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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-13561
 
ENTERTAINMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland
 
43-1790877
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
909 Walnut Street, Suite 200
Kansas City, Missouri
 
64106
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (816) 472-1700

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨

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

At July 26, 2012, there were 46,838,465 common shares outstanding.




CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
 
With the exception of historical information, certain statements contained or incorporated by reference herein may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as those pertaining to our acquisition or disposition of properties, our capital resources, future expenditures for development projects, and our results of operations. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of actual events. There is no assurance the events or circumstances reflected in the forward-looking statements will occur. You can identify forward-looking statements by use of words such as “will be,” “intend,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “expects,” “pipeline,” “anticipates,” “estimates,” “offers,” “plans” “would,” or other similar expressions or other comparable terms or discussions of strategy, plans or intentions in this Form 10-Q. In addition, references to our budgeted amounts and guidance are forward-looking statements. Factors that could materially and adversely affect us include, but are not limited to, the factors listed below:

General international, national, regional and local business and economic conditions;
Continuing volatility in the financial markets;
Adverse changes in our credit ratings;
An increase in interest rates;
The duration or outcome of litigation, or other factors outside of the litigation, relating to our significant investment in a planned casino and resort development which may cause the development to be indefinitely delayed or cancelled;
The failure of a bank to fund a request by us to borrow money;
Failure of banks in which we have deposited funds;
Defaults in the performance of lease terms by our tenants;
Defaults by our customers and counterparties on their obligations owed to us;
A borrower's bankruptcy or default;
The obsolescence of older multiplex theatres owned by some of our tenants or by any overbuilding of megaplex theatres in their markets;
Our ability to renew maturing leases with theatre tenants on terms comparable to prior leases and/or our ability to lease any re-claimed space from some of our larger theatres at economically favorable terms;
Risks of operating in the entertainment industry;
Our ability to compete effectively;
A single tenant represents a substantial portion of our lease revenue;
A single tenant leases or is the mortgagor of all our investments related to metropolitan ski areas and a single tenant leases a significant number of our public charter school properties;
The ability of our public charter school tenants to comply with their charters and continue to receive funding from state or other regulatory authorities, the approval by applicable governing authorities of substitute operators to assume control of any failed public charter schools and our ability to negotiate the terms of new leases with such substitute tenants on acceptable terms, and our ability to complete collateral substitutions as applicable;
Risks associated with use of leverage to acquire properties;
Financing arrangements that require lump-sum payments;
Our ability to raise capital;
Covenants in our debt instruments that limit our ability to take certain actions;
Risks of acquiring and developing properties and real estate companies;
The lack of diversification of our investment portfolio;
Our continued qualification as a real estate investment trust for U.S federal income tax purposes ("REIT");

i


The ability of our subsidiaries to satisfy their obligations;
Financing arrangements that expose us to funding or purchase risks;
We have a limited number of employees and the loss of personnel could harm operations;
Fluctuations in the value of real estate income and investments;
Risks relating to real estate ownership, leasing and development, for example local conditions such as an oversupply of space or a reduction in demand for real estate in the area, competition from other available space, whether tenants and users such as customers of our tenants consider a property attractive, changes in real estate taxes and other expenses, changes in market rental rates, the timing and costs associated with property improvements and rentals, changes in taxation or zoning laws or other governmental regulation, whether we are able to pass some or all of any increased operating costs through to tenants, and how well we manage our properties;
Our ability to secure adequate insurance and risk of potential uninsured losses, including from natural disasters;
Risks involved in joint ventures;
Risks in leasing multi-tenant properties;
A failure to comply with the Americans with Disabilities Act or other laws;
Risks of environmental liability;
Our real estate investments are relatively illiquid;
We own assets in foreign countries;
Risks associated with owning, operating or financing properties for which the tenant's, mortgagor's or our operations may be impacted by weather conditions and climate change;
Risks associated with the ownership of vineyards and wineries;
Risks associated with security breaches and other disruptions;
Our ability to pay distributions in cash or at current rates;
Fluctuations in interest rates;
Fluctuations in the market prices for our shares;
Certain limits on changes in control imposed under law and by our Declaration of Trust and Bylaws;
Policy changes obtained without the approval of our shareholders;
Equity issuances could dilute the value of our shares;
Risks associated with changes in the Canadian exchange rate; and
Changes in laws and regulations, including tax laws and regulations.

These forward-looking statements represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. For further discussion of these factors see Item 1A. "Risk Factors" in this Form 10-Q and Item 1A. "Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (“SEC”) on February 24, 2012.

