EPR PROPERTIES
For the period ended Sep 30, 2024. Filed Oct 31, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Sep 30, 2024 · Filed Oct 31, 2024
Contents
Item 1. Financial Statements
Consolidated Balance Sheets
(Dollars in thousands except share data)
| September 30, 2024 | December 31, 2023 | |
|---|---|---|
| (unaudited) | ||
| Assets | ||
| Real estate investments, net of accumulated depreciation of $1,546,509 and $1,435,683 at September 30, 2024 and December 31, 2023, respectively | $4,534,450 | $4,537,359 |
| Land held for development | 20,168 | 20,168 |
| Property under development | 76,913 | 131,265 |
| Operating lease right-of-use assets | 175,451 | 186,628 |
| Mortgage notes and related accrued interest receivable, net | 657,636 | 569,768 |
| Investment in joint ventures | 32,426 | 49,754 |
| Cash and cash equivalents | 35,328 | 78,079 |
| Restricted cash | 2,992 | 2,902 |
| Accounts receivable | 79,726 | 63,655 |
| Other assets | 74,072 | 61,307 |
| Total assets | $5,689,162 | $5,700,885 |
| Liabilities and Equity | ||
| Liabilities: | ||
| Accounts payable and accrued liabilities | $99,334 | $94,927 |
| Operating lease liabilities | 214,809 | 226,961 |
| Common dividends payable | 23,811 | 25,275 |
| Preferred dividends payable | 6,032 | 6,032 |
| Unearned rents and interest | 88,503 | 77,440 |
| Debt | 2,852,970 | 2,816,095 |
| Total liabilities | 3,285,459 | 3,246,730 |
| Equity: | ||
| Common Shares, $0.01 par value; 125,000,000 shares authorized at September 30, 2024 and December 31, 2023; and 83,612,683 and 82,964,231 shares issued at September 30, 2024 and December 31, 2023, respectively | 836 | 829 |
| Preferred Shares, $0.01 par value; 25,000,000 shares authorized: | ||
| 5,392,916 Series C convertible shares issued at September 30, 2024 and December 31, 2023; liquidation preference of $134,822,900 | 54 | 54 |
| 3,445,980 Series E convertible shares issued at September 30, 2024 and December 31, 2023; liquidation preference of $86,149,500 | 34 | 34 |
| 6,000,000 Series G shares issued at September 30, 2024 and December 31, 2023; liquidation preference of $150,000,000 | 60 | 60 |
| Additional paid-in-capital | 3,946,634 | 3,924,467 |
| Treasury shares at cost: 7,883,581 and 7,631,725 common shares at September 30, 2024 and December 31, 2023, respectively | (285,413) | (274,038) |
| Accumulated other comprehensive (loss) income | (609) | 3,296 |
| Distributions in excess of net income | (1,257,893) | (1,200,547) |
| Total equity | $2,403,703 | $2,454,155 |
| Total liabilities and equity | $5,689,162 | $5,700,885 |
Consolidated Statements of Income and Comprehensive Income
(Dollars in thousands except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| 2024 | 2023 | 2024 | 2023 | |
| Rental revenue | $148,677 | $163,940 | $436,051 | $467,401 |
| Other income | 17,419 | 14,422 | 43,874 | 33,879 |
| Mortgage and other financing income | 14,411 | 11,022 | 40,909 | 32,407 |
| Total revenue | 180,507 | 189,384 | 520,834 | 533,687 |
| Property operating expense | 14,611 | 14,592 | 43,958 | 42,719 |
| Other expense | 15,631 | 13,124 | 43,440 | 31,235 |
| General and administrative expense | 11,935 | 13,464 | 37,863 | 42,677 |
| Retirement and severance expense | — | — | 1,836 | 547 |
| Transaction costs | 175 | 847 | 375 | 1,153 |
| Provision (benefit) for credit losses, net | (770) | (719) | 2,371 | (407) |
| Impairment charges | — | 20,887 | 11,812 | 64,672 |
| Depreciation and amortization | 42,795 | 42,432 | 124,738 | 127,341 |
| Total operating expenses | 84,377 | 104,627 | 266,393 | 309,937 |
| (Loss) gain on sale of real estate | (3,419) | 2,550 | 15,989 | 1,415 |
| Income from operations | 92,711 | 87,307 | 270,430 | 225,165 |
| Costs associated with loan refinancing or payoff | 337 | — | 337 | — |
| Interest expense, net | 32,867 | 31,208 | 97,338 | 94,521 |
| Equity in loss (income) from joint ventures | 851 | (533) | 5,384 | 2,067 |
| Impairment charges on joint ventures | 12,130 | — | 12,130 | — |
| Income before income taxes | 46,526 | 56,632 | 155,241 | 128,577 |
| Income tax (benefit) expense | (124) | 372 | 780 | 1,060 |
| Net income | 46,650 | 56,260 | 154,461 | 127,517 |
| Preferred dividend requirements | 6,032 | 6,032 | 18,104 | 18,105 |
| Net income available to common shareholders of EPR Properties | $40,618 | $50,228 | $136,357 | $109,412 |
| Net income available to common shareholders of EPR Properties per share: | ||||
| Basic | $0.54 | $0.67 | $1.80 | $1.45 |
| Diluted | $0.53 | $0.66 | $1.80 | $1.45 |
| Shares used for computation (in thousands): | ||||
| Basic | 75,723 | 75,325 | 75,604 | 75,236 |
| Diluted | 76,108 | 75,816 | 75,945 | 75,655 |
| Other comprehensive income: | ||||
| Net income | $46,650 | $56,260 | $154,461 | $127,517 |
| Foreign currency translation adjustment | 3,852 | (6,088) | (5,910) | 535 |
| Unrealized (loss) gain on derivatives, net | (3,920) | 4,856 | 2,005 | (54) |
| Comprehensive income attributable to EPR Properties | $46,582 | $55,028 | $150,556 | $127,998 |
Consolidated Statements of Changes in Equity
(Dollars in thousands except per share data)
| EPR Properties Shareholders’ Equity | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common Stock · Preferred Stock · Additionalpaid-in capital · Treasuryshares · Accumulatedothercomprehensive income (loss) · Distributionsin excess ofnet income · Total | |||||||||||||||||
| Shares · Par · Shares · Par | |||||||||||||||||
| Balance at December 31, 2022 | 82,545,501 | $825 | 14,840,297 | $148 | $3,899,732 | $(269,751) | $1,897 | $(1,097,132) | $2,535,719 | ||||||||
| Restricted share units issued to Trustees | 1,449 | — | — | — | — | — | — | — | — | ||||||||
| Issuance of nonvested shares and performance shares, net of cancellations | 352,090 | 4 | — | — | 5,956 | (588) | — | — | 5,372 | ||||||||
| Purchase of common shares for vesting | — | — | — | — | — | (3,565) | — | — | (3,565) | ||||||||
| Share-based compensation expense | — | — | — | — | 4,322 | — | — | — | 4,322 | ||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | 230 | — | 230 | ||||||||
| Change in unrealized loss on derivatives, net | — | — | — | — | — | — | (304) | — | (304) | ||||||||
| Net income | — | — | — | — | — | — | — | 57,657 | 57,657 | ||||||||
| Issuances of common shares | 5,557 | — | — | — | 225 | — | — | — | 225 | ||||||||
| Conversion of Series E Convertible Preferred shares to common shares | 632 | — | (1,311) | — | — | — | — | — | — | ||||||||
| Dividend equivalents accrued on performance shares | — | — | — | — | — | — | — | (353) | (353) | ||||||||
| Dividends to common shareholders ($0.8250 per share) | — | — | — | — | — | — | — | (62,109) | (62,109) | ||||||||
| Dividends to Series C preferred shareholders ($0.359375 per share) | — | — | — | — | — | — | — | (1,938) | (1,938) | ||||||||
| Dividends to Series E preferred shareholders ($0.5625 per share) | — | — | — | — | — | — | — | (1,938) | (1,938) | ||||||||
| Dividends to Series G preferred shareholders ($0.359375 per share) | — | — | — | — | — | — | — | (2,156) | (2,156) | ||||||||
| Balance at March 31, 2023 | 82,905,229 | $829 | 14,838,986 | $148 | $3,910,235 | $(273,904) | $1,823 | $(1,107,969) | $2,531,162 | ||||||||
| Restricted share units issued to Trustees | 42,048 | — | — | — | — | — | — | — | — | ||||||||
| Purchase of common shares for vesting | — | — | — | — | — | (97) | — | — | (97) | ||||||||
| Share-based compensation expense | — | — | — | — | 4,477 | — | — | — | 4,477 | ||||||||
| Share-based compensation included in retirement and severance expense | — | — | — | — | 304 | — | — | — | 304 | ||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | 6,393 | — | 6,393 | ||||||||
| Change in unrealized loss on derivatives, net | — | — | — | — | — | (4,606) | — | (4,606) | |||||||||
| Net income | — | — | — | — | — | — | — | 13,600 | 13,600 | ||||||||
| Issuances of common shares | 6,134 | — | — | — | 257 | — | — | — | 257 | ||||||||
