff | — | | | 241 | |
| Equity in (income) loss from joint ventures | (1,315) | | | 2,582 | |
| Distributions from joint ventures | 780 | | | 90 | |
| Credit loss expense (benefit) | 9,206 | | | (5,581) | |
| Depreciation and amortization | 80,810 | | | 80,864 | |
| Amortization of deferred financing costs | 4,161 | | | 3,121 | |
| Amortization of above/below market leases and tenant allowances, net | (176) | | | (195) | |
| Share-based compensation expense to management and Trustees | 8,414 | | | 7,459 | |
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| Change in assets and liabilities: | | | |
| Operating lease assets and liabilities | (100) | | | (233) | |
| Mortgage notes accrued interest receivable | 350 | | | (143) | |
| Accounts receivable | 22,168 | | | 24,952 | |
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| Other assets | (3,902) | | | (6,320) | |
| Accounts payable and accrued liabilities | 2,955 | | | (1,719) | |
| Unearned rents and interest | 6,152 | | | 14,492 | |
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| Net cash provided by operating activities | 217,050 | | | 140,800 | |
| Investing activities: | | | |
| Acquisition of and investments in real estate and other assets | (169,656) | | | (29,702) | |
| Proceeds from sale of real estate | 80 | | | 28,635 | |
| Investment in unconsolidated joint ventures | (17,843) | | | (1,940) | |
| Distributions from joint venture related to refinancing | 6,695 | | | — | |
| Settlement of derivative | (3,830) | | | — | |
| Investment in mortgage notes receivable | (11,305) | | | (4,588) | |
| Proceeds from mortgage notes receivable paydowns | 272 | | | 7,982 | |
| Investment in notes receivable | — | | | (4,379) | |
| Proceeds from note receivable paydowns | 189 | | | 1,708 | |
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| Proceeds from insurance recovery, net | 1,071 | | | 30 | |
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| Additions to properties under development | (9,393) | | | (24,512) | |
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| Net cash used by investing activities | (203,720) | | | (26,766) | |
| Financing activities: | | | |
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| Principal payments on debt | — | | | (613,765) | |
| Deferred financing fees paid | (328) | | | (251) | |
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| Net proceeds from issuance of common shares | 359 | | | 198 | |
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| Impact of stock option exercises, net | (4) | | | — | |
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| Purchase of common shares for treasury for vesting | (4,250) | | | (2,744) | |
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| Dividends paid to shareholders | (129,968) | | | (12,068) | |
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| Net cash used by financing activities | (134,191) | | | (628,630) | |
| Effect of exchange rate changes on cash | 503 | | | (8) | |
| Net change in cash and cash equivalents and restricted cash | (120,358) | | | (514,604) | |
| Cash and cash equivalents and restricted cash at beginning of the period | 289,901 | | | 1,028,010 | |
| Cash and cash equivalents and restricted cash at end of the period | $ | 169,543 | | | $ | 513,406 | |
| Supplemental information continued on next page. | | | |
EPR PROPERTIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
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| Continued from previous page | | | |
| | Six Months Ended June 30, |
| | 2022 | | 2021 |
| Reconciliation of cash and cash equivalents and restricted cash: | | | |
| Cash and cash equivalents at beginning of the period | $ | 288,822 | | | $ | 1,025,577 | |
| Restricted cash at beginning of the period | 1,079 | | | 2,433 | |
| Cash and cash equivalents and restricted cash at beginning of the period | $ | 289,901 | | | $ | 1,028,010 | |
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| Cash and cash equivalents at end of the period | $ | 168,266 | | | $ | 509,836 | |
| Restricted cash at end of the period | 1,277 | | | 3,570 | |
| Cash and cash equivalents and restricted cash at end of the period | $ | 169,543 | | | $ | 513,406 | |
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| Supplemental schedule of non-cash activity: | | | |
| Transfer of property under development to real estate investments | $ | 38,119 | | | $ | 70,784 | |
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| Issuance of nonvested shares and restricted share units at fair value, including nonvested shares issued for payment of bonuses | $ | 21,751 | | | $ | 21,921 | |
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| Operating lease right-of-use asset and related operating lease liability recorded for new ground lease | $ | 29,022 | | | $ | 22,126 | |
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| Supplemental disclosure of cash flow information: | | | |
| Cash paid during the period for interest | $ | 63,551 | | | $ | 77,012 | |
| Cash paid during the period for income taxes | $ | 657 | | | $ | 921 | |
| Interest cost capitalized | $ | 271 | | | $ | 1,109 | |
| Change in accrued capital expenditures | $ | (217) | | | $ | 8,017 | |
See accompanying notes to consolidated financial statements.
EPR PROPERTIES
Notes to Consolidated Financial Statements (Unaudited)
1. Organization
Description of Business
EPR Properties (the Company) was formed on August 22, 1997 as a Maryland real estate investment trust (REIT), and an initial public offering of the Company's common shares of beneficial interest (common shares) was completed on November 18, 1997. Since that time, the Company has been a leading diversified Experiential net lease REIT specializing in select enduring experiential properties. The Company's underwriting is centered on key industry and property cash flow criteria, as well as the credit metrics of the Company's tenants and customers. The Company’s properties are located in the United States and Canada.
2. Summary of Significant Accounting Policies and Recently Issued Accounting Standards
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. In addition, operating results for the six month period ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. Amounts as of December 31, 2021 have been derived from the audited Consolidated Financial Statements as of that date and should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (SEC) on February 23, 2022.
The Company consolidates certain entities when it is deemed to be the primary beneficiary in a variable interest entity (VIE) in which it has a controlling financial interest in accordance with the consolidation guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The equity method of accounting is applied to entities in which the Company is not the primary beneficiary as defined in the FASB ASC Topic on Consolidation (Topic 810) but can exercise influence over the entity with respect to its operations and major decisions.
The Company examines specific criteria and uses its judgment when determining if the Company is the primary beneficiary of a VIE. The primary beneficiary generally is defined as the party with the controlling financial interest. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. As of June 30, 2022 and December 31, 2021, the Company does not have any investments in consolidated VIEs.
Risks and Uncertainties
The Company continues to be subject to risks and uncertainties resulting from the COVID-19 pandemic. The COVID-19 pandemic severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. In response to the COVID-19 pandemic, many jurisdictions within the United States and abroad instituted health and safety measures, including quarantines, mandated business and school closures and travel restrictions. As a result, the COVID-19 pandemic severely impacted experiential real estate properties, given that such properties involve congregate social activity and discretionary consumer spending. Although many of these health and safety measures have been lifted, the extent of the impact of the COVID-19 pandemic on the Company's business still remains highly uncertain and difficult to predict.
As of June 30, 2022, the Company had no properties closed due to COVID-19 restrictions. The continuing impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited
to, the scope, severity and duration of any resurgence of the pandemic (including COVID-19 variants), the actions taken to contain the outbreak or any resurgence or mitigate their impacts, the distribution and efficacy of vaccines and therapeutics, the public’s confidence in the health and safety measures implemented by the Company's tenants and borrowers, the continuing direct and indirect economic effects of the outbreak and containment measures, and the ability of the Company's tenants and borrowers to recover from the negative economic impacts of the pandemic as it subsides, and in many cases, service elevated levels of debt resulting from the pandemic, all of which are uncertain and cannot be predicted. During 2020 and 2021, the COVID-19 pandemic negatively affected the Company's business and could continue to have material adverse effects on the Company's financial condition, results of operations and cash flows. The Company considered the impact of, and recovery from, the COVID-19 pandemic on the assumptions and estimates used in determining the Company’s financial condition and results of operations for the six months ended June 30, 2022.
The following were impacts to the Company's financial statements and business during the six months ended June 30, 2022 arising out of or relating to the COVID-19 pandemic:
•The Company continued to recognize revenue on a cash basis for certain tenants including American-Multi Cinema, Inc. (AMC) and Regal Cinemas (Regal), a subsidiary of Cineworld Group.
•As of June 30, 2022, the Company has deferred amounts due from tenants of approximately $12.1 million that are booked as receivables. Additionally, the Company has amounts due from customers that were not booked as receivables because the full amounts were not deemed probable of collection as a result of the COVID-19 pandemic. The amounts not booked as receivables remain obligations of the customers and will be recognized as revenue when received. During the six months ended June 30, 2022, the Company collected $6.3 million in deferred rent and $0.3 million of deferred interest from cash basis customers and from customers for which the deferred payments were not previously recognized as revenue. In addition, during the six months ended June 30, 2022, the Company collected $14.7 million of deferred rent and $0.4 million of deferred interest from accrual basis customers that reduced related accounts and interest receivable. The repayment terms for all of these deferments vary by customer.
Reportable Segments
The Company has two reportable operating segments: Experiential and Education. The Experiential segment includes the following property types: theatres, eat & play (including seven theatres located in entertainment districts), attractions, ski, experiential lodging, fitness & wellness, gaming and cultural. The Education segment includes the following property types: early childhood education centers and private schools. See Note 15 for financial information related to these reportable segments.
Real Estate Investments
Real estate investments are carried at initial recorded value less accumulated depreciation. Costs incurred for the acquisition and development of the properties are capitalized. In addition, the Company capitalizes certain costs that relate to property under development including interest and a portion of internal legal personnel costs. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which generally are estimated to be 30 years to 40 years for buildings, three years to 25 years for furniture, fixtures and equipment and 10 years to 20 years for site improvements. Tenant improvements, including allowances, are depreciated over the shorter of the lease term or the estimated useful life and leasehold interests are depreciated over the useful life of the underlying ground lease.