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



ii


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

iii


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ENTERTAINMENT PROPERTIES TRUST
Consolidated Balance Sheets
(Dollars in thousands except share data)
 
June 30, 2012
 
December 31, 2011
 
(unaudited)
 
 
Assets
 
 
 
Rental properties, net of accumulated depreciation of $355,945 and $335,116 at June 30, 2012 and December 31, 2011, respectively
$
1,833,893

 
$
1,819,176

Rental properties held for sale, net
3,895

 
4,696

Land held for development
188,874

 
184,457

Property under development
40,141

 
22,761

Mortgage notes and related accrued interest receivable, net
403,619

 
325,097

Investment in a direct financing lease, net
236,157

 
233,619

Investment in joint ventures
10,577

 
25,053

Cash and cash equivalents
12,739

 
14,625

Restricted cash
19,165

 
19,312

Intangible assets, net
3,871

 
4,485

Deferred financing costs, net
18,452

 
18,527

Accounts receivable, net
33,138

 
35,005

Notes and related accrued interest receivable, net
5,007

 
5,015

Other assets
24,139

 
22,167

Total assets
$
2,833,667

 
$
2,733,995

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$
37,485

 
$
36,036

Common dividends payable
35,128

 
32,709

Preferred dividends payable
6,002

 
6,002

Unearned rents and interest
11,982

 
6,850

Long-term debt
1,270,560

 
1,154,295

Total liabilities
1,361,157

 
1,235,892

Equity:
 
 
 
Common Shares, $.01 par value; 75,000,000 shares authorized; and 48,279,507 and 48,062,593 shares issued at June 30, 2012 and December 31, 2011, respectively
482

 
480

Preferred Shares, $.01 par value; 25,000,000 shares authorized:
 
 
 
5,400,000 Series C convertible shares issued at June 30, 2012 and December 31, 2011; liquidation preference of $135,000,000
54

 
54

4,600,000 Series D shares issued at June 30, 2012 and December 31, 2011; liquidation preference of $115,000,000
46

 
46

3,450,000 Series E convertible shares issued at June 30, 2012 and December 31, 2011; liquidation preference of $86,250,000
35

 
35

Additional paid-in-capital
1,752,784

 
1,719,066

Treasury shares at cost: 1,442,159 and 1,335,879 common shares at June 30, 2012 and December 31, 2011, respectively
(49,539
)
 
(44,834
)
Accumulated other comprehensive income
20,680

 
23,463

Distributions in excess of net income
(252,338
)
 
(228,261
)
Entertainment Properties Trust shareholders’ equity
1,472,204

 
1,470,049

Noncontrolling interests
306

 
28,054

Equity
$
1,472,510

 
$
1,498,103

Total liabilities and equity
$
2,833,667

 
$
2,733,995

See accompanying notes to consolidated financial statements.

1


ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Rental revenue
$
59,211

 
$
56,024

 
$
117,494

 
$
111,406

Tenant reimbursements
4,365

 
4,515

 
9,186

 
9,176

Other income
107

 
131

 
133

 
155

Mortgage and other financing income
15,256

 
13,747

 
29,976

 
27,262

Total revenue
78,939

 
74,417

 
156,789

 
147,999

Property operating expense
5,245

 
6,579

 
11,419

 
12,769

Other expense
431

 
677

 
916

 
1,157

General and administrative expense
5,821

 
5,105

 
12,288

 
10,573

Costs associated with loan refinancing or payoff

 

 

 
5,339

Interest expense, net
18,459

 
17,287

 
36,600

 
36,031

Transaction costs
31

 
76

 
189

 
1,349

Impairment charges

 
24,298

 
8,195

 
24,298

Depreciation and amortization
12,791

 
11,782

 
25,073

 
23,455

Income before equity in income from joint ventures and discontinued operations
36,161

 
8,613

 
62,109

 
33,028

Equity in income from joint ventures
278

 
781

 
324

 
1,555

Income from continuing operations
$
36,439

 
$
9,394

 
$
62,433

 
$
34,583

Discontinued operations:
 
 
 
 
 
 
 
Income (loss) from discontinued operations
(59
)
 
566

 
(297
)
 
1,666

Impairment charges

 
(9,958
)
 
(4,648
)
 
(11,758
)
Costs associated with loan refinancing or payoff

 

 

 
(1,049
)
Gain on sale or acquisition of real estate
438

 

 
720

 
18,293

Net income
36,818

 
2

 
58,208

 
41,735

Add: Net income attributable to noncontrolling interests
(19
)
 

 
(37
)
 
(2
)
Net income attributable to Entertainment Properties Trust
36,799

 
2

 
58,171

 
41,733

Preferred dividend requirements
(6,002
)
 
(7,551
)
 
(12,003
)
 
(15,103
)
Net income (loss) available to common shareholders of Entertainment Properties Trust
$
30,797

 
$
(7,549
)
 
$
46,168

 
$
26,630

Per share data attributable to Entertainment Properties Trust common shareholders:
 
 
 
 
 
 
 
Basic earnings per share data:
 
 
 
 
 
 
 
Income from continuing operations
$
0.65

 
$
0.04

 
$
1.08

 
$
0.42

Income (loss) from discontinued operations
0.01

 
(0.20
)
 
(0.09
)
 
0.15

Net income (loss) available to common shareholders
$
0.66

 
$
(0.16
)
 
$
0.99

 
$
0.57

Diluted earnings per share data:
 
 
 
 
 
 
 
Income from continuing operations
$
0.64

 
$
0.04

 
$
1.07

 
$
0.42

Income (loss) from discontinued operations
0.01

 
(0.20
)
 
(0.09
)
 
0.15

Net income (loss) available to common shareholders
$
0.65

 
$
(0.16
)
 
$
0.98

 
$
0.57

Shares used for computation (in thousands):
 
 
 
 
 
 
 
Basic
46,826

 
46,648

 
46,751

 
46,576

Diluted
47,068

 
46,956

 
47,006

 
46,880

See accompanying notes to consolidated financial statements.