| Conversion of Series E Convertible Preferred shares to common shares | 42 | — | (90) | — | — | — | — | — | — | ||||||||
| Dividend equivalents accrued on performance shares | — | — | — | — | — | — | — | (450) | (450) | ||||||||
| Dividends to captive REIT preferred shareholders | — | — | — | — | — | — | — | (8) | (8) | ||||||||
| Dividends to common shareholders ($0.825 per share) | — | — | — | — | — | — | — | (62,129) | (62,129) | ||||||||
| Dividends to Series C preferred shareholders ($0.359375 per share) | — | — | — | — | — | — | — | (1,938) | (1,938) | ||||||||
| Dividends to Series E preferred shareholders ($0.5625 per share) | — | — | — | — | — | — | — | (1,938) | (1,938) | ||||||||
| Dividends to Series G preferred shareholders ($0.359375 per share) | — | — | — | — | — | — | — | (2,156) | (2,156) | ||||||||
| Balance at June 30, 2023 | 82,953,453 | $829 | 14,838,896 | $148 | $3,915,273 | $(274,001) | $3,610 | $(1,162,988) | $2,482,871 | ||||||||
| Continued on next page. | |||||||||||||||||
| EPR Properties Shareholders’ Equity | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Common Stock · Preferred Stock · Additionalpaid-in capital · Treasuryshares · Accumulatedothercomprehensive income (loss) · Distributionsin excess ofnet income · Total | |||||||||
| Shares · Par · Shares · Par | |||||||||
| Continued from previous page. | |||||||||
| Balance at June 30, 2023 | 82,953,453 | $829 | 14,838,896 | $148 | $3,915,273 | $(274,001) | $3,610 | $(1,162,988) | $2,482,871 |
| Purchase of common shares for vesting | — | — | — | — | — | (34) | — | — | (34) |
| Share-based compensation expense | — | — | — | — | 4,354 | — | — | — | 4,354 |
| Foreign currency translation adjustment | — | — | — | — | — | — | (6,088) | — | (6,088) |
| Change in unrealized gain on derivatives, net | — | — | — | — | — | — | 4,856 | — | 4,856 |
| Net income | — | — | — | — | — | — | — | 56,260 | 56,260 |
| Issuances of common shares | 5,951 | — | — | — | 258 | — | — | — | 258 |
| Dividend equivalents accrued on performance shares | — | — | — | — | — | — | — | (504) | (504) |
| Dividends to common shareholders ($0.825 per share) | — | — | — | — | — | — | — | (62,144) | (62,144) |
| Dividends to Series C preferred shareholders ($0.359375 per share) | — | — | — | — | — | — | — | (1,938) | (1,938) |
| Dividends to Series E preferred shareholders ($0.5625 per share) | — | — | — | — | — | — | — | (1,938) | (1,938) |
| Dividends to Series G preferred shareholders ($0.359375 per share) | — | — | — | — | — | — | — | (2,156) | (2,156) |
| Balance at September 30, 2023 | 82,959,404 | $829 | 14,838,896 | $148 | $3,919,885 | $(274,035) | $2,378 | $(1,175,408) | $2,473,797 |
| Continued on next page. | |||||||||
| EPR Properties Shareholders’ Equity | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common Stock · Preferred Stock · Additionalpaid-in capital · Treasury shares · Accumulatedothercomprehensive income (loss) · Distributionsin excess ofnet income · Total | |||||||||||||||||
| Shares · Par · Shares · Par | |||||||||||||||||
| Continued from previous page. | |||||||||||||||||
| Balance at December 31, 2023 | 82,964,231 | $829 | 14,838,896 | $148 | $3,924,467 | $(274,038) | $3,296 | $(1,200,547) | $2,454,155 | ||||||||
| Issuance of nonvested shares and performance shares, net of cancellations | 583,135 | 6 | — | — | 9,212 | — | — | — | 9,218 | ||||||||
| Purchase of common shares for vesting | — | — | — | — | — | (11,375) | — | — | (11,375) | ||||||||
| Share-based compensation expense | — | — | — | — | 3,692 | — | — | — | 3,692 | ||||||||
| Share-based compensation included in retirement and severance expense | — | — | — | — | 1,598 | — | — | — | 1,598 | ||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | (6,909) | — | (6,909) | ||||||||
| Change in unrealized gain on derivatives, net | — | — | — | — | — | — | 4,732 | — | 4,732 | ||||||||
| Net income | — | — | — | — | — | — | — | 62,709 | 62,709 | ||||||||
| Issuances of common shares | 6,245 | — | — | — | 273 | — | — | — | 273 | ||||||||
| Dividend equivalents accrued on performance shares | — | — | — | — | — | — | — | (598) | (598) | ||||||||
| Dividends to common shareholders ($0.835 per share) | — | — | — | — | — | — | — | (63,146) | (63,146) | ||||||||
| Dividends to Series C preferred shareholders ($0.359375 per share) | — | — | — | — | — | — | — | (1,938) | (1,938) | ||||||||
| Dividends to Series E preferred shareholders ($0.5625 per share) | — | — | — | — | — | — | — | (1,938) | (1,938) | ||||||||
| Dividends to Series G preferred shareholders ($0.359375 per share) | — | — | — | — | — | — | — | (2,156) | (2,156) | ||||||||
| Balance at March 31, 2024 | 83,553,611 | $835 | 14,838,896 | $148 | $3,939,242 | $(285,413) | $1,119 | $(1,207,614) | $2,448,317 | ||||||||
| Restricted share units issued to Trustees | 41,754 | 1 | — | — | — | — | — | — | 1 | ||||||||
| Share-based compensation expense | — | — | — | — | 3,538 | — | — | — | 3,538 | ||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | (2,853) | — | (2,853) | ||||||||
| Change in unrealized gain on derivatives, net | — | — | — | — | — | 1,193 | — | 1,193 | |||||||||
| Net income | — | — | — | — | — | — | — | 45,102 | 45,102 | ||||||||
| Issuances of common shares | 7,472 | — | — | — | 309 | — | — | — | 309 | ||||||||
| Dividend equivalents accrued on performance shares | — | — | — | — | — | — | — | (433) | (433) | ||||||||
| Dividend to captive REIT preferred shareholders | — | — | — | — | — | — | — | (8) | (8) | ||||||||
| Dividends to common shareholders ($0.855 per share) | — | — | — | — | — | — | — | (64,338) | (64,338) | ||||||||
| Dividends to Series C preferred shareholders ($0.359375 per share) | — | — | — | — | — | — | — | (1,938) | (1,938) | ||||||||
| Dividends to Series E preferred shareholders ($0.5625 per share) | — | — | — | — | — | — | — | (1,938) | (1,938) | ||||||||
| Dividends to Series G preferred shareholders ($0.359375 per share) | — | — | — | — | — | — | — | (2,156) | (2,156) | ||||||||
| Balance at June 30, 2024 | 83,602,837 | $836 | 14,838,896 | $148 | $3,943,089 | $(285,413) | $(541) | $(1,233,323) | $2,424,796 | ||||||||
| Continued on next page. | |||||||||||||||||
| EPR Properties Shareholders’ Equity | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Common Stock · Preferred Stock · Additionalpaid-in capital · Treasury shares · Accumulatedothercomprehensive income (loss) · Distributionsin excess ofnet income · Total | |||||||||
| Shares · Par · Shares · Par | |||||||||
| Continued from previous page. | |||||||||
| Balance at June 30, 2024 | 83,602,837 | $836 | 14,838,896 | $148 | $3,943,089 | $(285,413) | $(541) | $(1,233,323) | $2,424,796 |
| Restricted share units issued to Trustees | 3,656 | $— | — | $— | $— | $— | $— | $— | $— |
| Share-based compensation expense | — | — | — | — | 3,264 | — | — | — | 3,264 |
| Foreign currency translation adjustment | — | — | — | — | — | — | 3,852 | — | 3,852 |
| Change in unrealized loss on derivatives. net | — | — | — | — | — | — | (3,920) | — | (3,920) |
| Net income | — | — | — | — | — | — | — | 46,650 | 46,650 |
| Issuances of common shares | 6,190 | — | — | — | 281 | — | — | — | 281 |
| Dividend equivalents accrued on performance shares | — | — | — | — | — | — | — | (443) | (443) |
| Dividends to common shareholders ($0.855 per share) | — | — | — | — | — | — | — | (64,745) | (64,745) |
| Dividends to Series C preferred shareholders ($0.359375 per share) | — | — | — | — | — | — | — | (1,938) | (1,938) |
| Dividends to Series E preferred shareholders ($0.5625 per share) | — | — | — | — | — | — | — | (1,938) | (1,938) |
| Dividends to Series G preferred shareholders ($0.359375 per share) | — | — | — | — | — | — | — | (2,156) | (2,156) |
| Balance at September 30, 2024 | 83,612,683 | $836 | 14,838,896 | $148 | $3,946,634 | $(285,413) | $(609) | $(1,257,893) | $2,403,703 |
Consolidated Statements of Cash Flows
| Nine Months Ended September 30, | ||
|---|---|---|
| 2024 | 2023 | |
| Operating activities: | ||