Management reviews the Company's real estate investments, including operating lease right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable, which is based on an estimate of undiscounted future cash flows expected to result from its use and eventual disposition. If impairment exists due to the inability to recover the carrying value of the property, an impairment loss is recorded to the extent that the carrying value of the property exceeds its estimated fair value.
The Company evaluates the held-for-sale classification of its real estate as of the end of each quarter. Assets that are classified as held for sale are recorded at the lower of their carrying amount or fair value less costs to sell and are generally classified as held for sale once management has initiated an active program to market them for sale and it
is probable the assets will be sold within one year. On occasion, the Company will receive unsolicited offers from third parties to buy individual Company properties. Under these circumstances, the Company will classify the properties as held for sale when a sales contract is executed with no contingencies and the prospective buyer has funds at risk to ensure performance.
Real Estate Acquisitions
Upon acquisition of real estate properties, the Company evaluates the acquisition to determine if it is a business combination or an asset acquisition. If the acquisition is determined to be an asset acquisition, the Company records the purchase price and other related costs incurred to the acquired tangible assets and identified intangible assets and liabilities on a relative fair value basis. In addition, costs incurred for asset acquisitions, including transaction costs, are capitalized.
If the acquisition is determined to be a business combination, the Company records the fair value of acquired tangible assets and identified intangible assets and liabilities as well as any noncontrolling interest. Acquisition-related costs in connection with business combinations are expensed as incurred and included in "Transaction costs" in the accompanying consolidated statements of income and comprehensive income.
For real estate acquisitions (asset acquisitions or business combinations), the fair value (or relative fair value in an asset acquisition) of the tangible assets is determined by valuing the property using recent independent appraisals or methods similar to those used by independent appraisers. Land is valued using the sales comparison approach which uses available market data from recent comparable land sales as an input to estimate the fair value. Site improvements and tenant improvements are valued using the cost approach which uses replacement cost data obtained from industry recognized guides less depreciation as an input to estimate the fair value. The building is valued either using the cost approach described above or a combination of the cost and the income approach. The income approach uses market leasing assumptions to estimate the fair value of the property as if vacant. The cost and income approaches are reconciled to arrive at an estimated building fair value.
Deferred Financing Costs
Deferred financing costs are amortized over the terms of the related debt obligations or mortgage note receivable as applicable. Deferred financing costs of $34.1 million and $36.9 million as of June 30, 2022 and December 31, 2021, respectively, are shown as a reduction of debt. The deferred financing costs of $7.6 million and $8.7 million as of June 30, 2022 and December 31, 2021, respectively, related to the unsecured revolving credit facility are included in "Other assets" in the accompanying consolidated balance sheets.
Rental Revenue
The Company leases real estate to its tenants under leases classified as operating leases. The Company's leases generally provide for rent escalations throughout the lease terms. Rents that are fixed are recognized on a straight-line basis over the lease term. Base rent escalations that include a variable component are recognized upon the occurrence of the specified event as defined in the Company's lease agreements. Many of the Company's leasing arrangements include options to extend the lease, which are not included in the minimum lease terms unless it is reasonably certain to be exercised. Straight-line rental revenue is subject to an evaluation for collectibility, and the Company records a direct write-off against rental revenue if collectibility of these future rents is not probable. For the six months ended June 30, 2022 and 2021, the Company recognized $2.3 million and $2.7 million, respectively, of straight-line rental revenue. There were no straight-line write-offs for the six months ended June 30, 2022 and 2021.
The Company has agreed to defer rent for a substantial portion of its customers in response to the impact of the COVID-19 pandemic on their operations. On April 10, 2020, the FASB issued a Staff Q&A on Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic. In reliance upon the FASB Staff Q&A, the Company has not treated qualifying deferrals or rent concessions during the period affected by the COVID-19 pandemic as lease modifications. While deferments for this and future periods delay rent payments, these deferments generally do not release customers from the obligation to pay the deferred amounts in the future. Deferred rent amounts are reflected in the Company's financial statements as accounts receivable if collection is determined to be probable or recognized when received as variable lease payments if collection is
determined to not be probable. Certain agreements with tenants where remaining lease terms are extended, or other changes are made that do not qualify for the treatment in the FASB Staff Q&A, are treated as lease modifications. In these circumstances, upon an executed lease modification, if the tenant is not being recognized on a cash basis, the contractual rent reflected in accounts receivable and straight-line rent receivable will be amortized over the remaining term of the lease against rental revenue. In limited cases, customers may be entitled to the abatement of rent during governmentally imposed prohibitions on business operations which is recognized in the period to which the abatement relates, or the Company may provide rent concessions to tenants. In cases where the Company provides concessions to tenants to which they are not otherwise entitled, those amounts will be recognized in the period in which the concession is granted unless the changes are accounted for as lease modifications.
Most of the Company’s lease contracts are triple-net leases, which require the tenants to make payments to third parties for lessor costs (such as property taxes and insurance) associated with the properties. In accordance with Topic 842, the Company does not include these lessee payments to third parties in rental revenue or property operating expenses. In certain situations, the Company pays these lessor costs directly to third parties and the tenants reimburse the Company. In accordance with Topic 842, these payments are presented on a gross basis in rental revenue and property operating expense. During the six months ended June 30, 2022 and 2021, the Company recognized $1.1 million and $1.9 million, respectively, in tenant reimbursements related to the gross up of these reimbursed expenses which are included in rental revenue.
Certain of the Company's leases, particularly at its entertainment districts, require the tenants to make payments to the Company for property-related expenses such as common area maintenance. The Company has elected to combine these non-lease components with the lease components in rental revenue. For the six months ended June 30, 2022 and 2021, the amounts due for non-lease components included in rental revenue totaled $9.2 million and $7.9 million, respectively.
In addition, most of the Company's tenants are subject to additional rents (above base rents) if gross revenues of the properties exceed certain thresholds defined in the lease agreements (percentage rents). Percentage rents are recognized at the time when specific triggering events occur as provided by the lease agreement. Rental revenue included percentage rents of $4.0 million for both the six months ended June 30, 2022 and 2021.
The Company regularly evaluates the collectibility of its receivables on a lease-by-lease basis. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of the Company's tenants, historical trends of the tenant, current economic conditions and changes in customer payment terms. When the collectibility of lease receivables or future lease payments are no longer probable, the Company records a direct write-off of the receivable to rental revenue and recognizes future rental revenue on a cash basis.
Property Sales
Sales of real estate properties are recognized when a contract exists and the purchaser has obtained control of the property. Gains on sales of properties are recognized in full in a partial sale of nonfinancial assets, to the extent control is not retained. Any noncontrolling interest retained by the seller would, accordingly, be measured at fair value.
The Company evaluates each sale or disposal transaction to determine if it meets the criteria to qualify as discontinued operations. A discontinued operation is a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on the Company's operations and financial results. If the sale or disposal transaction does not meet the criteria, the operations and related gain or loss on sale is included in income from continuing operations.
Mortgage Notes and Other Notes Receivable
Mortgage notes and other notes receivable, including related accrued interest receivable, consist of loans originated by the Company and the related accrued and unpaid interest income as of the balance sheet date. Mortgage notes and other notes receivable are initially recorded at the amount advanced to the borrower less allowance for credit loss. Interest income is recognized using the effective interest method over the estimated life of the note. Interest income includes both the stated interest and the amortization or accretion of premiums or discounts (if any).
In accordance with ASC Topic 326, Measurement of Credit Losses on Financial Instruments, the Company records allowance for credit loss to reflect that all mortgage notes and notes receivable have some inherent risk of loss regardless of credit quality, collateral, or other mitigating factors. While Topic 326 does not require any particular method for determining the reserves, it does specify that it should be based on relevant information about past events, including historical loss experience, current portfolio and market conditions, as well as reasonable and supportable forecasts for the term of each mortgage note or note receivable. The Company uses a forward looking commercial real estate forecasting tool to estimate its current expected credit losses (CECL) for each of its mortgage notes and notes receivable on a loan by loan basis. The CECL allowance required by Topic 326 is a valuation account that is deducted from the related mortgage note or note receivable.
Certain of the Company’s mortgage notes and notes receivable include commitments to fund incremental amounts to its borrowers. These future funding commitments are also subject to the CECL model. The allowance related to future funding is recorded as a liability and is included in "Accounts payable and accrued liabilities" in the accompanying consolidated balance sheet.
As permitted under Topic 326, the Company made an accounting policy election to not measure an allowance for credit losses for accrued interest receivables related to its mortgage notes and notes receivable. Accordingly, if accrued interest receivable is deemed to be uncollectible, the Company will record any necessary write-offs as a reversal of interest income. During the six months ended June 30, 2022, the Company wrote-off approximately $1.5 million of accrued interest and fees receivables against interest income related to one mortgage note receivable and two notes receivable. There were no accrued interest write-offs for the six months ended June 30, 2021. As of June 30, 2022, the Company believes that all outstanding accrued interest is collectible.
In the event the Company has a past due mortgage note or note receivable and the Company determines it is collateral dependent, the Company measures expected credit losses based on the fair value of the collateral. As of June 30, 2022, the Company does not have any mortgage notes or notes receivable with past due principal balances.
Mortgage and Other Financing Income
Certain of the Company's borrowers are subject to additional interest based on certain thresholds defined in the mortgage agreements (participating interest). Participating interest income is recognized at the time when specific parameters have been met as provided by the mortgage agreement. There was no participating interest income for the six months ended June 30, 2022 and 2021.