2


ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
36,818

 
$
2

 
$
58,208

 
$
41,735

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(2,910
)
 
828

 
(124
)
 
9,558

Change in unrealized loss on derivatives
(171
)
 
(864
)
 
(2,659
)
 
(3,846
)
Comprehensive income (loss)
33,737

 
(34
)
 
55,425

 
47,447

Comprehensive income attributable to the noncontrolling interests
(19
)
 

 
(37
)
 
(2
)
Comprehensive income (loss) attributable to Entertainment Properties Trust
$
33,718

 
$
(34
)
 
$
55,388

 
$
47,445

See accompanying notes to consolidated financial statements.

3





ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Changes in Equity
Six Months Ended June 30, 2012
(Unaudited)
(Dollars in thousands)
 
Entertainment Properties Trust Shareholders’ Equity
 
 
 
 
 
Common Stock
 
Preferred Stock
 
Additional
paid-in capital
 
Treasury
shares
 
Accumulated
other
comprehensive
income (loss)
 
Distributions
in excess of
net income
 
Noncontrolling
Interests
 
Total
 
Shares
 
Par
 
Shares
 
Par
 
 
Balance at December 31, 2011
48,062,593

 
$
480

 
13,450,000

 
$
135

 
$
1,719,066

 
$
(44,834
)
 
$
23,463

 
$
(228,261
)
 
$
28,054

 
$
1,498,103

Restricted share units issued to Trustees
10,925

 

 

 

 
488

 

 

 

 

 
488

Issuance of nonvested shares, including nonvested shares issued for the payment of bonuses
148,095

 
1

 

 

 
1,486

 

 

 

 

 
1,487

Cancellation of 185 employee nonvested shares

 

 

 

 
5

 
(5
)
 

 

 

 

Amortization of nonvested shares

 

 

 

 
2,266

 

 

 

 

 
2,266

Share option expense

 

 

 

 
481

 

 

 

 

 
481

Foreign currency translation adjustment

 

 

 

 

 

 
(124
)
 

 

 
(124
)
Change in unrealized gain/loss on derivatives

 

 

 

 

 

 
(2,659
)
 

 

 
(2,659
)
Net income

 

 

 

 

 

 

 
58,171

 
37

 
58,208

Purchase of 73,411 common shares for treasury

 

 

 

 

 
(3,209
)
 

 

 

 
(3,209
)
Issuances of common shares
4,464

 

 

 

 
197

 

 

 

 

 
197

Stock option exercises, net
53,430

 
1

 

 

 
1,010

 
(1,491
)
 

 

 

 
(480
)
Dividends to common and preferred shareholders

 

 

 

 

 

 

 
(82,248
)
 

 
(82,248
)
Forfeiture of noncontrolling interest

 

 

 

 
27,785

 

 

 

 
(27,785
)
 

Balance at June 30, 2012
48,279,507

 
$
482

 
13,450,000

 
$
135

 
$
1,752,784

 
$
(49,539
)
 
$
20,680

 
$
(252,338
)
 
$
306

 
$
1,472,510


See accompanying notes to consolidated financial statements.

4


ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 
Six Months Ended June 30,
 
2012
 
2011
Operating activities:
 
 
 
Net income
$
58,208

 
$
41,735

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Non-cash impairment charges
8,195

 
24,298

Loss (income) from discontinued operations
4,225

 
(7,152
)
Costs associated with loan refinancing or payoff (non-cash portion)

 
1,759

Equity in income from joint ventures
(324
)
 
(1,555
)
Distributions from joint ventures
638

 
1,304

Depreciation and amortization
25,073

 
23,455

Amortization of deferred financing costs
2,177

 
1,787

Share-based compensation expense to management and trustees
2,998

 
2,841

Decrease in restricted cash
1,851

 
1,649

Increase in mortgage notes accrued interest receivable
(37
)
 

Decrease in accounts receivable, net
494

 
1,015

Decrease in notes receivable and accrued interest receivable
8

 
48

Increase in direct financing lease receivable
(2,538
)
 
(2,553
)
Increase in other assets
(1,051
)
 
(1,874
)
Increase (decrease) in accounts payable and accrued liabilities
(1,156
)
 
2,927

Increase in unearned rents and interest
2,511

 
138

Net operating cash provided by continuing operations
101,272

 
89,822

Net operating cash provided by discontinued operations
2,168

 
2,508

Net cash provided by operating activities
103,440

 
92,330

Investing activities:
 
 
 
Acquisition of rental properties and other assets
(40,424
)
 
(38,924
)
Investment in unconsolidated joint ventures
(661
)
 