| Net income | $154,461 | $127,517 |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||
| Impairment charges | 11,812 | 64,672 |
| Impairment charges on joint ventures | 12,130 | — |
| Gain on sale of real estate | (15,989) | (1,415) |
| Deferred income tax benefit | (1,254) | (258) |
| Costs associated with loan refinancing or payoff | 337 | — |
| Equity in loss from joint ventures | 5,384 | 2,067 |
| Distributions from joint ventures | — | 1,300 |
| Provision (benefit) for credit losses, net | 2,371 | (407) |
| Depreciation and amortization | 124,738 | 127,341 |
| Amortization of deferred financing costs | 6,657 | 6,449 |
| Amortization of above/below market leases and tenant allowances, net | (252) | (456) |
| Share-based compensation expense to management and Trustees | 10,494 | 13,153 |
| Share-based compensation expense included in retirement and severance expense | 1,598 | 304 |
| Change in assets and liabilities: | ||
| Operating lease assets and liabilities | (975) | 273 |
| Mortgage notes accrued interest receivable | (2,720) | (497) |
| Accounts receivable | (16,129) | (1,311) |
| Other assets | (7,176) | (4,588) |
| Accounts payable and accrued liabilities | 12,031 | 14,261 |
| Unearned rents and interest | 2,681 | 21,687 |
| Net cash provided by operating activities | 300,199 | 370,092 |
| Investing activities: | ||
| Acquisition of and investments in real estate and other assets | (42,388) | (47,807) |
| Proceeds from sale of real estate | 65,149 | 34,957 |
| Investment in unconsolidated joint ventures | (186) | (4,259) |
| Investment in mortgage notes receivable | (88,577) | (17,563) |
| Proceeds from mortgage notes receivable paydowns | 457 | 408 |
| Investment in notes receivable | — | (3,025) |
| Proceeds from note receivable paydowns | 1,289 | 1,178 |
| Additions to properties under development | (81,386) | (60,922) |
| Net cash used by investing activities | (145,642) | (97,033) |
| Financing activities: | ||
| Proceeds from long-term debt facilities | 214,000 | — |
| Principal payments on debt | (181,638) | — |
| Deferred financing fees paid | — | (369) |
| Costs associated with loan refinancing or payoff (cash portion) | (9,534) | — |
| Net proceeds from issuance of common shares | 589 | 483 |
| Purchase of common shares for treasury for vesting | (11,375) | (3,696) |
| Dividends paid to shareholders | (209,193) | (204,145) |
| Net cash used by financing activities | (197,151) | (207,727) |
| Effect of exchange rate changes on cash | (67) | (22) |
| Net change in cash and cash equivalents and restricted cash | (42,661) | 65,310 |
| Cash and cash equivalents and restricted cash at beginning of the period | 80,981 | 110,511 |
| Cash and cash equivalents and restricted cash at end of the period | $38,320 | $175,821 |
| Supplemental information continued on next page. | ||
Consolidated Statements of Cash Flows
| Continued from previous page | ||
|---|---|---|
| Nine Months Ended September 30, | ||
| 2024 | 2023 | |
| Reconciliation of cash and cash equivalents and restricted cash: | ||
| Cash and cash equivalents at beginning of the period | $78,079 | $107,934 |
| Restricted cash at beginning of the period | 2,902 | 2,577 |
| Cash and cash equivalents and restricted cash at beginning of the period | $80,981 | $110,511 |
| Cash and cash equivalents at end of the period | $35,328 | $172,953 |
| Restricted cash at end of the period | 2,992 | 2,868 |
| Cash and cash equivalents and restricted cash at end of the period | $38,320 | $175,821 |
| Supplemental schedule of non-cash activity: | ||
| Transfer of property under development to real estate investments | $111,805 | $30,340 |
| Transfer of real estate investments to mortgage note | $— | $1,321 |
| Issuance of nonvested shares and restricted share units at fair value, including nonvested shares issued for payment of bonuses | $21,325 | $25,431 |
| Supplemental disclosure of cash flow information: | ||
| Cash paid during the period for interest | $81,222 | $80,144 |
| Cash paid during the period for income taxes | $1,471 | $1,228 |
| Interest cost capitalized | $2,304 | $2,486 |
| Change in accrued capital expenditures | $(13,731) | $(5,981) |
Notes to Consolidated Financial Statements (Unaudited)
- 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 (U.S.) and Canada.
- Summary of Significant Accounting Policies and Recently Issued Accounting Standards
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. In addition, operating results for the nine-month period ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. Amounts as of December 31, 2023 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, 2023 filed with the Securities and Exchange Commission (SEC) on February 29, 2024.
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 joint venture 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 September 30, 2024 and December 31, 2023, the Company does not have any investments in consolidated VIEs.
Deferred Financing Costs
Deferred financing costs are amortized over the terms of the related debt obligations, as applicable. Deferred financing costs of $20.6 million and $25.1 million as of September 30, 2024 and December 31, 2023, respectively, are shown as a reduction of "Debt" in the accompanying consolidated balance sheets. The deferred financing costs related to the unsecured revolving credit facility of $11.2 million and $4.1 million as of September 30, 2024 and December 31, 2023, respectively, 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 the option 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. During the nine months ended September 30, 2024 and 2023 the Company recognized straight-line write-offs totaling $0.1 million and $0.6 million, respectively. For the nine months ended September 30, 2024 and 2023, the Company recognized $13.3 million and $7.7 million, respectively, of straight-line rental revenue, net of write-offs.
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 nine months ended September 30, 2024 and 2023, the Company recognized $1.4 million for both periods, in tenant reimbursements related to the gross-up of these reimbursed expenses that 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. In accordance with Topic 842, the Company has elected to combine these non-lease components with the lease components in rental revenue. For the nine months ended September 30, 2024 and 2023, the amounts due for non-lease components included in rental revenue totaled $13.7 million and $14.8 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 specified triggering events occur as provided by the lease agreement. Rental revenue included percentage rents of $9.8 million and $6.0 million for the nine months ended September 30, 2024 and 2023, respectively.
The Company regularly evaluates the collectibility of its receivables on a lease-by-lease basis. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of the Company's tenants, historical trends of the tenant, 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.
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).
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. There wereno accrued interest write-offs for the nine months ended September 30, 2024 and 2023. As of September 30, 2024, the Company believes that all outstanding accrued interest is collectible.
In the event the Company has a past due mortgage note or note receivable that the Company determines is collateral-dependent, the Company measures expected credit losses based on the fair value of the collateral with the credit allowance being the difference between the outstanding principal balance of the notes and the estimated fair value. As of September 30, 2024, the Company does not have any mortgage notes or notes receivable with past due principal balances. See Note 6 for further discussion of mortgage notes and notes receivable for which the Company elected to apply the collateral-dependent practical expedient.