Concentrations of Risk
AMC, Regal and Topgolf USA (Topgolf) represented a significant portion of the Company's total revenue for the six months ended June 30, 2022 and 2021. The Company began recognizing revenue on a cash basis for AMC at the end of the first quarter of 2020 and for Regal at the end of the third quarter of 2020 and cash payments were reduced due to the impact of the COVID-19 pandemic. Additionally, Regal had higher revenues during the six months ended June 30, 2022 due to the repayment of deferred rent that was recognized as rental revenue when received. The following is a summary of the Company's total revenue derived from rental or interest payments from AMC, Regal and Topgolf (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| Total Revenue | % of Company's Total Revenue | | Total Revenue | % of Company's Total Revenue |
| AMC | $ | 47,588 | | 15.0 | % | | $ | 47,625 | | 20.1 | % |
| Regal | 45,919 | | 14.4 | % | | 11,762 | | 5.0 | % |
| Topgolf | 45,423 | | 14.3 | % | | 41,896 | | 17.7 | % |
Share-Based Compensation
Share-based compensation to employees of the Company is granted pursuant to the Company's Annual Incentive Program and Long-Term Incentive Plan and share-based compensation to non-employee Trustees of the Company is granted pursuant to the Company's Trustee compensation program.
Share-based compensation expense consists of amortization of non-vested share grants and share options issued to employees, and amortization of share units issued to non-employee Trustees for payment of their annual retainers. Share-based compensation is included in "General and administrative expense" in the accompanying consolidated statements of income and comprehensive income.
Nonvested Shares Issued to Employees
The Company grants nonvested shares to employees pursuant to both the Annual Incentive Program and the Long-Term Incentive Plan. The Company amortizes the expense related to the nonvested shares awarded to employees under the Long-Term Incentive Plan and the premium awarded under the nonvested share alternative of the Annual Incentive Program on a straight-line basis over the future vesting period (three years or four years). Expense recognized related to nonvested shares and included in "General and administrative expense" in the accompanying consolidated statements of income and comprehensive income was $3.9 million and $4.4 million for the six months ended June 30, 2022 and 2021, respectively.
Nonvested Performance Shares Issued to Employees
The Company awards performance shares to the Company's executive officers pursuant to the Long-Term Incentive Plan. The performance shares contain both a market condition and a performance condition. The Company amortizes the expense related to the performance shares over the future performance period of three years. Expense recognized related to performance shares and included in "General and administrative expense" in the accompanying consolidated statements of income and comprehensive income was $3.3 million and $1.9 million for the six months ended June 30, 2022 and 2021, respectively.
Share Options
Share options were granted to employees pursuant to the Long-Term Incentive Plan prior to 2022. The fair value of share options granted was estimated at the date of grant using the Black-Scholes option pricing model. Share options granted to employees vest over a period of four years and share option expense for these options is recognized on a straight-line basis over the vesting period. Expense recognized related to share options and included in "General and administrative expense" in the accompanying consolidated statements of income and comprehensive income was $7 thousand and $9 thousand for the six months ended June 30, 2022 and 2021, respectively.
Restricted Share Units Issued to Non-Employee Trustees
The Company issues restricted share units to non-employee Trustees for payment of their annual retainers under the Company's Trustee compensation program. The fair value of the share units granted was based on the share price at the date of grant. The share units vest upon the earlier of the day preceding the next annual meeting of shareholders or a change of control. The settlement date for the shares is selected by the non-employee Trustee, and ranges from one year from the grant date to upon termination of service. This expense is amortized by the Company on a straight-line basis over the year of service by the non-employee Trustees. Total expense recognized related to shares issued to non-employee Trustees and included in "General and administrative expense" in the accompanying consolidated statements of income and comprehensive income was $1.2 million for both the six months ended June 30, 2022 and 2021.
Derivative Instruments
The Company uses derivative instruments to reduce exposure to fluctuations in foreign currency exchange rates and variable interest rates.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to
changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as foreign currency risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. If hedge accounting is not applied, realized and unrealized gains or losses are reported in earnings.
The Company's policy is to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Impact of Recently Issued Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the year ended December 31, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. On March 5, 2021, the Financial Conduct Authority (FCA) announced that the USD LIBOR will no longer be published after June 30, 2023. At June 30, 2022, the Company had seven agreements (including debt, interest rate swap, mortgage note and lease agreements) that are indexed to LIBOR. The Company has transitioned several existing contracts to a replacement index and continues to make progress transitioning the remaining contracts.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the accounting guidance for troubled debt restructurings (TDR) by creditors that have adopted the CECL model and enhances disclosure requirements for loan modifications made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current period gross write-offs by year of origination for financing receivables. ASU 2022-02 is effective for fiscal years (and interim periods within those years), beginning after December 15, 2022. The Company expects to adopt the guidance beginning January 1, 2023 and is currently evaluating the impact that ASU 2022-02 will have on its disclosures.
3. Real Estate Investments
The following table summarizes the carrying amounts of real estate investments as of June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Buildings and improvements | $ | 4,687,295 | | | $ | 4,523,052 | |
| Furniture, fixtures & equipment | 118,921 | | | 108,907 | |
| Land | 1,248,738 | | | 1,222,149 | |
| Leasehold interests | 26,987 | | | 26,717 | |
| 6,081,941 | | | 5,880,825 | |
| Accumulated depreciation | (1,243,240) | | | (1,167,734) | |
| Total | $ | 4,838,701 | | | $ | 4,713,091 | |
Depreciation expense on real estate investments was $78.4 million and $78.0 million for the six months ended June 30, 2022 and 2021, respectively.
4. Impairment Charges
The Company reviews its properties for changes in circumstances that indicate that the carrying value of a property may not be recoverable based on an estimate of undiscounted future cash flows. During the six months ended June
30, 2022, the Company received an offer to sell a recently vacated property. As a result, the Company reassessed the expected holding period, and determined that the estimated cash flows were not sufficient to recover the carrying value of the property. The Company estimated the fair value of this property by taking into account the purchase offer. The Company reduced the carrying value of the real estate investment, net to $4.7 million. During the six months ended June 30, 2022, the Company recognized an impairment charge of $4.4 million on the real estate investment, which is the amount that the carrying value of the asset exceeded the estimated fair value.
During the six months ended June 30, 2022, the Company also recognized $0.6 million in other-than-temporary impairments related to its equity investments in joint ventures in two theatre projects located in China. See Note 9 for further details on these impairments.
5. Investments
The Company's investment spending during the six months ended June 30, 2022 totaled $239.2 million, and included the acquisition of one fitness and wellness property for approximately $19.9 million, the acquisition of two attraction properties located in Canada for approximately $142.8 million, spending on build-to-suit experiential development and redevelopment projects and the acquisition of interests in two joint ventures for approximately $50.6 million. See Note 9 for further details on these two joint ventures.
6. Investment in Mortgage Notes and Notes Receivable
The Company measures expected credit losses on its mortgage notes and notes receivable on an individual basis over the related contractual term as its financial instruments do not have similar risk characteristics. The Company uses a forward-looking commercial real estate loss forecasting tool to estimate its expected credit losses. The loss forecasting tool is comprised of a probability of default model and a loss given default model that utilizes the Company’s loan specific inputs as well as selected forward-looking macroeconomic variables and mean loss rates. Based on certain inputs, such as origination year, balance, interest rate as well as collateral value and borrower operating income, the model produces life of loan expected losses on a loan by loan basis. As of June 30, 2022, the Company did not anticipate any prepayments; therefore, the contractual term of its mortgage notes was used for the calculation of the expected credit losses. The Company updates the model inputs at each reporting period to reflect, if applicable, any newly originated loans, changes to loan specific information on existing loans and current macroeconomic conditions.
Investment in mortgage notes, including related accrued interest receivable, at June 30, 2022 and December 31, 2021 consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Outstanding principal amount of mortgage | Carrying amount as of | Unfunded commitments |
| Description | Year of Origination | Interest Rate | Maturity Date | June 30, 2022 | December 31, 2021 | June 30, 2022 |
| Attraction property Powells Point, North Carolina | 2019 | 7.75 | % | 6/30/2025 | $ | 29,035 | | $ | 28,879 | | $ | 28,243 | | $ | — | |
| Fitness & wellness property Omaha, Nebraska | 2017 | 7.85 | % | 1/3/2027 | 10,905 | | 10,953 | | 10,940 | | — | |
| Fitness & wellness property Merriam, Kansas | 2019 | 7.55 | % | 7/31/2029 | 9,090 | | 9,180 | | 9,159 | | — | |
| Ski property Girdwood, Alaska | 2019 | 8.20 | % | 12/31/2029 | 45,599 | | 45,587 | | 45,877 | | 11,401 | |
| Fitness & wellness property Omaha, Nebraska | 2016 | 7.85 | % | 6/30/2030 | 10,539 | | 10,584 | | 10,615 | | 379 | |
| Experiential lodging property Nashville, Tennessee | 2019 | 7.01 | % | 9/30/2031 | 71,223 | | 71,656 | | 70,896 | | — | |
| Eat & play property Austin, Texas | 2012 | 11.31 | % | 6/1/2033 | 10,507 | | 10,507 | | 10,874 | | — | |
| Experiential lodging property Breaux Bridge, LA | 2022 | 7.25 | % | 3/8/2034 | 11,305 | | 11,373 | | — | | — | |
| Ski property West Dover and Wilmington, Vermont | 2007 | 12.14 | % | 12/1/2034 | 51,050 | | 51,049 | | 51,047 | | — | |
| Four ski properties Ohio and Pennsylvania | 2007 | 11.07 | % | 12/1/2034 | 37,562 | | 37,533 | | 37,519 | | — | |
| Ski property Chesterland, Ohio | 2012 | 11.55 | % | 12/1/2034 | 4,550 | | 4,532 | | 4,516 | | — | |
| Ski property Hunter, New York | 2016 | 8.88 | % | 1/5/2036 | 21,000 | | 21,000 | | 21,000 | | — | |
| Eat & play property Midvale, Utah | 2015 | 10.25 | % | 5/31/2036 | 17,505 | | 17,505 | | 17,639 | | — | |
| Eat & play property West Chester, Ohio | 2015 | 9.75 | % | 8/1/2036 | 18,068 | | 18,067 | | 18,198 | | — | |
| Fitness & wellness property Fort Collins, Colorado | 2018 | 7.85 | % | 1/31/2038 | 10,292 | | 10,081 | | 10,277 | | — | |
| Early childhood education center Lake Mary, Florida | 2019 | 8.10 | % | 5/9/2039 | 4,200 | | 4,345 | | 4,329 | | — | |
| Eat & play property Eugene, Oregon | 2019 | 8.13 | % | 6/17/2039 | 14,700 | | 7,780 | | 14,996 | | — | |
| Early childhood education center Lithia, Florida | 2017 | 8.58 | % | 10/31/2039 | 3,959 | | 4,006 | | 4,034 | | — | |
| | | | $ | 381,089 | | $ | 374,617 | | $ | 370,159 | | $ | 11,780 | |
Investment in notes receivable, including related accrued interest receivable, was $3.6 million and $7.3 million at June 30, 2022 and December 31, 2021, respectively, and is included in "Other assets" in the accompanying consolidated balance sheets.