(2,784
)
Investment in mortgage notes receivable
(64,561
)
 
(6,036
)
Investment in a direct financing lease, net

 
(2,113
)
Additions to properties under development
(43,597
)
 
(18,437
)
Net cash used by investing activities of continuing operations
(149,243
)
 
(68,294
)
Net cash used by other investing activities of discontinued operations

 
(58
)
Net proceeds from sale of real estate from discontinued operations
12,969

 
212,396

Net cash provided (used) by investing activities
(136,274
)
 
144,044

Financing activities:
 
 
 
Proceeds from long-term debt facilities
396,000

 
195,000

Principal payments on long-term debt
(279,663
)
 
(345,352
)
Deferred financing fees paid
(2,101
)
 
(934
)
Net proceeds from issuance of common shares
133

 
145

Impact of stock option exercises, net
(480
)
 
(499
)
Purchase of common shares for treasury
(3,209
)
 
(3,070
)
Dividends paid to shareholders
(79,764
)
 
(77,951
)
Net cash provided (used) by financing activities
30,916

 
(232,661
)
Effect of exchange rate changes on cash
32

 
251

Net increase (decrease) in cash and cash equivalents
(1,886
)
 
3,964

Cash and cash equivalents at beginning of the period
14,625

 
11,776

Cash and cash equivalents at end of the period
$
12,739

 
$
15,740

Supplemental information continued on next page.
 
 
 

5


ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Continued from previous page.
 
Six Months Ended June 30,
 
2012
 
2011
Supplemental schedule of non-cash activity:
 
 
 
Transfer of property under development to rental property
$
22,702

 
$
4,552

Acquisiton of real estate in exchange for assumption of debt at fair value
$

 
$
4,109

Issuance of nonvested shares and restricted share units at fair value, including nonvested shares issued for payment of bonuses
$
7,181

 
$
6,785

Conversion of equity to mortgage note receivable related to Atlantic-EPR I
$
14,852

 
$

Adjustment of noncontrolling interest to additional paid in capital
27,785

 

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the year for interest
$
34,487

 
$
36,025

Cash paid (received) during the year for income taxes
$
(715
)
 
$
632

See accompanying notes to consolidated financial statements.

6



ENTERTAINMENT PROPERTIES TRUST
Notes to Consolidated Financial Statements (Unaudited)


1. Organization

Description of Business
Entertainment Properties Trust (the Company) is a Maryland real estate investment trust (REIT) organized on August 29, 1997. The Company develops, owns, leases and finances megaplex theatres, entertainment retail centers (centers generally anchored by an entertainment component such as a megaplex theatre and containing other entertainment-related or retail properties), public charter schools, metropolitan ski areas and other destination recreational and specialty properties. The Company’s properties are located in the United States and Canada.

2. Summary of Significant Accounting Policies

Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. In addition, operating results for the six month period ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The Company consolidates certain entities if it is deemed to be the primary beneficiary in a variable interest entity (VIE), as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic on Consolidation. The Topic on Consolidation requires the consolidation of VIEs in which an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. This topic requires an ongoing reassessment of and eliminates the quantitative approach previously required for determining whether a company is the primary beneficiary and requires enhanced disclosures on variable interest entities.  The equity method of accounting is applied to entities in which the Company is not the primary beneficiary as defined in the Consolidation Topic of the FASB ASC, or does not have effective control, but can exercise influence over the entity with respect to its operations and major decisions.

The Company reports its noncontrolling interests as required by the Consolidation Topic of the FASB ASC. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. The ownership interests in the subsidiary that are held by owners other than the parent are noncontrolling interests. Such noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company's equity. On the consolidated statements of income, revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Company and noncontrolling interests. Consolidated statements of changes in shareholders' equity are included for both quarterly and annual financial statements, including beginning balances, activity for the period and ending balances for equity, noncontrolling interests and total equity. The Company does not have any redeemable noncontrolling interests under the scope of the Distinguishing Liabilities from Equity guidance of the FASB ASC.

The consolidated balance sheet as of December 31, 2011 has been derived from the audited consolidated balance sheet at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (SEC) on February 24, 2012.



7


Operating Segments
For financial reporting purposes, the Company groups its investments into four reportable operating segments: entertainment, education, recreation and other. See Note 18 for financial information related to these operating segments.

Rental Properties
Rental properties are carried at cost less accumulated depreciation. Costs incurred for the acquisition and development of the properties are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which generally are estimated to be 40 years for buildings and 3 to 25 years for furniture, fixtures and equipment. Tenant improvements, including allowances, are depreciated over the shorter of the base term of the lease or the estimated useful life. Expenditures for ordinary maintenance and repairs are charged to operations in the period incurred. Significant renovations and improvements which improve or extend the useful life of the asset are capitalized and depreciated over their estimated useful life.

Management reviews a property for impairment whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. The review of recoverability is based on an estimate of undiscounted future cash flows expected to result from its use and eventual disposition. If impairment exists due to the inability to recover the carrying value of the property, an impairment loss is recorded to the extent that the carrying value of the property exceeds its estimated fair value.