Concentrations of Risk
Topgolf USA (Topgolf), American-Multi Cinema, Inc. (AMC) and Regal Cinemas (Regal), a subsidiary of Cineworld Group, represented a significant portion of the Company's total revenue for the nine months ended September 30, 2024 and 2023. The following is a summary of the Company's total revenue derived from rental or interest payments from Topgolf, AMC and Regal (dollars in thousands):
| Nine Months Ended September 30, | ||||
|---|---|---|---|---|
| 2024 | 2023 | |||
| Total Revenue | % of Company's Total Revenue | Total Revenue | % of Company's Total Revenue | |
| Topgolf | $74,657 | 14.3% | $72,227 | 13.5% |
| AMC | 70,662 | 13.6% | 70,915 | 13.3% |
| Regal | 57,677 | 11.1% | 84,818 | 15.9% |
Impact of Recently Issued Accounting Standards
In November 2023, the FASB issued Accounting Standards Update (ASU) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 31, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on the Company's financial statements and related disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU enhances annual income tax disclosures by requiring entities to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. In addition, the ASU requires annual disclosure of income taxes paid disaggregated by jurisdiction. The guidance is effective for fiscal years beginning after December 15, 2024 on a prospective basis, with the option to apply the standard retrospectively. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on the Company's financial statements and related disclosures.
- Real Estate Investments
The following table summarizes the carrying amounts of real estate investments as of September 30, 2024 and December 31, 2023 (in thousands):
| September 30, 2024 | December 31, 2023 | |
|---|---|---|
| Buildings and improvements | $4,697,894 | $4,609,050 |
| Furniture, fixtures & equipment | 119,112 | 115,596 |
| Land | 1,235,500 | 1,219,943 |
| Leasehold interests | 28,453 | 28,453 |
| 6,080,959 | 5,973,042 | |
| Accumulated depreciation | (1,546,509) | (1,435,683) |
| Total | $4,534,450 | $4,537,359 |
Depreciation expense on real estate investmentswas $121.9 million and $119.8 million for the nine months ended September 30, 2024 and 2023, respectively.
- 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 nine months ended September 30, 2024, the Company reassessed the holding period of a theatre property the Company was previously operating through a third-party management agreement but closed in September 2024. The property is currently vacant as the Company prepares to sell it. The Company determined that the carrying value of the theatre did not exceed the sum of the undiscounted cash flows and estimated the fair value of the real estate investments of this property using an independent appraisal. During the nine months ended September 30, 2024, the Company reduced the carrying value of the real estate investments, net to $6.5 million and recognized an impairment charge of $11.8 million on real estate investments, which is the amount that the carrying value of the asset exceeded the estimated fair value.
During the nine months ended September 30, 2024, the Company also recognized $12.1 million of impairment charges related to its equity investments in two unconsolidated real estate joint ventures that own two experiential lodging properties located in St. Pete Beach, Florida. See Note 9 for further details on these impairments.
- Investments and Dispositions
The Company's investment spending during the nine months ended September 30, 2024 totaled $214.6 million, and included $52.0 million for the financing of a fitness & wellness property in Colorado, $33.4 million for the acquisition of an attraction property in New York and $19.9 million for the acquisition and financing of land forthree build-to-suit eat & play developments in Illinois, Kansas and Oklahoma. Investment spending for the nine months ended September 30, 2024 also included experiential build-to-suit development and redevelopment projects.
During the nine months ended September 30, 2024, the Company completed the sale oftwo cultural properties, six vacant theatre properties, one leased theatre property andone vacant early childhood education center for net proceeds totaling $65.1 million and recognized a net gain on sale totaling $16.0 million.
- Investment in Mortgage Notes and Notes Receivable
The Company measures expected credit losses on its mortgage notes and notes receivable on an individual basis because its financial instruments do not have similar risk characteristics. The Company uses a forward-looking commercial real estate loss 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. As of September 30, 2024, the Company did not anticipate any prepayments. Therefore, the contractual terms of its mortgage notes and notes receivable were 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. The CECL allowance is a valuation account that is deducted from the related mortgage note or note receivable. Effective January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.
Certain of the Company’s mortgage notes and notes receivable include commitments to fund future incremental amounts to its borrowers. These future funding commitments are also subject to the CECL model. The CECL allowance related to future funding is recorded as a liability and is included in "Accounts payable and accrued liabilities" in the accompanying consolidated balance sheets.
Investment in mortgage notes, including related accrued interest receivable, was $657.6 million and $569.8 million at September 30, 2024 and December 31, 2023, respectively. Investment in notes receivable, including related accrued interest receivable, was $3.4 million and $3.9 million at September 30, 2024 and December 31, 2023, respectively, and is included in "Other assets" in the accompanying consolidated balance sheets.
At September 30, 2024, one of the Company's mortgage notes receivable andtwo of the Company's notes receivable are considered collateral-dependent and expected credit losses are based on the fair value of the underlying collateral with the credit allowance being the difference between the outstanding principal balance of the notes and the estimated fair value at the reporting date. The Company assessed the fair value of the collateral as of September 30, 2024 on the mortgage note receivable and the notes receivable. The mortgage note receivable has a carrying amount at September 30, 2024 of approximately $10.4 million net of an allowance for credit loss totaling $0.4 million. Thetwo notes receivable remain fully reserved with an allowance for credit loss totaling $6.9 million and $1.9 million, respectively, which represents the outstanding principal balances of the notes as of September 30, 2024. Income from these borrowers is recognized on a cash basis. During the nine months ended September 30, 2024 and 2023, the Company received cash basis interest payments of $0.7 million for each period from the mortgage note receivable borrower and $0.7 million for each period fromone of the note receivable borrowers. During the nine months ended September 30, 2024 and 2023, the Company received principal payments totaling $0.8 million and $0.7 million, respectively, fromone of the note receivable borrowers.
At September 30, 2024, the Company's investment in one of the notes 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 $6.9 million, which is fully reserved in the allowance for credit losses at September 30, 2024.
The following summarizes the activity within the allowance for credit losses related to mortgage notes, unfunded commitments and notes receivable for the nine months ended September 30, 2024 (in thousands):
| Mortgage notes receivable | Unfunded commitments - mortgage notes receivable | Notes receivable | Unfunded commitments - notes receivable | Total | |
|---|---|---|---|---|---|
| Allowance for credit losses at December 31, 2023 | $3,656 | $1,072 | $9,687 | $— | $14,415 |
| Provision (benefit) for credit losses, net | 2,970 | 276 | (875) | — | 2,371 |
| Charge-offs | — | — | — | — | — |
| Recoveries | — | — | — | — | — |
| Allowance for credit losses at September 30, 2024 | $6,626 | $1,348 | $8,812 | $— | $16,786 |
- Accounts Receivable
The following table summarizes the carrying amounts of accounts receivable as of September 30, 2024 and December 31, 2023 (in thousands):
| September 30, 2024 | December 31, 2023 | |
|---|---|---|
| Receivable from tenants | $3,370 | $7,298 |
| Receivable from non-tenants (1) | 6,966 | 824 |
| Straight-line rent receivable | 69,390 | 55,533 |
| Total | $79,726 | $63,655 |
(1) Receivable from non-tenants includes a payment of $5.9 million made to the City of Kansas City, Missouri under protest related to an assessment of tax years ending December 31, 2018 through 2022. The City has denied the Company’s necessary deduction for dividends paid for each of these years resulting in assessment of additional tax, penalties and interest. The Company filed a lawsuit and demanded a refund of the $5.9 million payment during the nine months ended September 30, 2024. The Company has entered into discussions with City representatives to resolve this matter. Although there can be no assurances, based on the discussions and the Company's position in the lawsuit, the Company believes that it is more likely than not that the payment will be refunded.
As of September 30, 2024, as a result of the COVID-19 pandemic, the Company continues to recognize revenue on a cash basis for AMC and two other tenants, one of which has deferred rent from this period that is not booked as a receivable of approximately $11.5 million. The Company has collected all deferred receivables from accrual basis tenants that were deferred due to the COVID-19 pandemic. During the nine months ended September 30, 2024 and 2023, the Company collected $0.6 million and $35.7 million, respect ively, in deferred rent and interest from cash basis customers and from customers for which the deferred payments were not previously recognized as revenue.
- Capital Markets and Dividends
During thethree and nine months ended September 30, 2024, the Company declared cash dividends totaling $0.855 and $2.545 per common share, respectively. Additionally, during the three and nine months ended September 30, 2024, the Company declared cash dividends of $0.359375 and $1.078125 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 $1.6875 per share, respectively, on the Company's 9.00% Series E cumulative convertible preferred shares.