During the six months ended June 30, 2022, the Company recorded an allowance for credit loss of $6.8 million related to one of its mortgage notes receivable secured by an eat & play investment and $3.1 million related to two notes receivable. Although foreclosure was not deemed probable and the principal balance of the mortgage note and notes receivable were not past due at June 30, 2022, based on delays in interest payments and the borrowers' declining financial condition, the Company determined the borrower is experiencing financial difficulty. The repayment is expected to be provided substantially through the sale or operation of the collateral, therefore, the Company elected to apply the collateral dependent practical expedient. Expected credit losses are based on the fair value of the underlying collateral at the reporting date. The mortgage note is secured by the real estate assets of the borrower and the notes receivable are secured by the equipment and personal property of the borrowers. The collateral was appraised during the six months ended June 30, 2022, which resulted in credit loss expense of $6.8 million for the mortgage note and $1.2 million for one of the notes receivable. The principal balance for the other note receivable was fully reserved with credit loss expense of $1.9 million. Although foreclosure was not deemed probable and the principal balance of the note receivable were not past due at June 30, 2022, based on delays in interest payments and the borrowers' declining financial condition, the Company determined the borrower is experiencing financial difficulty. The repayment is expected to be provided substantially through the sale or operation of the collateral, therefore, the Company elected to apply the collateral dependent practical expedient.
Income from these borrowers is recognized on a cash basis. During the six months ended June 30, 2022, the Company wrote-off $1.5 million in accrued interest receivables and fees to "Mortgage and other financing income" in the accompanying consolidated statements of income related to the mortgage note and notes receivables.
During the year ended December 31, 2020, the Company entered into an amended and restated loan and security agreement with one of its notes receivable borrowers in response to the impacts of the COVID-19 pandemic. Although the borrower was not in default, nor had the borrower declared bankruptcy, the Company determined that these modifications resulted in a troubled debt restructuring. At June 30, 2022, this note receivable was considered collateral dependent and expected credit losses are based on the fair value of the underlying collateral at the reporting date. The note is secured by the working capital and non-real estate assets of the borrower. The Company assessed the fair value of the collateral as of June 30, 2022 and the note remains fully reserved with an allowance for credit loss totaling $8.6 million, which represents the outstanding principal balance of the note as of June 30, 2022. Income for this borrower is recognized on a cash basis.
At June 30, 2022, the Company's investment in this note receivable was a variable interest investment and the underlying entity is a VIE. The Company is not the primary beneficiary of this VIE because the Company does not individually have the power to direct the activities that are most significant to the entity and accordingly, this investment is not consolidated. The Company's maximum exposure to loss associated with this VIE is limited to the Company's outstanding note receivable in the amount of $8.6 million, which is fully reserved in the allowance for credit losses at June 30, 2022.
The following summarizes the activity within the allowance for credit losses related to mortgage notes, unfunded commitments and notes receivable for the six months ended June 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| Mortgage notes receivable | Unfunded commitments - mortgage notes receivable | Notes receivable | Unfunded commitments - notes receivable | Total |
| Allowance for credit losses at December 31, 2021 | $ | 2,124 | | $ | 76 | | $ | 8,686 | | $ | — | | $ | 10,886 | |
| Credit loss (benefit) expense | 6,223 | | (70) | | 3,053 | | — | | 9,206 | |
| Charge-offs | — | | — | | — | | — | | — | |
| Recoveries | — | | — | | — | | — | | — | |
Allowance for credit losses at June 30, 2022 | $ | 8,347 | | $ | 6 | | $ | 11,739 | | $ | — | | $ | 20,092 | |
7. Accounts Receivable
The following table summarizes the carrying amounts of accounts receivable as of June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Receivable from tenants | $ | 14,899 | | | $ | 37,417 | |
| Receivable from non-tenants | 4,794 | | | 2,237 | |
| | | |
| | | |
| | | |
| Straight-line rent receivable | 40,483 | | | 38,419 | |
| | | |
| Total | $ | 60,176 | | | $ | 78,073 | |
As of June 30, 2022, receivable from tenants includes payments of approximately $12.1 million that were deferred due to the COVID-19 pandemic and determined to be collectible. Additionally, the Company has amounts due from tenants that were not booked as receivables because the full amounts were not deemed probable of collection as a result of the COVID-19 pandemic. While deferments for this and future periods delay rent payments, these deferments do not release tenants from the obligation to pay the deferred amounts in the future.
8. Capital Markets and Dividends
During the three and six months ended June 30, 2022, the Company declared cash dividends totaling $0.825 and $1.60 per common share, respectively. Additionally, during the three and six months ended June 30, 2022, the Board declared cash dividends of $0.359375 and $0.71875 per share, respectively, on each of the Company's 5.75% Series C cumulative convertible preferred shares and the Company's 5.75% Series G cumulative redeemable preferred shares and cash dividends of $0.5625 and $1.125 per share, respectively, on the Company's 9.00% Series E cumulative convertible preferred shares.
On January 14, 2022, the Company amended the note purchase agreement governing its private placement notes (Note Purchase Agreement) to, among other things: (i) amend certain financial and other covenants and provisions in the existing Note Purchase Agreement to conform generally to the changes beneficial to the Company in the corresponding covenants and provisions contained in the Company's Third Amended, Restated and Consolidated Credit Agreement, dated October 6, 2021, and (ii) amend certain financial and other covenants and provisions in the existing Note Purchase Agreement to reflect the prior termination of the Covenant Relief Period (as defined in the existing Note Purchase Agreement) and removal of related provisions.
9. Unconsolidated Real Estate Joint Ventures
The following table summarizes our investment in unconsolidated joint ventures as of June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Investment as of | | Income (Loss) for the Six Months Ended |
| Property Type | | Location | | Ownership Interest | | June 30, 2022 | December 31, 2021 | | June 30, 2022 | June 30, 2021 |
| Experiential lodging | | St. Pete Beach, FL | | 65 | % | (1) | $ | 21,256 | | $ | 25,894 | | | $ | 2,837 | | $ | (2,592) | |
| Experiential lodging | | Warrens, WI | | 95 | % | (2) | 8,413 | | 10,068 | | | (1,654) | | — | |
| Experiential lodging | | Breaux Bridge, LA | | 85 | % | (3) | 18,036 | | — | | | 193 | | — | |
| Theatres | | China | | various | (4) | — | | 708 | | | (61) | | 10 | |
| | | | | | $ | 47,705 | | $ | 36,670 | | | $ | 1,315 | | $ | (2,582) | |
(1) The Company has equity investments in two unconsolidated real estate joint ventures related to two experiential lodging properties located in St. Petersburg Beach, Florida. The Company's investments in these joint ventures were considered to be variable interest investments, however, the underlying entities are not VIEs. There are two separate joint ventures, one that holds the investment in the real estate of the experiential lodging properties and the other that holds lodging operations, which are facilitated by a management agreement with an eligible independent contractor. The Company's investment in the operating entity is held in a taxable REIT subsidiary (TRS). The Company accounts for its investment in these joint ventures under the equity method of accounting because control over major decisions is shared. On May 18, 2022, the joint venture that holds the real estate refinanced its secured mortgage loan, the new terms of which are described below. In connection with this refinancing, during the six months ended June 30, 2022, the Company received $6.7 million in distributions. In addition, the Company received $0.8 million in distributions from operations during the six months ended June 30, 2022. No distributions were received during the six months ended June 30, 2021. The Company's accounting policy is to classify the distribution on its consolidated statement of cash flows using the nature of the distribution approach based on facts and circumstances surrounding the distribution.
The joint venture that holds the real property has a secured mortgage loan of $105.0 million at June 30, 2022. The maturity date of this mortgage loan is May 18, 2025. The note can be extended for two additional one-year periods from the original maturity date upon the satisfaction of certain conditions. The mortgage loan bears interest at SOFR
plus 3.65%, with monthly interest payments required. The joint venture has an interest rate cap agreement to limit the variable portion of the interest rate (SOFR) on this note to 3.5% from May 19, 2022 to June 1, 2024.
(2) The Company has equity investments in two unconsolidated real estate joint ventures related to an experiential lodging property located in Warrens, Wisconsin. The Company's investments in these joint ventures were considered to be variable interest investments, however, the underlying entities are not VIEs. There are two separate joint ventures, one that holds the investment in the real estate of the experiential lodging property and the other that holds lodging operations, which are facilitated by a management agreement. The Company's investment in the operating entity is held in a TRS. The Company accounts for its investment in these joint ventures under the equity method of accounting because control over major decisions is shared.