The Company evaluates the held-for-sale classification of its real estate as of the end of each quarter. Assets that are classified as held for sale are recorded at the lower of their carrying amount or fair value less costs to sell. Assets are generally classified as held for sale once management has initiated an active program to market them for sale and has received a firm purchase commitment that is expected to close within one year. The results of operations of these real estate properties are reflected as discontinued operations in all periods reported. On occasion, the Company will receive unsolicited offers from third parties to buy individual Company properties. Under these circumstances, the Company will classify the properties as held for sale when a sales contract is executed with no contingencies and the prospective buyer has funds at risk to ensure performance.

Allowance for Doubtful Accounts
The Company makes quarterly estimates of the collectability of its accounts receivable related to base rents, tenant escalations (straight-line rents), reimbursements and other revenue or income. The Company specifically analyzes trends in accounts receivable, historical bad debts, customer credit worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of its allowance for doubtful accounts. When evaluating customer credit worthiness, management reviews the periodic financial statements for significant tenants and specifically evaluates the strength and material changes in net operating income, coverage ratios, leverage and other factors to assess the tenant's credit quality. In addition, when customers are in bankruptcy, the Company makes estimates of the expected recovery of pre-petition administrative and damage claims. These estimates have a direct impact on the Company's net income.

Revenue Recognition
Rents that are fixed and determinable are recognized on a straight-line basis over the minimum terms of the leases. Base rent escalation on leases that are dependent upon increases in the Consumer Price Index (CPI) is recognized when known. In addition, most of the Company's tenants are subject to additional rents if gross revenues of the properties exceed certain thresholds defined in the lease agreements (percentage rents). Percentage rents as well as participating interest for those mortgage agreements that contain similar such clauses are recognized at the time when specific triggering events occur as provided by the lease or mortgage agreements. Rental revenue included percentage rents of $627 thousand and $523 thousand for the six months ended June 30, 2012 and 2011 , respectively. Lease termination fees are recognized when the related leases are canceled and the Company has no obligation to provide services to such former tenants. Termination fees of $99 thousand were recognized during the six months ended June 30, 2012. No termination fees were recognized during the six months ended June 30, 2011.

Direct financing lease income is recognized on the effective interest method to produce a level yield on funds not yet recovered. Estimated unguaranteed residual values at the date of lease inception represent management's initial estimates of fair value of the leased assets at the expiration of the lease, not to exceed original cost. Significant assumptions used

8


in estimating residual values include estimated net cash flows over the remaining lease term and expected future real estate values. The Company evaluates on an annual basis (or more frequently if necessary) the collectability of its direct financing lease receivable and unguaranteed residual value to determine whether they are impaired. A direct financing lease receivable is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a direct financing lease receivable is considered to be impaired, the amount of loss is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the direct financing lease receivable's effective interest rate or to the fair value of the underlying collateral, less costs to sell, if such receivable is collateralized.

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 and the Company defers certain loan origination and commitment fees, net of certain origination costs, and amortizes them over the term of the related loan. Interest income on performing loans is accrued as earned. The Company evaluates the collectability of both interest and principal of each of its loans to determine whether it is impaired. A loan is considered to be impaired when, based on current information and events, the Company determines that it is probable that it will be unable to collect all amounts due according to the existing contractual terms. An insignificant delay or shortfall in amounts of payments does not necessarily result in the loan being identified as impaired. When a loan is considered to be impaired, the amount of loss, if any, is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the loan’s effective interest rate or to the fair value of the Company’s interest in the underlying collateral, less costs to sell, if the loan is collateral dependent. For impaired loans, interest income is recognized on a cash basis, unless the Company determines based on the loan to estimated fair value ratio the loan should be on the cost recovery method, and any cash payments received would then be reflected as a reduction of principal. Interest income recognition is recommenced if and when the impaired loan becomes contractually current and performance is demonstrated to be resumed.

Concentrations of Risk
American Multi-Cinema, Inc. (AMC) was the lessee of a substantial portion (35%) of the megaplex theatre rental properties held by the Company (including joint venture properties) at June 30, 2012 as a result of a series of sale leaseback transactions pertaining to a number of AMC megaplex theatres. Subsequent to June 30, 2012, the leases at four of the Company's megaplex theatres located in Canada were assumed by third-party operators and are no longer leased to AMC. This brings the portion of megaplex theatres leased to AMC to 31%. A substantial portion of the Company’s total revenues (approximately $50.1 million or 32% and $52.8 million or 36%, for the six months ended June 30, 2012 and 2011, respectively) result from the revenue by AMC under the leases, or from its parent, AMC Entertainment, Inc. (AMCE), as the guarantor of AMC’s obligations under the leases. AMCE had total assets of $3.6 billion and $3.7 billion, total liabilities of $3.5 billion and $3.4 billion and total stockholders' equity of $154 million and $360 million at March 29, 2012 and March 31, 2011, respectively. AMCE had a net loss of $82.0 million for the fifty-two weeks ended March 29, 2012, a net loss of $122.9 million for the fifty-two weeks ended March 31, 2011 and net earnings of $69.8 million for the fifty-two weeks ended April 1, 2010. AMCE has publicly held debt and the foregoing financial information was reported in its consolidated financial information which is publicly available. On May 20, 2012, AMC Entertainment Holdings, Inc., the parent of AMCE (AMCEH), announced that it entered into an agreement with Dalian Wanda Group Co. Ltd. (Wanda), pursuant to which Wanda would acquire AMCEH in a transaction valued at $2.6 billion. The sale of AMCEH to Wanda is subject to completion. If the transaction is completed, AMCE will become a wholly-owned subsidiary of Wanda.