On July 3, 2024, the Company amended its Third Amended, Restated and Consolidated Credit Agreement, which governs its unsecured revolving credit facility, to incorporate the Canadian Overnight Repo Rate Average (CORRA) as a replacement index rate benchmark with respect to loans denominated in Canadian Dollars (CAD) as the Canadian Dollar Offered Rate (CDOR) has been phased out.
On August 22, 2024, the Company repaid its $136.6 million Series A unsecured private placement notes due 2024, using funds available under its $1.0 billion senior unsecured revolving credit facility.
On September 19, 2024, the Company entered into the Fourth Amended, Restated and Consolidated Credit Agreement (the Amended Credit Agreement) providing for a new amended and restated senior unsecured revolving credit facility. The Amended Credit Agreement amended, restated and replaced the Company's prior senior unsecured revolving credit facility provided under the Third Amended, Restated and Consolidated Credit Agreement. The amendments to the prior facility, among other things: (i) extended the maturity date of the revolving credit facility; (ii) generally reduced the interest rate payable on outstanding loans; (iii) eliminated the tangible net worth covenant; (iv) modified the secured debt to total assets financial covenant to permit increased secured debt if the Company so elects; and (v) modified and simplified the capitalization rates used to value assets under the facility.
The Amended Credit Agreement provides for an initial maximum principal amount of $1.0 billion, which includes a $100.0 million letter-of-credit subfacility and a $300.0 million foreign currency revolving credit subfacility. The new credit facility contains an "accordion" feature under which the Company may increase the total maximum principal amount available by $1.0 billion, to a total of $2.0 billion, subject to lender consent. The new credit facility matures on October 2, 2028. The Company hastwo options to extend the maturity date of the new credit facility by an additionalsix months each (for a total of 12 months), subject to applicable fees and the absence of any default. The unsecured revolving credit facility bears interest at a floating rate of SOFR plus 1.15% (based on our unsecured debt ratings and with a SOFR floor ofzero), which was 5.98% at September 30, 2024. Additionally, the facility fee on the revolving credit facility is 0.25%.
In connection with entering into the Amended Credit Agreement, the Company incurred $9.0 million in fees that were capitalized in deferred financing costs and amortized as part of the effective yield. These fees are included in "Other assets" in the accompanying consolidated balance sheet as of September 30, 2024. During the nine months ended September 30, 2024, the Company also recorded a non-cash write-off of deferred financing costs (net of accumulated amortization), totaling $0.3 million to "Costs associated with loan refinancing or payoff" in connection with entering into the Amended Credit Agreement.
- Unconsolidated Real Estate Joint Ventures
The following table summarizes the Company's investments in unconsolidated joint ventures as of September 30, 2024 and December 31, 2023 (in thousands):
| Investment as of · (Loss) Income for the Nine Months Ended | |||||||
|---|---|---|---|---|---|---|---|
| Property Type · Location · Ownership Interest · September 30, 2024 · December 31, 2023 · September 30, 2024 · September 30, 2023 | |||||||
| Experiential lodging | St. Pete Beach, FL | 65% | (1) | $— | $14,727 | $(2,597) | $(835) |
| Experiential lodging | Warrens, WI | 95% | (2) | 10,271 | 9,945 | 325 | 300 |
| Experiential lodging | Breaux Bridge, LA | 85% | (3) | 16,530 | 18,996 | (2,651) | (1,383) |
| Experiential lodging | Harrisville, PA | 62% | (4) | 5,625 | 6,086 | (461) | (149) |
| Theatres | China | various | — | — | — | — | |
| $32,426 | $49,754 | $(5,384) | $(2,067) | ||||
(1) The Company has equity investments intwo unconsolidated real estate joint ventures, one that holds the investment in the real estate of the experiential lodging properties and the other that holds the lodging operations, which are facilitated by a management agreement. The joint venture that holds the real property has a secured non-recourse mortgage loan of $105.0 million at September 30, 2024. The maturity date of this mortgage loan is May 18, 2025. 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 June 1, 2024 to December 1, 2024.
On September 26, 2024, Hurricane Helene made landfall on St. Pete Beach as a Category 3 storm and damaged the joint ventures' experiential lodging properties. On October 9, 2024, further damage was caused by Hurricane Milton. The properties will remain closed as the joint ventures continue to assess and repair damage and the Company does not anticipate that the properties will re-open until well into 2025. The Company plans to work in good faith with its joint venture partners, the non-recourse debt provider and the insurance companies to identify a path forward which the Company expects will result in the eventual removal of both experiential properties from the Company's portfolio. Accordingly, the Company determined that its investment in these joint ventures had no fair value and was not recoverable, and during the third quarter of 2024, recognized $12.1 million in other-than-temporary impairment charges on joint ventures related to these equity investments.
(2) The Company has equity investments intwo unconsolidated real estate joint ventures, one that holds the investment in the real estate of the experiential lodging property and the other that holds the lodging operations, which are facilitated by a management agreement. The joint venture that holds the real property has a secured non-recourse mortgage loan of $23.7 million at September 30, 2024. 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.
(3) The Company has equity investments intwo unconsolidated real estate joint ventures, one that holds the investment in the real estate of the experiential lodging property and the other that holds the lodging operations, which are facilitated by a management agreement. The joint venture that holds the real estate property has a secured non-recourse senior mortgage loan of$38.5 million at September 30, 2024. 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 a 92% equity investment intwo separate unconsolidated real estate joint ventures, that through subsequent joint ventures (described below), hold the investments in the real estate of the experiential lodging property and the lodging operations, which are facilitated by a management agreement. The Company's investments in thesetwo unconsolidated real estate joint ventures were considered to be variable interest investments and the Company's investment in the joint venture that holds the lodging operations is a VIE. The Company is not the primary beneficiary of the VIE because the Company does not individually have the power to direct the activities that are most important to the joint venture and, accordingly, this investment is not consolidated. Other than the guarantee described below, the Company's maximum exposure to loss is limited to its initial investment, which was nominal.
The Company's investments in thetwo unconsolidated real estate joint ventures (representing 92% of each joint venture's equity) have a 67% equity interest intwo separate consolidated joint ventures, one that holds the investments in the real estate of the experiential lodging property and the other that holds the lodging operations, which are facilitated by a management agreement. The consolidated joint venture that holds the real estate property has a secured non-recourse senior mortgage loan commitment of up to $22.5 million at September 30, 2024 in order to fund renovations, with $19.0 million outstanding at September 30, 2024. The maturity date of this mortgage loan is November 1, 2029. The mortgage loan bears interest at an annual fixed rate of 6.38% with monthly interest payments required. The Company has guaranteed $10.0 million in principal on the secured mortgage loan, and, upon completion of construction and achieving a specified debt service coverage ratio, the principal guarantee will be reduced to $5.0 million. The guarantee will be removed completely upon achievement of specified debt service coverage for three consecutive calculation periods. Additionally, the Company has guaranteed the completion of the renovations in the amount of approximately $13.9 million, with $2.1 million remaining to fund at September 30, 2024.
- 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 $0.5 million and $1.3 million at September 30, 2024 and December 31, 2023, respectively. The Company had derivative liabilities of $1.9 million and $4.9 million at September 30, 2024 and December 31, 2023, respectively. The Company has not posted or received collateral with its derivative counterparties as of September 30, 2024 or December 31, 2023. 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 SOFR-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 September 30, 2024, the Company had one interest rate swap agreement designated as a cash flow hedge of interest rate risk. The interest rate swap agreement outstanding as of September 30, 2024 is summarized below:
| Fixed rate | Notional Amount (in millions) | Index | Maturity |
|---|---|---|---|
| 2.5325% | $25.0 | USD SOFR | September 30, 2026 |
The change in the fair value of interest rate derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (AOCI) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction.
Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of September 30, 2024, the Company estimatesthat during the twelve months ending September 30, 2025, $17 thousand of losses willbe 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 itssix 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 September 30, 2024, 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 |
On September 17, 2024, the Company entered intosix USD-CAD cross-currency swaps that will be effective October 1, 2024 with a total fixed original notional value of $170.0 million CAD and $125.0 million USD. The net effect of these swaps is to lock in an exchange rate of $1.35 CAD per USD on approximately $15.3 million annual CAD denominated cash flows through December 2026.