The joint venture that holds the real property has a secured mortgage loan of $15.0 million at June 30, 2022 that provides for additional draws of approximately $9.6 million to fund renovations. The maturity date of this mortgage loan is September 15, 2031. The loan bears interest at an annual fixed rate of 4.00% with monthly interest payments required. Additionally, the Company has guaranteed the completion of the renovations in the amount of approximately $14.2 million, with $11.2 million remaining to fund at June 30, 2022.
(3) The Company has equity investments in two unconsolidated real estate joint ventures related to an experiential lodging property located in Breaux Bridge, Louisiana. The Company's investments in these joint ventures were considered to be variable interest investments, however, the underlying entities are not VIEs. There are two separate joint ventures, one that holds the investment in the real estate of the experiential lodging property and the other that holds lodging operations, which are facilitated by a management agreement. The Company's investment in the operating entity is held in a TRS. The Company accounts for its investment in these joint ventures under the equity method of accounting because control over major decisions is shared.
The joint venture that holds the real estate property has a secured senior mortgage loan of $38.5 million at June 30, 2022. The maturity date of this mortgage loan is March 8, 2034. The mortgage loan bears interest at an annual fixed rate of 3.85% through April 7, 2025 and increases to 4.25% from April 8, 2025 through maturity. Monthly interest payments are required. Additionally, the Company provided a subordinated loan to the joint venture for $11.3 million with a maturity date of March 8, 2034. The mortgage loan bears interest at an annual fixed rate of 7.25% through the sixth anniversary and increases to SOFR plus 7.20% with a cap of 8.00%, through maturity.
(4) The Company has equity investments in unconsolidated joint ventures for three theatre projects located in China, with ownership interests ranging from 30% to 49%. During the six months ended June 30, 2022, the Company recognized $0.6 million in other-than-temporary impairment charges related to these equity investments. The Company determined these investments had no fair value based primarily on discounted cash flow projections. The Company received distributions of $90 thousand from its investment in these joint ventures for the six months ended June 30, 2021. No distributions were received during the six months ended June 30, 2022.
10. Derivative Instruments
All derivatives are recognized at fair value in the consolidated balance sheets within the line items "Other assets" and "Accounts payable and accrued liabilities" as applicable. The Company has elected not to offset its derivative position for purposes of balance sheet presentation and disclosure. The Company had derivative assets of $2.3 million at June 30, 2022 and no derivative assets at December 31, 2021. The Company had derivative liabilities of $0.3 million and $4.9 million at June 30, 2022 and December 31, 2021, respectively. The Company has not posted or received collateral with its derivative counterparties as of June 30, 2022 or December 31, 2021. See Note 11 for disclosures relating to the fair value of the derivative instruments.
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions including the effect of changes in foreign currency exchange rates on foreign currency transactions and interest rates on its LIBOR-based borrowings. The Company manages this risk by following established risk management policies and procedures including the use of derivatives. The Company’s objective in using derivatives is to add stability to reported earnings and to manage its exposure to foreign exchange and interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps, cross-currency swaps and foreign currency forwards.
Cash Flow Hedges of Interest Rate Risk
The Company uses interest rate swaps as its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt or payment of variable-rate amounts from a counterparty which results in the Company recording net interest expense that is fixed over the life of the agreements without exchange of the underlying notional amount.
At June 30, 2022, the Company had one interest rate swap agreement designated as a cash flow hedge of interest rate risk related to its variable rate secured bonds totaling $25.0 million. The interest rate swap agreement outstanding as of June 30, 2022 is summarized below:
| | | | | | | | | | | | | | | | | | | | |
| Fixed rate | | Notional Amount (in millions) | | Index | | Maturity |
| 1.3925% | | $ | 25.0 | | | USD LIBOR | | September 30, 2024 |
| | | | | | |
The change in the fair value of interest rate derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (AOCI) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction.
Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of June 30, 2022, the Company estimates that during the twelve months ending June 30, 2023, $0.4 million of gains will be reclassified from AOCI to interest expense.
Cash Flow Hedges of Foreign Exchange Risk
The Company is exposed to foreign currency exchange risk against its functional currency, USD, on CAD denominated cash flow from its six Canadian properties. The Company uses cross-currency swaps to mitigate its exposure to fluctuations in the USD-CAD exchange rate on cash inflows associated with these properties which should hedge a significant portion of the Company's expected CAD denominated cash flows. As of June 30, 2022, the Company had the following cross-currency swaps:
| | | | | | | | | | | | | | | | | | | | |
| Fixed rate | | Notional Amount (in millions, CAD) | | Annual Cash Flow (in millions, CAD) | | Maturity |
$1.26 CAD per USD | | $ | 150.0 | | | $ | 10.8 | | | October 1, 2024 |
$1.28 CAD per USD | | 200.0 | | | 4.5 | | | October 1, 2024 |
$1.30 CAD per USD | | 90.0 | | | 8.1 | | | December 1, 2024 |
| | $ | 440.0 | | | $ | 23.4 | | | |
The change in the fair value of foreign currency derivatives designated and that qualify as cash flow hedges of foreign exchange risk is recorded in AOCI and reclassified into earnings in the period that the hedged forecasted transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction. As of June 30, 2022, the Company estimates that during the twelve months ending June 30, 2023, $0.1 million of gains will be reclassified from AOCI to other income.
Net Investment Hedges
The Company is exposed to fluctuations in the USD-CAD exchange rate on its net investments in Canada. As such, the Company uses currency forward agreements to manage its exposure to changes in foreign exchange rates on certain of its foreign net investments. As of June 30, 2022, the Company had the following foreign currency forwards designated as net investment hedges:
| | | | | | | | | | | | | | |
| Fixed rate | | Notional Amount (in millions, CAD) | | Maturity |
$1.28 CAD per USD | | $ | 200.0 | | | October 1, 2024 |
$1.30 CAD per USD | | 90.0 | | | December 2, 2024 |
| Total | | $ | 290.0 | | | |
The Company previously also used CAD to USD cross-currency swaps that were designated as net investment hedges. The cross-currency swaps included a monthly settlement feature to lock in on exchange rate of CAD to USD. On April 29, 2022, the Company terminated its CAD to USD cross-currency swaps in conjunction with entering into new agreements. The Company paid $3.8 million in connection with the settlement of the CAD to USD cross-currency swap agreements.
For qualifying foreign currency derivatives designated as net investment hedges, the change in the fair value of the derivatives are reported in AOCI as part of the cumulative translation adjustment. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company's accounting policy election. The earnings recognition of excluded components are presented in other income.
Below is a summary of the effect of derivative instruments on the consolidated statements of changes in equity and income for the three and six months ended June 30, 2022 and 2021.
Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021 (Dollars in thousands) | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| Description | 2022 | 2021 | | 2022 | 2021 |
| Cash Flow Hedges | | | | | |
| Interest Rate Swaps | | | | | |
| Amount of Gain (Loss) Recognized in AOCI on Derivative | $ | 225 | | $ | (130) | | | $ | 1,050 | | $ | 129 | |
| Amount of Expense Reclassified from AOCI into Earnings (1) | (37) | | (2,079) | | | (113) | | (4,112) | |
| Cross-Currency Swaps | | | | | |
| Amount of Gain (Loss) Recognized in AOCI on Derivative | 199 | | (121) | | | 173 | | (214) | |
| Amount of Expense Reclassified from AOCI into Earnings (2) | (45) | | (99) | | | (99) | | (148) | |
| Net Investment Hedges | | | | | |
| Cross-Currency Swaps | | | | | |
| Amount of Gain (Loss) Recognized in AOCI on Derivative | 3,684 | | (2,314) | | | 665 | | (4,100) | |
| Amount of Income Recognized in Earnings (2) (3) | 71 | | 71 | | | 170 | | 173 | |
| Currency Forward Agreements | | | | | |
| Amount of Gain Recognized in AOCI on Derivative | 938 | | — | | | 938 | | — | |
| | | | | |
| Total | | | | | |
| Amount of Gain (Loss) Recognized in AOCI on Derivatives | $ | 5,046 | | $ | (2,565) | | | $ | 2,826 | | $ | (4,185) | |
| Amount of Expense Reclassified from AOCI into Earnings | (82) | | (2,178) | | | (212) | | (4,260) | |
| Amount of Income Recognized in Earnings | 71 | | 71 | | | 170 | | 173 | |
| | | | | |
| Interest expense, net in accompanying consolidated statements of income and comprehensive income | $ | 33,289 | | $ | 38,312 | | | $ | 66,549 | | $ | 77,506 | |
| Other income in accompanying consolidated statements of income and comprehensive income | $ | 9,961 | | $ | 1,033 | | | $ | 19,266 | | $ | 1,711 | |
(1) Included in "Interest expense, net" in the accompanying consolidated statements of income and comprehensive income for the three and six months ended June 30, 2022 and 2021.
(2) Included in "Other income" in the accompanying consolidated statements of income and comprehensive income for the three and six months ended June 30, 2022 and 2021.
(3) Amounts represent derivative gains excluded from the effectiveness testing.
Credit-risk-related Contingent Features
The Company has an agreement with its interest rate derivative counterparty that contains a provision where if the Company defaults on any of its obligations for borrowed money or credit in an amount exceeding $50.0 million and such default is not waived or cured within a specified period of time, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its interest rate derivative obligations.
As of June 30, 2022, the fair value of the Company's derivatives in a liability position related to these agreements was $0.3 million. If the Company breached any of the contractual provisions of these derivative contracts, it would be required to settle its obligations under the agreements for $44 thousand, which is the agreements' termination value after considering the right of offset. As of June 30, 2022, the Company had not posted any collateral related to these agreements and was not in breach of any provisions in these agreements.