For the six months ended June 30, 2012 and 2011, approximately $21.4 million or 14%, and $21.5 million or 15%, respectively, of total revenue was derived from the Company's four entertainment retail centers in Ontario, Canada. The Company's wholly owned subsidiaries that hold the four Canadian entertainment retail centers and third-party debt represent approximately $144.0 million or 10% and $144.6 million or 10% of the Company's net assets as of June 30, 2012 and December 31, 2011, respectively.
 
Share-Based Compensation
Share-based compensation to employees of the Company is determined pursuant to the Company's Annual Incentive

9


Program and Long-Term Incentive Plan. Share-based compensation to non-employee trustees of the Company is determined pursuant to the Company's director compensation program. Prior to May 9, 2007, all common shares and options to purchase common shares (share options) were issued under the Company's 1997 Share Incentive Plan. The Company's 2007 Equity Incentive Plan was approved by shareholders at the May 9, 2007 annual meeting and this plan replaced the 1997 Share Incentive Plan.

Share based compensation expense consists of share option expense, amortization of nonvested share grants, and shares and share units issued to non-employee Trustees for payment of their annual retainers. Share based compensation is included in general and administrative expense in the accompanying consolidated statements of income, and totaled $3.0 million and $2.8 million for the six months ended June 30, 2012 and 2011, respectively.

Share Options
Share options are granted to employees pursuant to the Long-Term Incentive Plan and to non-employee Trustees for their service to the Company. The fair value of share options granted is estimated at the date of grant using the Black-Scholes option pricing model. Share options granted to employees vest over a period of four to five years and share option expense for these options is recognized on a straight-line basis over the vesting period. Share options granted to non-employee Trustees vest immediately but may not be exercised for a period of one year from the grant date. Share option expense for non-employee Trustees is recognized on a straight-line basis over the year of service by the non-employee Trustees.

The expense related to share options included in the determination of net income for the six months ended June 30, 2012 and 2011 was $481 thousand and $377 thousand, respectively. The following assumptions were used in applying the Black-Scholes option pricing model at the grant dates: risk-free interest rate of 1.1% to 1.4% and 2.5% to 3.1% for the six months ended June 30, 2012 and 2011, respectively, dividend yield of 6.3% to 6.7% for the six months ended June 30, 2012 and 6.4% for the six months ended June 30, 2011, volatility factors in the expected market price of the Company’s common shares of 51.3% to 51.4% for the six months ended June 30, 2012 and 39.8% for the six months ended June 30, 2011, 0.25% expected forfeiture rate for the six months ended June 30, 2012, no expected forfeitures for the six months ended June 30, 2011, an expected life of approximately six years for the six months ended June 30, 2012 and an expected life of approximately eight years for the six months ended June 30, 2011. The Company uses historical data to estimate the expected life of the option and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Additionally, expected volatility is computed based on the average historical volatility of the Company’s publicly traded shares.

Nonvested Shares Issued to Employees
The Company grants nonvested shares to employees pursuant to both the Annual Incentive Program and the Long-Term Incentive Plan. The Company amortizes the expense related to the nonvested shares awarded to employees under the Long-Term Incentive Plan and the premium awarded under the nonvested share alternative of the Annual Incentive Program on a straight-line basis over the future vesting period (three to five years). Total expense recognized related to all nonvested shares was $2.3 million and $2.1 million for the six months ended June 30, 2012 and 2011, respectively.

Restricted Share Units Issued to Non-Employee Trustees
The Company issues restricted share units to non-employee Trustees for payment of their annual retainers. The fair value of the share units granted was based on the share price at the date of grant. The share units vest upon the earlier of the day preceding the next annual meeting of shareholders or a change of control. The settlement date for the shares is selected by the non-employee trustee, and ranges from one year from the grant date to upon termination of service. This expense is amortized by the Company on a straight-line basis over the year of service by the non-employee Trustees. Total expense recognized related to shares issued to non-employee Trustees was $250 thousand, and $241 thousand for the six months ended June 30, 2012 and 2011, respectively.

Derivative Instruments
The Company has acquired certain derivative instruments to reduce exposure to fluctuations in foreign currency exchange rates and variable interest rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. These derivatives consist of foreign currency forward contracts, cross currency swaps and interest rate swaps.

10


The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

The Company has made an accounting policy election under FASB ASU 2011-04 (Amendments to ASC 820) to use the exception in ASC 820-10-35-18D (commonly referred to as the “portfolio exception”) with respect to measuring counterparty credit risk for derivative instruments, consistent with the guidance in ASC 820-10-35-18G. The Company further documents that it meets the criteria for the exception in ASC 820-10-35-18E.