Additionally, on September 17, 2024, the Company entered intotwo USD-CAD cross-currency swaps that will be effective December 1, 2024 with a total fixed original notional value of $90.0 million CAD and $66.2 million USD. The net effect of these swaps is to lock in an exchange rate of $1.35 CAD per USD on approximately $8.1 million annual CAD denominated cash flows through December 2026.
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 thehedged transaction. As of September 30, 2024, the Company estimatesthat during the twelve months ending September 30, 2025, $83 thousand of losses 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 September 30, 2024, the Company had the following foreign currency forwards designated as net investment hedges:
| Fixed rate | Notional Amount (in millions, CAD) | Maturity |
|---|---|---|
| $1.35 CAD per USD | $200.0 | October 1, 2025 |
| $1.35 CAD per USD | 90.0 | December 1, 2025 |
| Total | $290.0 |
For qualifying foreign currency derivatives designated as net investment hedges, the change in the fair value of the derivatives is reported in AOCI as part of the cumulative translation adjustment. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company's accounting policy election. The earnings recognition of excluded components are presented in other income.
Below is a summary of the effect of derivative instruments on the consolidated statements of changes in equity and income for the three and nine months ended September 30, 2024 and 2023.
Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and Comprehensive Income for the Three and Nine Months Ended September 30, 2024 and 2023 (Dollars in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||
|---|---|---|---|---|
| Description | 2024 | 2023 | 2024 | 2023 |
| Cash Flow Hedges | ||||
| Interest Rate Swaps | ||||
| Amount of (Loss) Gain Recognized in AOCI on Derivative | $(503) | $218 | $(132) | $436 |
| Amount of Income Reclassified from AOCI into Earnings (1) | 189 | 178 | 551 | 463 |
| Cross-Currency Swaps | ||||
| Amount of (Loss) Gain Recognized in AOCI on Derivative | (415) | 467 | 39 | 11 |
| Amount of Income Reclassified from AOCI into Earnings (2) | 257 | 196 | 770 | 637 |
| Net Investment Hedges | ||||
| Currency Forward Agreements | ||||
| Amount of (Loss) Gain Recognized in AOCI on Derivative | (2,556) | 4,545 | 3,419 | 599 |
| Total | ||||
| Amount of (Loss) Gain Recognized in AOCI on Derivatives | $(3,474) | $5,230 | $3,326 | $1,046 |
| Amount of Income Reclassified from AOCI into Earnings | 446 | 374 | 1,321 | 1,100 |
| Interest expense, net in accompanying consolidated statements of income and comprehensive income | $32,867 | $31,208 | $97,338 | $94,521 |
| Other income in accompanying consolidated statements of income and comprehensive income | $17,419 | $14,422 | $43,874 | $33,879 |
(1) Included in "Interest expense, net" in the accompanying consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2024 and 2023.
(2) Included in "Other income" in the accompanying consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2024 and 2023.
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 agreements.
As of September 30, 2024, the fair value of the Company's derivatives in a liability position related to these agreements was$1.9 million. If the Company breached any of the contractual provisions of these derivative contracts, it would be required to settle its obligations under the agreements at their termination value of $1.8 million, after considering the right of offset. As of September 30, 2024, the Company had not posted any collateral related to these agreements and was not in breach of any provisions in these agreements.
- 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.
Derivative Financial Instruments
The Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives also use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of September 30, 2024, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives and therefore, classified its derivatives as Level 2 within the fair value reporting hierarchy.
The table below presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 aggregated by the level in the fair value hierarchy within which those measurements are classified and by derivative type.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at
September 30, 2024 and December 31, 2023
| Description | Quoted Prices in Active Markets for Identical Assets (Level I) | Significant OtherObservableInputs (Level 2) | SignificantUnobservableInputs (Level 3) | Balance atend of period |
|---|---|---|---|---|
| Cross-Currency Swaps (1) | $— | $37 | $— | $37 |
| Cross-Currency Swaps (2) | — | (385) | — | (385) |
| Currency Forward Agreements (2) | — | (1,489) | — | (1,489) |
| Interest Rate Swap Agreements (1) | — | 477 | — | 477 |
| Cross-Currency Swaps (1) | $— | $384 | $— | $384 |
| Currency Forward Agreements (2) | — | (4,908) | — | (4,908) |
| Interest Rate Swap Agreements (1) | — | 876 | — | 876 |
(1) Included in "Other assets" in the accompanying consolidated balance sheets.
(2) Included in "Accounts payable and accrued liabilities" in the accompanying consolidated balance sheets.
Non-recurring fair value measurements
The table below presents the Company's assets measured at fair value on a non-recurring basis as of September 30, 2024 and December 31, 2023, 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 September 30, 2024 and December 31, 2023
| Description | Quoted Prices inActive Marketsfor IdenticalAssets (Level I) | SignificantOtherObservableInputs (Level 2) | SignificantUnobservableInputs (Level 3) | Balance atend of period |
|---|---|---|---|---|
| Real estate investments, net (1) | $— | $— | $6,500 | $6,500 |
| Investment in joint ventures (2) | — | — | — | — |
| Real estate investments, net (3) | $— | $— | $39,150 | $39,150 |
(1) As further discussed in Note 4, during the nine months ended September 30, 2024, the Company recorded an impairment charge of $11.8 million related to real estate investments, net, onone property. Management estimated the fair value of this investment taking into account various factors, including an independent appraisal, shortened hold period and market conditions. The significant inputs and assumptions used in the real estate appraisal included land valued at approximately $475 thousand per acre less demolition costs of approximately $13.91 per square foot of building. These measurements were classified within Level 3 of the fair value hierarchy because many of the assumptions were not observable.
(2) As further discussed in Note 9, during the nine months ended September 30, 2024, the Company recorded impairment charges of $12.1 million related to its investment in two unconsolidated real estate joint ventures that own two experiential lodging properties located in St. Pete Beach, Florida. 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.
(3) During the year ended December 31, 2023, the Company recorded an impairment charge of $67.4 million related to real estate investments, net, on 12 properties. Management estimated the fair values of these investments taking into account various factors including independent appraisals, shortened hold periods and market conditions. The significant inputs and assumptions used in the real estate appraisals included market rents ranging from $4.50 per square foot to $20.00 per square foot, discount rates ranging from 8.50% to 11.50% and terminal capitalization rates ranging from 7.75% to 10.25%. These measurements were classified within Level 3 of the fair value hierarchy because 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 September 30, 2024 and December 31, 2023:
Mortgage notes receivable and related accrued interest receivable, net:
The fair value of the Company’s mortgage notes and related accrued interest receivable, net, is estimated by discounting the future cash flows of each instrument using current market rates. At September 30, 2024, the Company had a carrying value of $657.6 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 8.78%. The fixed-rate mortgage notes bear interest at rates of 6.50% to 12.50%. Discounting the future cash flows for fixed-rate mortgage notes receivable using rates of 6.50% to 10.90%, management estimates the fair value of the fixed-rate mortgage notes receivable to be approximately $693.9 million with an estimated weighted average market rate of 8.01% at September 30, 2024.
At December 31, 2023, the Company had a carrying value of $569.8 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 8.82%. The fixed-rate mortgage notes bear interest at rates of 6.99% to 12.32%. Discounting the future cash flows for fixed-rate mortgage notes receivable using rates of 7.15% to 10.25%, management estimates the fair value of the fixed-rate mortgage notes receivable to be $611.2 million with an estimated weighted average market rate of 7.84% at December 31, 2023.
Derivative instruments:
Derivative instruments are carried at their fair value.
Debt instruments:
The fair value of the Company's debt is estimated by discounting the future cash flows of each instrument using current market rates. At September 30, 2024, the Company had a carrying value of $194.0 million in variable-rate debt outstanding with an average interest rate of approximately 5.85%. The carrying value of the variable-rate debt outstanding approximated the fair value at September 30, 2024.
At December 31, 2023, the Company had a carrying value of $25.0 million in variable-rate debt outstanding with an interest rate of approximately 5.48%. The carrying value of the variable-rate debt outstanding approximated the fair value at December 31, 2023.
At both September 30, 2024 and December 31, 2023, the $25.0 million of variable-rate debt outstanding, discussed above, had been effectively converted to a fixed rate by an interest rate swap agreement. See Note 10 for additional information related to the Company's interest rate swap agreement.