11. Fair Value Disclosures
The Company has certain financial instruments that are required to be measured under the FASB’s Fair Value Measurement guidance. The Company currently does not have any non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis.
As a basis for considering market participant assumptions in fair value measurements, the FASB’s Fair Value Measurement guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Derivative Financial Instruments
The Company uses interest rate swaps, foreign currency forwards and cross currency swaps to manage its interest rate and foreign currency risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The fair value of interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the FASB's fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Although the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives also use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of June 30, 2022, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives and therefore, classified its derivatives as Level 2 within the fair value reporting hierarchy.
The table below presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 aggregated by the level in the fair value hierarchy within which those measurements are classified and by derivative type.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at
June 30, 2022 and December 31, 2021
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Quoted Prices in
Active Markets
for Identical
Assets (Level I) | | Significant
Other
Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs (Level 3) | | Balance at
end of period |
| June 30, 2022 | | | | | | | | |
| Cross-Currency Swaps (1) | | $ | — | | | $ | (105) | | | $ | — | | | $ | (105) | |
| Cross-Currency Swaps (2) | | — | | | 279 | | | — | | | 279 | |
| Currency Forward Agreements (1) | | — | | | (226) | | | — | | | (226) | |
| Currency Forward Agreements (2) | | — | | | 1,164 | | | — | | | 1,164 | |
| Interest Rate Swap Agreements (2) | | — | | | 901 | | | — | | | 901 | |
| December 31, 2021 | | | | | | | | |
| | | | | | | | |
| Cross-Currency Swaps (1) | | $ | — | | | $ | (4,626) | | | $ | — | | | $ | (4,626) | |
| | | | | | | | |
| | | | | | | | |
| Interest Rate Swap Agreements (1) | | — | | | (262) | | | — | | | (262) | |
(1) Included in "Accounts payable and accrued liabilities" in the accompanying consolidated balance sheets.
(2) Included in "Other assets" in the accompanying consolidated balance sheets.
Non-recurring fair value measurements
The table below presents the Company's assets measured at fair value on a non-recurring basis as of June 30, 2022, aggregated by the level in the fair value hierarchy within which those measurements are classified.
Assets Measured at Fair Value on a Non-Recurring Basis at June 30, 2022 and December 31, 2021
(Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | |
| Description | Quoted Prices in
Active Markets
for Identical
Assets (Level I) | | Significant
Other
Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs (Level 3) | | Balance at
end of period |
June 30, 2022 | | | | | | | |
| Real estate investments, net | $ | — | | | $ | 4,700 | | | $ | — | | | $ | 4,700 | |
| Mortgage notes and related accrued interest receivable | — | | | — | | | 7,780 | | | 7,780 | |
| Investment in joint ventures | — | | | — | | | — | | | — | |
| Other assets (1) | — | | | — | | | 1,316 | | | 1,316 | |
| December 31, 2021 | | | | | | | |
| Real estate investments, net | $ | — | | | $ | 6,956 | | | $ | — | | | $ | 6,956 | |
| Other assets (1) | — | | | — | | | — | | | — | |
(1) Includes collateral dependent notes receivable, which are presented within "Other assets" in the accompanying consolidated balance sheets.
As further discussed in Note 4, during the six months ended June 30, 2022, the Company recorded an impairment charge of $4.4 million related to real estate investments, net on one of its properties. Additionally, during the year ended December 31, 2021, the Company recorded impairment charges of $2.7 million related to real estate investments, net on two of its properties. Management estimated the fair values of these investments taking into account various factors including purchase offers, shortened hold periods and market conditions. The Company determined, based on the inputs, that the valuation of these properties with purchase offers were classified within Level 2 of the fair value hierarchy and were measured at fair value.
As further discussed in Note 6, during the six months ended June 30, 2022, the Company recorded an allowance for credit losses of $6.8 million related to one mortgage note and $1.2 million related to one note receivable, as a result
of recent changes in the borrower's financial status. Management valued the mortgage note and note receivable based on the fair value of the underlying collateral determined using independent appraisals which used discounted cash flow models. The significant inputs and assumptions used in the real estate appraisals included market rents of approximately $20 per square foot and a discount rate of 6.75%. These measurements were classified within Level 3 of the fair value hierarchy as many of the assumptions were not observable. Additionally, during the six months ended June 30, 2022, the Company recorded an allowance for credit losses totaling $1.9 million related to one note receivable to fully reserve the outstanding principal balance of $1.9 million, as a result of recent changes in the borrower's financial status. Management valued the note receivable based on the fair value of the underlying collateral which was determined taking into account various factors including implied asset value changes based on current market conditions and review of the financial statements of the borrower, and was classified within Level 3 of the fair value hierarchy.
Additionally, as further discussed in Note 9, during the six months ended June 30, 2022, the Company recorded impairment charges of $0.6 million related to its investment in joint ventures. Management estimated the fair value of these investments, taking into account various factors including implied asset value changes based on discounted cash flow projections and current market conditions. The Company determined, based on the inputs, that its valuation of investment in joint ventures was classified within Level 3 of the fair value hierarchy as many of the assumptions were not observable.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments at June 30, 2022 and December 31, 2021:
Mortgage notes receivable and related accrued interest receivable:
The fair value of the Company’s mortgage notes and related accrued interest receivable is estimated by discounting the future cash flows of each instrument using current market rates. At June 30, 2022, the Company had a carrying value of $374.6 million in fixed rate mortgage notes receivable outstanding, including related accrued interest and allowance for credit losses, with a weighted average interest rate of approximately 9.03%. The fixed rate mortgage notes bear interest at rates of 7.01% to 12.14%. Discounting the future cash flows for fixed rate mortgage notes receivable using rates of 7.25% to 9.25%, management estimates the fair value of the fixed rate mortgage notes receivable to be approximately $407.4 million with an estimated weighted average market rate of 7.95% at June 30, 2022.
At December 31, 2021, the Company had a carrying value of $370.2 million in fixed rate mortgage notes receivable outstanding, including related accrued interest, with a weighted average interest rate of approximately 9.04%. The fixed rate mortgage notes bear interest at rates of 7.01% to 11.96%. Discounting the future cash flows for fixed rate mortgage notes receivable using rates of 7.50% to 9.25%, management estimates the fair value of the fixed rate mortgage notes receivable to be $400.1 million with an estimated weighted average market rate of 8.05% at December 31, 2021.
Derivative instruments:
Derivative instruments are carried at their fair value.
Debt instruments:
The fair value of the Company's debt is estimated by discounting the future cash flows of each instrument using current market rates. At June 30, 2022, the Company had a carrying value of $25.0 million in variable rate debt outstanding with an average interest rate of approximately 1.71%. The carrying value of the variable rate debt outstanding approximated the fair value at June 30, 2022.
At December 31, 2021, the Company had a carrying value of $25.0 million in variable rate debt outstanding with a weighted average interest rate of approximately 0.15%. The carrying value of the variable rate debt outstanding approximated the fair value at December 31, 2021.
At both June 30, 2022 and December 31, 2021, the $25.0 million of variable rate debt outstanding, discussed above, had been effectively converted to a fixed rate by interest rate swap agreements. See Note 10 for additional information related to the Company's interest rate swap agreement.
At June 30, 2022, the Company had a carrying value of $2.82 billion in fixed rate long-term debt outstanding with a weighted average interest rate of approximately 4.34%. Discounting the future cash flows for fixed rate debt using June 30, 2022 market rates of 4.35% to 6.81%, management estimates the fair value of the fixed rate debt to be approximately $2.54 billion with an estimated weighted average market rate of 6.23% at June 30, 2022.
At December 31, 2021, the Company had a carrying value of $2.82 billion in fixed rate long-term debt outstanding with an average weighted interest rate of approximately 4.34%. Discounting the future cash flows for fixed rate debt using December 31, 2021 market rates of 2.25% to 4.56%, management estimates the fair value of the fixed rate debt to be approximately $2.93 billion with an estimated weighted average market rate of 3.43% at December 31, 2021.
12. Earnings Per Share
The following table summarizes the Company’s computation of basic and diluted earnings per share (EPS) for the three and six months ended June 30, 2022 and 2021 (amounts in thousands except per share information):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 | | Six Months Ended June 30, 2022 |
| | Income
(numerator) | | Shares
(denominator) | | Per Share
Amount | | Income
(numerator) | | Shares
(denominator) | | Per Share
Amount |
| Basic EPS: | | | | | | | | | | | |
| Net income | $ | 40,909 | | | | | | | $ | 83,101 | | | | | |
| Less: preferred dividend requirements | (6,033) | | | | | | | (12,066) | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net income available to common shareholders | $ | 34,876 | | | 74,986 | | | $ | 0.47 | | | $ | 71,035 | | | 74,915 | | | $ | 0.95 | |
| Diluted EPS: | | | | | | | | | | | |
| Net income available to common shareholders | $ | 34,876 | | | 74,986 | | | | | $ | 71,035 | | | 74,915 | | | |
| Effect of dilutive securities: | | | | | | | | | | | |
| Share options and performance shares | — | | | 248 | | | | | — | | | 227 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net income available to common shareholders | $ | 34,876 | | | 75,234 | | | $ | 0.46 | | | $ | 71,035 | | | 75,142 | | | $ | 0.95 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 |
| | Income
(numerator) | | Shares
(denominator) | | Per Share
Amount | | Income
(numerator) | | Shares
(denominator) | | Per Share
Amount |
| Basic EPS: | | | | | | | | | | | |
| Net income | $ | 18,552 | | | | | | | $ | 21,932 | | | | | |
| Less: preferred dividend requirements | (6,033) | | | | | | | (12,067) | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net income available to common shareholders | $ | 12,519 | | | 74,781 | | | $ | 0.17 | | | $ | 9,865 | | | 74,704 | | | $ | 0.13 | |
| Diluted EPS: | | | | | | | | | | | |
| Net income available to common shareholders | $ | 12,519 | | | 74,781 | | | | | $ | 9,865 | | | 74,704 | | | |
| Effect of dilutive securities: | | | | | | | | | | | |
| Share options and performance shares | — | | | 89 | | | | | — | | | 68 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net income available to common shareholders | $ | 12,519 | | | 74,870 | | | $ | 0.17 | | | $ | 9,865 | | | 74,772 | | | $ | 0.13 | |
The effect of the potential common shares from the conversion of the Company’s convertible preferred shares and from the exercise of share options are included in diluted earnings per share if the effect is dilutive. Potential common shares from the performance shares are included in diluted earnings per share upon the satisfaction of certain performance and market conditions. These conditions are evaluated at each reporting period and if the conditions have been satisfied during the reporting period, the number of contingently issuable shares are included in the computation of diluted earnings per share.