Reclassifications
Certain reclassifications have been made to the prior period amounts to conform to the current period presentation.

3. Rental Properties
The following table summarizes the carrying amounts of rental properties as of June 30, 2012 and December 31, 2011 (in thousands):
 
June 30, 2012
 
December 31, 2011
Buildings and improvements
$
1,654,885

 
$
1,602,676

Furniture, fixtures & equipment
43,011

 
54,737

Land
491,942

 
496,879

 
2,189,838

 
2,154,292

Accumulated depreciation
(355,945
)
 
(335,116
)
Total
$
1,833,893

 
$
1,819,176

Depreciation expense on rental properties was $23.6 million and $22.0 million for the six months ended June 30, 2012 and 2011, respectively.

4. Impairment Charges

During the three months ended March 31, 2012 or shortly thereafter, the Company entered into non-binding agreements to sell a portion of one of its vineyard properties as well as another winery, and began negotiations for the sale of three other vineyard and winery properties. As a result, in the first quarter of 2012, the Company revised its estimated undiscounted cash flows associated with each of these asset groups, considering the shorter expected holding periods, and determined that those estimated cash flows were not sufficient to recover the carrying values of these properties.  The Company determined the estimated fair value of these assets (included in the Other segment) to be $47.1 million using Level 3 inputs and recorded impairment charges totaling $12.8 million during the first quarter of 2012.  Management estimated the fair values of these properties taking into account the various purchase offers, pending purchase agreements, input from an outside broker and previous appraisals. At June 30, 2012, one of the vineyard and winery properties with a carrying value of $3.9 million has been classified as held for sale in the accompanying consolidated balance sheet, and the related results of operations, including the impairment of $0.8 million, has been classified within discontinued operations. Additionally, on May 25, 2012, the Company sold 197 plantable acres at its Buena Vista vineyard in Sonoma, California, and the related results of operations, including the impairment of $3.8 million, has been classified within discontinued operations. See Note 15 for further details.

11


5. Investments and Dispositions

On January 1, 2012, the Company converted $14.9 million of equity in its unconsolidated joint venture, Atlantic-EPR I, to a secured first mortgage loan of the same amount with Cantera 30 Theatre, L.P, the entity that holds direct title to the underlying theatre investment located in Warrenville, Illinois. The note is secured by the theatre, bears interest at 9.50%, requires monthly interest payments and matures on January 31, 2018.
 
On February 23, 2012, the Company acquired two TopGolf golf and dining facilities for a purchase price of $20.0 million pursuant to a sale-leaseback transaction. The facilities are located in Allen and Dallas, Texas and are leased pursuant to a long-term triple-net master lease.

On February 28, 2012, the Company acquired two dining and entertainment facilities from Latitude Global, Inc. The facilities are located in Jacksonville, Florida and Indianapolis, Indiana and were acquired for a purchase price of $13.7 million. As a part of this transaction, the Company has agreed to finance an additional $7.3 million in construction costs for these two facilities of which $6.0 million has been funded through June 30, 2012.

On February 29, 2012, the Company entered into a secured first mortgage loan agreement for $19.3 million with Basis School, Inc. The loan is secured by a six story building and the underlying land with approximately 40,000 square feet located in Washington D.C., which is expected to be developed into a public charter school. The note bears interest beginning at 9.0% with increases of 0.5% every four years, requires monthly interest payments and matures on September 1, 2032. The carrying value of the mortgage note at June 30, 2012 was $15.7 million.

On May 25, 2012, the Company completed the sale of 197 plantable acres of its Buena Vista vineyard in Sonoma County, California for $13.0 million and a gain on sale of $0.4 million was recognized during the three months ended June 30, 2012. As further discussed in Note 15, the results of operations of the property have been classified within discontinued operations.

On June 14, 2012, the Company acquired one theatre property from Frank Theatres for a purchase price of $6.5 million pursuant to a sale-leaseback transaction. The 10-screen theatre is located in Southern Pines, North Carolina and is leased to Frank Theatres pursuant to a long-term triple-net lease.

On June 28, 2012, the Company entered into a secured first mortgage loan agreement for $36.0 million with Montparnasse 56 USA. The loan is secured by the observation deck of the John Hancock building in Chicago, Illinois. This note bears interest at 10.65%, requires monthly interest payments and matures on June 28, 2032. The carrying value of this mortgage note receivable at June 30, 2012 was $36.0 million, including related accrued interest receivable of $32 thousand.

During the six months ended June 30, 2012, the Company entered into development agreements to develop seven entertainment properties including six theatre properties.  The Company has agreed to finance $64.4 million in development costs for these properties, of which $5.2 million has been funded through June 30, 2012.       