At September 30, 2024, the Company had a carrying value of $2.68 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 September 30, 2024 market rates of 5.03% to 5.52%, management estimates the fair value of the fixed rate debt to be approximately $2.58 billion with an estimated weighted average market rate of 5.21% at September 30, 2024.
At December 31, 2023, 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 December 31, 2023 market rates of 6.46% to 6.70%, management estimates the fair value of the fixed rate debt to be approximately $2.58 billion with an estimated weighted average market rate of 6.60% at December 31, 2023.
- Earnings Per Share
The following table summarizes the Company’s computation of basic and diluted earnings per share (EPS) for the three and nine months ended September 30, 2024 and 2023 (amounts in thousands except per share information):
| Three Months Ended September 30, 2024 · Nine Months Ended September 30, 2024 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Income(numerator) · Shares(denominator) · Per ShareAmount · Income(numerator) · Shares(denominator) · Per ShareAmount | |||||||||
| Basic EPS: | |||||||||
| Net income | $46,650 | $154,461 | |||||||
| Less: preferred dividend requirements | (6,032) | (18,104) | |||||||
| Net income available to common shareholders | $40,618 | 75,723 | $0.54 | $136,357 | 75,604 | $1.80 | |||
| Diluted EPS: | |||||||||
| Net income available to common shareholders | $40,618 | 75,723 | $136,357 | 75,604 | |||||
| Effect of dilutive securities: | |||||||||
| Performance shares | — | 385 | — | 341 | |||||
| Net income available to common shareholders | $40,618 | 76,108 | $0.53 | $136,357 | 75,945 | $1.80 | |||
| Three Months Ended September 30, 2023 · Nine Months Ended September 30, 2023 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Income(numerator) · Shares(denominator) · Per ShareAmount · Income(numerator) · Shares(denominator) · Per ShareAmount | |||||||||
| Basic EPS: | |||||||||
| Net income | $56,260 | $127,517 | |||||||
| Less: preferred dividend requirements | (6,032) | (18,105) | |||||||
| Net income available to common shareholders | $50,228 | 75,325 | $0.67 | $109,412 | 75,236 | $1.45 | |||
| Diluted EPS: | |||||||||
| Net income available to common shareholders | $50,228 | 75,325 | $109,412 | 75,236 | |||||
| Effect of dilutive securities: | |||||||||
| Share options and performance shares | — | 491 | — | 419 | |||||
| Net income available to common shareholders | $50,228 | 75,816 | $0.66 | $109,412 | 75,655 | $1.45 | |||
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 because they are anti-dilutive, or in the case of contingently issuable performance shares, are not probable of issuance:
The additional 2.3 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 nine months ended September 30, 2024 and 2023.
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 nine months ended September 30, 2024 and 2023.
Outstanding options to purchase 57 thousand and 83 thousand common shares at per share prices ranging from $44.44 to $76.63 for the three and nine months ended September 30, 2024 and 2023, respectively.
The effect of 116 thousand contingently issuable performance shares granted during 2024 for the three andnine months ended September 30, 2024.
- Retirement of Executive Vice President, General Counsel and Secretary
On March 1, 2024, the Company's Executive Vice President, General Counsel and Secretary, Craig Evans, retired from the Company. Details of Mr. Evans' retirement are included in the previously disclosed Retirement and Release Agreement entered into between the Company and Mr. Evans. The role of General Counsel and Secretary was assumed by Paul Turvey upon Mr. Evans' retirement. For thenine months ended September 30, 2024, the Company recorded retirement and severance expense related to Mr. Evans' retirement, as well as the departure of another employee, totaling $1.8 million, which included cash payments totaling $0.2 million and accelerated vesting of nonvested shares totaling $1.6 million.
- 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 September 30, 2024, there were 860,060 shares available for grant under the 2016 Equity Incentive Plan.
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, 2023 | 609,228 | $44.44 | |
| Granted | 290,271 | 41.96 | |
| Vested | (284,885) | 45.47 | |
| Outstanding at September 30, 2024 | 614,614 | $42.79 | 1.11 |
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 $13.7 million and$8.7 million for the nine months ended September 30, 2024 and 2023, respectively. Expense recognized related to nonvested shares and included in "General and administrative expense" in the accompanying consolidated statements of income and comprehensive income was $5.2 million and $5.7 million for the nine months ended September 30, 2024 and 2023, respectively. Expense related to nonvested shares and included in retirement and severance expense in the accompanying consolidated statements of income and comprehensive income was$0.7 million and $0.4 million for the nine months ended September 30, 2024 and 2023, respectively. At September 30, 2024, unamortized share-based compensation expense related to nonvested shares was $11.3 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 | Weighted avg. grant date fair value (1) | |
|---|---|---|
| Outstanding at December 31, 2023 | 312,641 | $70.04 |
| Granted | 116,266 | 44.76 |
| Vested (2) | (102,438) | 75.14 |
| Outstanding at September 30, 2024 | 326,469 | $59.44 |
(1) The grant date fair value was determined utilizing (i) a Monte Carlo simulation model to generate an estimate of the Company's future stock price over the three-year performance period for performance shares based on the Company's Total Shareholder Return (TSR) performance further described below and (ii) the Company's grant date fair value for performance shares based on the Company's estimated Compounded Annual Growth Rate (CAGR) in AFFO per share over the three-year performance period.
(2) The achievement of the performance conditions for the performance shares granted during the year ended December 31, 2021 resulted in a performance payout percentage of 250% for both the Company's TSR relative to the TSRs of the Company's peer group companies and the Company's TSR relative to the TSRs of companies in the MSCI US REIT Index and a payout percentage of 200% for the Company's CAGR in AFFO per share over the three-year performance period. The achievement of the performance conditions and the above payout percentages resulted in the issuance of 243,290 common shares and 49,574 common shares from dividend equivalents. The fair value of the performance shares and dividend equivalents that vested was $12.6 million.
The number of common shares issuable upon settlement of the performance shares granted during the nine months ended September 30, 2024, 2023 and 2022 will be based upon the Company's achievement level relative to performance measures at December 31, 2026, 2025 and 2024, respectively. The achievement level for the performance shares granted during the nine months ended September 30, 2024 is 52.2% based upon the Company's TSR relative to the TSRs of the Company's peer group companies,26.1% based upon the Company's TSR relative to the TSRs of companies in the MSCI US REIT Index and 21.7% based upon the Company's estimated CAGR in AFFO per share over the three-year performance period. The achievement level for the performance shares granted during the years ended December 31, 2023 and 2022 is 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 $4.1 million and $5.9 million for the nine months ended September 30, 2024 and 2023, respectively. The estimated fair value is amortized to expense over the three-year performance periods, which end on December 31, 2026, 2025 and 2024 for performance shares granted in 2024, 2023 and 2022, 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 nine months ended September 30, 2024: risk-free interest rate of 4.5%, volatility factors in the expected market price of the Company's common shares of 30% 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 September 30, 2024, achievement of the performance condition was deemed probable for the performance shares granted during the nine months ended September 30, 2022 with an expected payout percentage of 200%, which resulted in a grant date fair value of approximately $2.3 million. Achievement of the performance condition for the performance shares granted during the nine months ended September 30, 2024 and 2023 was deemed not probable at September 30, 2024.
Expense recognized related to performance shares and included in "General and administrative expense" in the accompanying consolidated statements of income and comprehensive income was $4.0 million and $5.9 million for the nine months ended September 30, 2024 and 2023, respectively. Expense related to performance shares and included in retirement and severance expense in the accompanying consolidated statements of income and comprehensive income was $0.9 million for the nine months ended September 30, 2024. At September 30, 2024, unamortized share-based compensation expense related to nonvested performance shares was $5.7 million.
The performance shares accrue dividend equivalents that are paid only if common shares are issued upon settlement of the performance shares. During the nine months ended September 30, 2024 and 2023, the Company accrued dividend equivalents expected to be paid on earned awards of $1.5 million and $1.3 million, 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, 2023 | 42,048 | $41.67 | |
| Granted | 45,410 | 40.69 | |
| Vested | (42,048) | 41.67 | |
| Outstanding at September 30, 2024 | 45,410 | $40.69 | 0.67 |
The holders of restricted share units receive dividend equivalents from the date of grant. 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 $1.3 million and $1.5 million for the nine months ended September 30, 2024 and 2023, respectively. At September 30, 2024, unamortized share-based compensation expense related to restricted share units was $1.3 million.