The following shares have been excluded from the calculation of diluted earnings per share, either because they are anti-dilutive or, in the case of contingently issuable performance shares, are not probable:
•The additional 2.2 million common shares that would result from the conversion of the Company’s 5.75% Series C cumulative convertible preferred shares and the corresponding add-back of the preferred dividends declared on those shares for both the three and six months ended June 30, 2022 and 2021.
•The additional 1.7 million common shares that would result from the conversion of the Company’s 9.0% Series E cumulative convertible preferred shares and the corresponding add-back of the preferred dividends declared on those shares for both the three and six months ended June 30, 2022 and 2021.
•Outstanding options to purchase 89 thousand common shares at per share prices ranging from $44.44 to $76.63 for the three and six months ended June 30, 2022.
•Outstanding options to purchase 90 thousand and 106 thousand common shares at per share prices ranging from $44.44 to $76.63 for the three and six months ended June 30, 2021, respectively.
•The effect of 102 thousand contingently issuable performance shares granted during 2021 for both the three and six months ended June 30, 2021.
•The effect of 56 thousand contingently issuable performance shares granted during 2020 for both the three and six months ended June 30, 2022 and 2021.
13. Equity Incentive Plans
All grants of common shares and options to purchase common shares were issued under the Company's 2007 Equity Incentive Plan prior to May 12, 2016 and under the 2016 Equity Incentive Plan on and after May 12, 2016. Under the 2016 Equity Incentive Plan, an aggregate of 3,950,000 common shares, options to purchase common shares and restricted share units, subject to adjustment in the event of certain capital events, may be granted. Additionally, the 2020 Long Term Incentive Plan (2020 LTIP) is a sub-plan under the Company's 2016 Equity Incentive Plan. Under the 2020 LTIP, the Company awards performance shares and restricted shares to the Company's executive officers. At June 30, 2022, there were 1,983,595 shares available for grant under the 2016 Equity Incentive Plan.
Share Options
Share options have exercise prices equal to the fair market value of a common share at the date of grant. The options may be granted for any reasonable term, not to exceed 10 years. The Company generally issues new common shares upon option exercise. A summary of the Company’s share option activity and related information is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of options | | Option price per share | | Weighted avg. exercise price |
| Outstanding at December 31, 2021 | 108,671 | | | $ | 44.44 | | | — | | | $ | 76.63 | | | $ | 56.79 | |
| Exercised | (9,799) | | | 44.62 | | | — | | | 47.15 | | | 46.30 | |
| | | | | | | | | |
| | | | | | | | | |
| Outstanding at June 30, 2022 | 98,872 | | | $ | 44.44 | | | — | | | $ | 76.63 | | | $ | 57.83 | |
The weighted average fair value of options granted was $20.34 during the six months ended June 30, 2021. No options were granted during the six months ended June 30, 2022. The intrinsic value of share options exercised was $38 thousand and $7 thousand for the six months ended June 30, 2022 and 2021, respectively.
The following table summarizes outstanding and exercisable options at June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options outstanding | | Options exercisable |
| Exercise price range | | Options outstanding | Weighted avg. life remaining | Weighted avg. exercise price | Aggregate intrinsic value (in thousands) | | Options exercisable | Weighted avg. life remaining | Weighted avg. exercise price | Aggregate intrinsic value (in thousands) |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
$44.44 - 49.99 | | 11,510 | | 4.8 | | | | 10,132 | | 1.7 | | |
50.00 - 59.99 | | 31,008 | | 2.0 | | | | 31,008 | | 2.0 | | |
60.00 - 69.99 | | 52,198 | | 4.0 | | | | 50,754 | | 3.4 | | |
70.00 - 76.63 | | 4,156 | | 5.6 | | | | 3,671 | | 5.4 | | |
| | 98,872 | | 3.5 | $ | 57.83 | | $ | 5 | | | 95,565 | | 2.8 | $ | 57.77 | | $ | 1 | |
Nonvested Shares
A summary of the Company’s nonvested share activity and related information is as follows:
| | | | | | | | | | | | | | | | | |
| Number of shares | | Weighted avg. grant date fair value | | Weighted avg. life remaining |
| Outstanding at December 31, 2021 | 478,554 | | | $ | 56.57 | | | |
| Granted | 243,286 | | | 46.65 | | | |
| Vested | (215,096) | | | 59.97 | | | |
| Forfeited | (2,176) | | | 46.98 | | | |
| Outstanding at June 30, 2022 | 504,568 | | | $ | 50.38 | | | 1.36 |
The holders of nonvested shares have voting rights and receive dividends from the date of grant. The fair value of the nonvested shares that vested was $10.2 million and $6.5 million for the six months ended June 30, 2022 and 2021, respectively. At June 30, 2022, unamortized share-based compensation expense related to nonvested shares was $13.4 million.
Nonvested Performance Shares
A summary of the Company's nonvested performance share activity and related information is as follows:
| | | | | |
| Target Number of Performance Shares |
| Outstanding at December 31, 2021 | 158,776 | |
| Granted | 98,610 | |
| |
| |
Outstanding at June 30, 2022 | 257,386 | |
The number of common shares issuable upon settlement of the performance shares granted during the six months ended June 30, 2022, 2021 and 2020 will be based upon the Company's achievement level relative to the following performance measures at December 31, 2024, 2023 and 2022, respectively: 50% based upon the Company's Total Shareholder Return (TSR) relative to the TSRs of the Company's peer group companies, 25% based upon the
Company's TSR relative to the TSRs of companies in the MSCI US REIT Index and 25% based upon the Company's Compounded Annual Growth Rate (CAGR) in AFFO per share over the three-year performance period. The Company's achievement level relative to the performance measures is assigned a specific payout percentage which is multiplied by a target number of performance shares.
The performance shares based on relative TSR performance have market conditions and are valued using a Monte Carlo simulation model on the grant date, which resulted in a grant date fair value of approximately $6.0 million and $6.6 million for the six months ended June 30, 2022 and 2021, respectively. The estimated fair value is amortized to expense over the three-year performance periods, which end on December 31, 2024, 2023 and 2022 for performance shares granted in 2022, 2021 and 2020, respectively. The following assumptions were used in the Monte Carlo simulation for computing the grant date fair value of the performance shares with a market condition for the six months ended June 30, 2022: risk-free interest rate of 1.7%, volatility factors in the expected market price of the Company's common shares of 71% and an expected life of approximately three years.
The performance shares based on growth in AFFO per share have a performance condition. The probability of achieving the performance condition is assessed at each reporting period. If it is deemed probable that the performance condition will be met, compensation cost will be recognized based on the closing price per share of the Company's common stock on the date of the grant multiplied by the number of awards expected to be earned. If it is deemed that it is not probable that the performance condition will be met, the Company will discontinue the recognition of compensation cost and any compensation cost previously recorded will be reversed. At June 30, 2022, achievement of the performance condition was deemed probable for the performance shares granted during the six months ended June 30, 2022 and 2021 with an expected payout percentage of 200%, which resulted in a grant date fair value of approximately $2.3 million for each period. Achievement of the minimum performance condition for the performance shares granted during the six months ended June 30, 2020 was deemed not probable at June 30, 2022, resulting in no expected payout.
At June 30, 2022, unamortized share-based compensation expense related to nonvested performance shares was $11.8 million.
The performance shares accrue dividend equivalents which are paid only if common shares are issued upon settlement of the performance shares. During the six months ended June 30, 2022 and 2021, the Company accrued dividend equivalents expected to be paid on earned awards of $324 thousand and $18 thousand, respectively.
Restricted Share Units
A summary of the Company’s restricted share unit activity and related information is as follows:
| | | | | | | | | | | | | | | | | |
| Number of shares | | Weighted avg. grant date fair value | | Weighted avg. life remaining |
| Outstanding at December 31, 2021 | 43,306 | | | $ | 49.15 | | | |
| Granted | 41,399 | | | 50.49 | | | |
| Vested | (46,100) | | | 49.00 | | | |
| Outstanding at June 30, 2022 | 38,605 | | | $ | 50.77 | | | 0.92 |
The holders of restricted share units receive dividend equivalents from the date of grant. At June 30, 2022, unamortized share-based compensation expense related to restricted share units was $1.8 million.