- 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 September 30, 2024 and December 31, 2023, the Company was lessee in 51 operating ground leases. 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 September 30, 2024, rental revenue fromone 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, however, 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 a sub-tenant, 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 nine months ended September 30, 2024 and 2023 (in thousands):
| Three Months Ended September 30, · Nine Months Ended September 30, | |||||
|---|---|---|---|---|---|
| Classification | 2024 | 2023 | 2024 | 2023 | |
| Operating leases | Rental revenue | $142,189 | $155,689 | $416,589 | $446,454 |
| Sublease income - operating ground leases | Rental revenue | 6,488 | 8,251 | 19,462 | 20,947 |
| Lease costs | |||||
| Operating ground lease cost | Property operating expense | $6,531 | $6,571 | $19,617 | $19,735 |
| Operating office lease cost | General and administrative expense | 224 | 224 | 672 | 672 |
- Segment Information
The Company groups its investments intotwo reportable operating segments: Experiential and Education.
The financial information summarized below is presented by reportable operating segment (in thousands):
| Balance Sheet Data: | ||||
|---|---|---|---|---|
| As of September 30, 2024 | ||||
| Experiential | Education | Corporate/Unallocated | Consolidated | |
| Total Assets | $5,227,247 | $418,529 | $43,386 | $5,689,162 |
| As of December 31, 2023 | ||||
| Experiential | Education | Corporate/Unallocated | Consolidated | |
| Total Assets | $5,189,831 | $433,177 | $77,877 | $5,700,885 |
| Operating Data: | ||||||
|---|---|---|---|---|---|---|
| Three Months Ended September 30, 2024 | ||||||
| Experiential · Education · Corporate/Unallocated · Consolidated | ||||||
| Rental revenue | $139,241 | $9,436 | $— | $148,677 | ||
| Other income | 17,232 | — | 187 | 17,419 | ||
| Mortgage and other financing income | 14,206 | 205 | — | 14,411 | ||
| Total revenue | 170,679 | 9,641 | 187 | 180,507 | ||
| Property operating expense | 14,180 | 189 | 242 | 14,611 | ||
| Other expense | 15,631 | — | — | 15,631 | ||
| Total investment expenses | 29,811 | 189 | 242 | 30,242 | ||
| Net operating income - before unallocated items | 140,868 | 9,452 | (55) | 150,265 | ||
| Reconciliation to Consolidated Statements of Income and Comprehensive Income: | ||||||
| General and administrative expense | (11,935) | |||||
| Transaction costs | (175) | |||||
| (Provision) benefit for credit losses, net | 770 | |||||
| Depreciation and amortization | (42,795) | |||||
| Loss on sale of real estate | (3,419) | |||||
| Costs associated with loan refinancing or payoff | (337) | |||||
| Interest expense, net | (32,867) | |||||
| Equity in loss from joint ventures | (851) | |||||
| Impairment charges on joint ventures | (12,130) | |||||
| Income tax benefit | 124 | |||||
| Net income | 46,650 | |||||
| Preferred dividend requirements | (6,032) | |||||
| Net income available to common shareholders of EPR Properties | $40,618 | |||||
| Operating Data: | ||||||
|---|---|---|---|---|---|---|
| Three Months Ended September 30, 2023 | ||||||
| Experiential · Education · Corporate/Unallocated · Consolidated | ||||||
| Rental revenue | $153,953 | $9,987 | $— | $163,940 | ||
| Other income | 14,275 | — | 147 | 14,422 | ||
| Mortgage and other financing income | 10,810 | 212 | — | 11,022 | ||
| Total revenue | 179,038 | 10,199 | 147 | 189,384 | ||
| Property operating expense | 14,144 | 156 | 292 | 14,592 | ||
| Other expense | 13,124 | — | — | 13,124 | ||
| Total investment expenses | 27,268 | 156 | 292 | 27,716 | ||
| Net operating income - before unallocated items | 151,770 | 10,043 | (145) | 161,668 | ||
| Reconciliation to Consolidated Statements of Income and Comprehensive Income: | ||||||
| General and administrative expense | (13,464) | |||||
| Transaction costs | (847) | |||||
| (Provision) benefit for credit losses, net | 719 | |||||
| Impairment charges | (20,887) | |||||
| Depreciation and amortization | (42,432) | |||||
| Gain on sale of real estate | 2,550 | |||||
| Interest expense, net | (31,208) | |||||
| Equity in income from joint ventures | 533 | |||||
| Income tax expense | (372) | |||||
| Net income | 56,260 | |||||
| Preferred dividend requirements | (6,032) | |||||
| Net income available to common shareholders of EPR Properties | $50,228 | |||||
| Operating Data: | ||||||
|---|---|---|---|---|---|---|
| Nine Months Ended September 30, 2024 | ||||||
| Experiential · Education · Corporate/Unallocated · Consolidated | ||||||
| Rental revenue | $407,638 | $28,413 | $— | $436,051 | ||
| Other income | 43,215 | 100 | 559 | 43,874 | ||
| Mortgage and other financing income | 40,285 | 624 | — | 40,909 | ||
| Total revenue | 491,138 | 29,137 | 559 | 520,834 | ||
| Property operating expense | 42,762 | 475 | 721 | 43,958 | ||
| Other expense | 43,440 | — | — | 43,440 | ||
| Total investment expenses | 86,202 | 475 | 721 | 87,398 | ||
| Net operating income - before unallocated items | 404,936 | 28,662 | (162) | 433,436 | ||
| Reconciliation to Consolidated Statements of Income and Comprehensive Income: | ||||||
| General and administrative expense | (37,863) | |||||
| Retirement and severance expense | (1,836) | |||||
| Transaction costs | (375) | |||||
| (Provision) benefit for credit losses, net | (2,371) | |||||
| Impairment charges | (11,812) | |||||
| Depreciation and amortization | (124,738) | |||||
| Gain on sale of real estate | 15,989 | |||||
| Costs associated with loan refinancing or payoff | (337) | |||||
| Interest expense, net | (97,338) | |||||
| Equity in loss from joint ventures | (5,384) | |||||
| Impairment charges on joint ventures | (12,130) | |||||
| Income tax expense | (780) | |||||
| Net income | 154,461 | |||||
| Preferred dividend requirements | (18,104) | |||||
| Net income available to common shareholders of EPR Properties | $136,357 | |||||
| Operating Data: | ||||||
|---|---|---|---|---|---|---|
| Nine Months Ended September 30, 2023 | ||||||
| Experiential · Education · Corporate/Unallocated · Consolidated | ||||||
| Rental revenue | $438,074 | $29,327 | $— | $467,401 | ||
| Other income | 33,208 | 1 | 670 | 33,879 | ||
| Mortgage and other financing income | 31,753 | 654 | — | 32,407 | ||
| Total revenue | 503,035 | 29,982 | 670 | 533,687 | ||
| Property operating expense | 42,065 | 156 | 498 | 42,719 | ||
| Other expense | 31,235 | — | — | 31,235 | ||
| Total investment expenses | 73,300 | 156 | 498 | 73,954 | ||
| Net operating income - before unallocated items | 429,735 | 29,826 | 172 | 459,733 | ||
| Reconciliation to Consolidated Statements of Income and Comprehensive Income: | ||||||
| General and administrative expense | (42,677) | |||||
| Retirement and severance expense | (547) | |||||
| Transaction costs | (1,153) | |||||
| (Provision) benefit for credit losses, net | 407 | |||||
| Impairment charges | (64,672) | |||||
| Depreciation and amortization | (127,341) | |||||
| Gain on sale of real estate | 1,415 | |||||
| Interest expense, net | (94,521) | |||||
| Equity in loss from joint ventures | (2,067) | |||||
| Income tax expense | (1,060) | |||||
| Net income | 127,517 | |||||
| Preferred dividend requirements | (18,105) | |||||
| Net income available to common shareholders of EPR Properties | $109,412 | |||||
- Other Commitments and Contingencies
As of September 30, 2024, the Company had 13 development projects with commitments to fund an aggregate of approximately $144.1 million. The Company advances development costs 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 investments that it may be required to fund in the future. The Company is generally obligated to fund these commitments at the request of the borrower or upon the occurrence of events outside of its direct control. As of September 30, 2024, the Company hadfive mortgage notes with commitments totaling approximately $73.1 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 thatthe Company's obligations will be satisfied. These bonds expire upon the completion of the improvements or infrastructure. As of September 30, 2024, the Company hadthree surety bonds outstanding totaling $0.6 million.
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.