14. Operating Leases
The Company’s real estate investments are leased under operating leases. In addition to its lessor arrangements on its real estate investments, as of June 30, 2022 and December 31, 2021, the Company was lessee in 52 and 51 operating ground leases, respectively. The Company's tenants, who are generally sub-tenants under these ground leases, are responsible for paying the rent under these ground leases. As of June 30, 2022, rental revenue from several of the Company's tenants, who are also sub-tenants under the ground leases, is being recognized on a cash basis. In most cases, the ground lease sub-tenants have continued to pay the rent under these ground leases. In
addition, two of these properties do not currently have sub-tenants. In the event the tenant fails to pay the ground lease rent or if the property does not have sub-tenants, the Company is primarily responsible for the payment, assuming the Company does not sell or re-tenant the property. The Company is also the lessee in an operating lease of its executive office.
The following table summarizes rental revenue, including sublease arrangements and lease costs, for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| Classification | | 2022 | | 2021 | | 2022 | | 2021 |
| Operating leases | Rental revenue | | $ | 136,918 | | | $ | 110,349 | | | $ | 270,746 | | | $ | 208,021 | |
| Sublease income - operating ground leases | Rental revenue | | 5,957 | | | 5,534 | | | $ | 11,732 | | | $ | 10,476 | |
| | | | | | | | | |
| Lease costs | | | | | | | | | |
| Operating ground lease cost | Property operating expense | | $ | 6,136 | | | $ | 5,811 | | | $ | 12,105 | | | $ | 11,224 | |
| Operating office lease cost | General and administrative expense | | 226 | | | 226 | | | 452 | | | 452 | |
| | | | | | | | | |
15. Segment Information
The Company groups its investments into two reportable operating segments: Experiential and Education.
The financial information summarized below is presented by reportable operating segment (in thousands):
| | | | | | | | | | | | | | |
| Balance Sheet Data: |
| As of June 30, 2022 |
| Experiential | Education | Corporate/Unallocated | Consolidated |
| Total Assets | $ | 5,123,623 | | $ | 497,006 | | $ | 172,813 | | $ | 5,793,442 | |
| | | | |
| As of December 31, 2021 |
| Experiential | Education | Corporate/Unallocated | Consolidated |
| Total Assets | $ | 4,995,241 | | $ | 505,086 | | $ | 300,823 | | $ | 5,801,150 | |
| | | | | | | | | | | | | | |
| Operating Data: | | | | |
| Three Months Ended June 30, 2022 |
| Experiential | Education | Corporate/Unallocated | Consolidated |
| Rental revenue | $ | 133,009 | | $ | 9,866 | | $ | — | | $ | 142,875 | |
| Other income | 7,685 | | — | | 2,276 | | 9,961 | |
Mortgage and other financing income | 7,382 | | 228 | | — | | 7,610 | |
| Total revenue | 148,076 | | 10,094 | | 2,276 | | 160,446 | |
| | | | |
Property operating expense | 13,358 | | — | | 234 | | 13,592 | |
| Other expense | 8,872 | | — | | — | | 8,872 | |
Total investment expenses | 22,230 | | — | | 234 | | 22,464 | |
| Net operating income - before unallocated items | 125,846 | | 10,094 | | 2,042 | | 137,982 | |
| | | | |
| Reconciliation to Consolidated Statements of Income and Comprehensive Income: |
| General and administrative expense | | | (12,691) | |
| | | |
| | | |
| | | |
| | | |
| Transaction costs | | | | (1,145) | |
| Credit loss expense | | | | (9,512) | |
| | | | |
| Depreciation and amortization | | | (40,766) | |
| Interest expense, net | | | | (33,289) | |
| Equity in income from joint ventures | | | 1,421 | |
| Impairment charges on joint ventures | | | (647) | |
| | | |
| | | |
| Income tax expense | | | (444) | |
| | | |
| | | |
| | | |
| | | |
| Net income | | | 40,909 | |
| | | | |
| Preferred dividend requirements | | | (6,033) | |
| Net income available to common shareholders of EPR Properties | $ | 34,876 | |
| | | | | | | | | | | | | | |
| Operating Data: | | | | |
| Three Months Ended June 30, 2021 |
| Experiential | Education | Corporate/Unallocated | Consolidated |
| Rental revenue | $ | 106,559 | | $ | 9,324 | | $ | — | | $ | 115,883 | |
| Other income | 1,061 | | — | | (28) | | 1,033 | |
Mortgage and other financing income | 8,239 | | 207 | | — | | 8,446 | |
| Total revenue | 115,859 | | 9,531 | | (28) | | 125,362 | |
| | | | |
Property operating expense | 14,421 | | 15 | | 242 | | 14,678 | |
| Other expense | 3,025 | | — | | — | | 3,025 | |
Total investment expenses | 17,446 | | 15 | | 242 | | 17,703 | |
| Net operating income - before unallocated items | 98,413 | | 9,516 | | (270) | | 107,659 | |
| | | | |
| Reconciliation to Consolidated Statements of Income and Comprehensive Income: |
| General and administrative expense | | | (11,376) | |
| | | |
| | | |
| | | |
| | | |
| Transaction costs | | | | (662) | |
| Credit loss benefit | | | | 2,819 | |
| | | | |
| Depreciation and amortization | | | (40,538) | |
| Gain on sale of real estate | | | 511 | |
| Interest expense, net | | | | (38,312) | |
| Equity in loss from joint ventures | | | (1,151) | |
| | | | |
| | |
| Income tax expense | | | | (398) | |
| | | | |
| | | |
| | |
| Net income | | | 18,552 | |
| Preferred dividend requirements | | (6,033) | |
| Net income available to common shareholders of EPR Properties | $ | 12,519 | |
| | | | | | | | | | | | | | |
| Operating Data: | | | | |
| Six Months Ended June 30, 2022 |
| Experiential | Education | Corporate/Unallocated | Consolidated |
| Rental revenue | $ | 262,034 | | $ | 20,444 | | $ | — | | $ | 282,478 | |
| Other income | 16,895 | | — | | 2,371 | | 19,266 | |
| Mortgage and other financing income | 15,716 | | 458 | | — | | 16,174 | |
| Total revenue | 294,645 | | 20,902 | | 2,371 | | 317,918 | |
| | | | |
| Property operating expense | 27,051 | | (7) | | 487 | | 27,531 | |
| Other expense | 16,969 | | — | | — | | 16,969 | |
| Total investment expenses | 44,020 | | (7) | | 487 | | 44,500 | |
| Net operating income - before unallocated items | 250,625 | | 20,909 | | 1,884 | | 273,418 | |
| | | | |
| Reconciliation to Consolidated Statements of Income and Comprehensive Income: |
| General and administrative expense | | | (25,915) | |
| | | |
| | | |
| | | |
| Transaction costs | | | | (3,392) | |
| Credit loss expense | | | | (9,206) | |
| Impairment charges | | | | (4,351) | |
| Depreciation and amortization | | | (80,810) | |
| Interest expense, net | | | | (66,549) | |
| Equity in income from joint ventures | | | 1,315 | |
| Impairment charges on joint ventures | | | | (647) | |
| | | |
| | |
| Income tax expense | | | | (762) | |
| | | | |
| | | |
| Net income | | | 83,101 | |
| Preferred dividend requirements | | (12,066) | |
| Net income available to common shareholders of EPR Properties | $ | 71,035 | |
| | | | | | | | | | | | | | |
| Operating Data: | | | | |
| Six Months Ended June 30, 2021 |
| Experiential | Education | Corporate/Unallocated | Consolidated |
| Rental revenue | $ | 199,835 | | $ | 18,662 | | $ | — | | $ | 218,497 | |
| Other income | 1,390 | | — | | 321 | | 1,711 | |
| Mortgage and other financing income | 16,380 | | 539 | | — | | 16,919 | |
| Total revenue | 217,605 | | 19,201 | | 321 | | 237,127 | |
| | | | |
| Property operating expense | 29,413 | | 97 | | 481 | | 29,991 | |
| Other expense | 5,577 | | — | | — | | 5,577 | |
| Total investment expenses | 34,990 | | 97 | | 481 | | 35,568 | |
| Net operating income - before unallocated items | 182,615 | | 19,104 | | (160) | | 201,559 | |
| | | | |
| Reconciliation to Consolidated Statements of Income and Comprehensive Income: |
| General and administrative expense | | | (22,712) | |
| | | |
| | | |
| Transaction costs | | | | (1,210) | |
| Credit loss benefit | | | | 5,581 | |
| | | | |
| Depreciation and amortization | | | (80,864) | |
| Gain on sale of real estate | | | 712 | |
| Costs associated with loan refinancing or payoff | | | (241) | |
| Interest expense, net | | | | (77,506) | |
| Equity in loss from joint ventures | | | (2,582) | |
| | | | |
| | |
| Income tax expense | | | | (805) | |
| | | | |
| | | |
| Net income | | | 21,932 | |
| Preferred dividend requirements | | (12,067) | |
| Net income available to common shareholders of EPR Properties | $ | 9,865 | |
16. Other Commitments and Contingencies
As of June 30, 2022, the Company had 16 development projects with commitments to fund an aggregate of approximately $110.7 million. Development costs are advanced by the Company in periodic draws. If the Company determines that construction is not being completed in accordance with the terms of the development agreement, it can discontinue funding construction draws. The Company has agreed to lease the properties to the operators at pre-determined rates upon completion of construction.
The Company has certain commitments related to its mortgage notes and notes receivable investments that it may be required to fund in the future. The Company is generally obligated to fund these commitments at the request of the borrower or upon the occurrence of events outside of its direct control. As of June 30, 2022, the Company had two mortgage notes with commitments totaling approximately $11.8 million. If commitments are funded in the future, interest will be charged at rates consistent with the existing investments.
In connection with construction of the Company's development projects and related infrastructure, certain public agencies require posting of surety bonds to guarantee that the Company's obligations are satisfied. These bonds expire upon the completion of the improvements or infrastructure. As of June 30, 2022, the Company had four surety bonds outstanding totaling $33.3 million.