Additionally during the six months ended June 30, 2012, the Company purchased four public charter school properties for a total initial investment of $4.1 million. Two of the properties are located in Salt Lake City and Hurricane, Utah and are leased to HighMark, and the other two properties are located in Buckeye and Queen Creek, Arizona and are leased to Portfolio Charter Investments. As a part of these transactions, the Company has agreed to finance an additional $30.1 million in development costs for these properties, of which $11.9 million was funded through June 30, 2012.

During the six months ended June 30, 2012, the Company advanced $8.9 million under its secured mortgage loan agreement with Peak Resorts, Inc. (Peak) to provide for additional improvements made to Mount Snow. The carrying value of this mortgage note receivable at June 30, 2012 was $42.6 million. The maturity date for this mortgage loan agreement was extended to April 1, 2013 in accordance with a provision in the original loan agreement. Additionally, the Company advanced $2.4 million under another secured mortgage loan agreement with Peak to provide for additional improvements made to a ski resort in Bennington, New Hampshire.


12


6. Accounts Receivable, Net
The following table summarizes the carrying amounts of accounts receivable, net as of June 30, 2012 and December 31, 2011(in thousands):
 
June 30,
2012
 
December 31,
2011
Receivable from tenants
$
8,296

 
$
6,874

Receivable from non-tenants
430

 
1,265

Receivable from Canada Revenue Agency
389

 
1,099

Straight-line rent receivable
26,959

 
26,499

Deferred rent receivable (1)

 
4,420

Allowance for doubtful accounts
(2,936
)
 
(5,152
)
Total
$
33,138

 
$
35,005

 
(1) 
At December 31, 2011, rent deferral payments of $3.4 million were guaranteed by a private equity firm and $1.0 million were unguaranteed but fully reserved. In June 2012, in conjunction with the tenant's sale of its operations, the guaranteed rent deferral payments of $3.4 million were paid in full, and unguaranteed rent deferral payments of $0.4 million were received and the remaining unguaranteed rent deferral payments of $0.6 million were written off to the previously established allowance for doubtful accounts.

7. Investment in a Direct Financing Lease

The Company’s investment in a direct financing lease relates to the Company’s master lease of 27 public charter school properties with affiliates of Imagine Schools, Inc. Investment in a direct financing lease, net represents estimated unguaranteed residual values of leased assets and net unpaid rentals, less related deferred income. The following table summarizes the carrying amounts of investment in a direct financing lease, net as of June 30, 2012 and December 31, 2011(in thousands):

 
 
June 30, 2012
 
December 31, 2011
Total minimum lease payments receivable
$
672,087

 
$
683,653

Estimated unguaranteed residual value of leased assets
215,987

 
215,987

Less deferred income (1)
(651,917
)
 
(666,021
)
Investment in a direct financing lease, net
$
236,157

 
$
233,619

 
 
 
 
(1) Deferred income is net of $1.8 million of initial direct costs at June 30, 2012 and December 31, 2011.

Additionally, the Company has determined that no allowance for losses was necessary at June 30, 2012 and December 31, 2011.

The Company’s direct financing lease has expiration dates ranging from approximately 20 to 23 years. Future minimum rentals receivable on this direct financing lease at June 30, 2012 are as follows (in thousands): 
 
Amount
Year:
 
2012
$
11,774

2013
24,041

2014
24,762

2015
25,505

2016
26,270

Thereafter
559,735

Total
$
672,087


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8. Unconsolidated Real Estate Joint Ventures

At June 30, 2012, the Company had a 39.1% and 29.2% investment interest in two unconsolidated real estate joint ventures, Atlantic-EPR I and Atlantic-EPR II, respectively. The Company accounts for its investment in these joint ventures under the equity method of accounting.

As further discussed in Note 5, on January 1, 2012, the Company converted a $14.9 million equity interest in Atlantic-EPR I to a secured first mortgage loan of the same amount. Additionally, Atlantic EPR I entered into an agreement to develop a family entertainment venue at the property it owns for approximately $4.0 million which is expected to be funded through additional advances under the mortgage note. The Company recognized a loss of $28 thousand and income of $1.4 million during the six months ended June 30, 2012 and 2011, respectively, from its equity investment in the Atlantic-EPR I joint venture. The Company also received distributions from Atlantic-EPR I of $410 thousand and $1.1 million on its equity investment during the six months ended June 30, 2012 and 2011, respectively. Condensed financial information for Atlantic-EPR I is as follows as of and for the six months ended June 30, 2012 and 2011 (in thousands):
 
2012
 
2011
Rental properties, net
$
25,702

 
$
26,346

Cash
10

 
1,178

Long-term debt (due January 2018)
15,165

 

Partners’ equity
10,683

 
27,634

Rental revenue
1,360

 
2,283

Net income (loss)
(97
)
 
816

 
The Company recognized income of $213 thousand and $182 thousand from its equity investment in the Atlantic-EPR II joint venture during the six months ended June 30, 2012 and 2011, respectively. The Company also received distributions from Atlantic-EPR II of $228 thousand and $199 thousand on its equity investment during the six months ended June 30, 2012 and 2011, respectively. Condensed financial information for Atlantic-EPR II is as follows as of and for the six months ended June 30, 2012 and 2011(in thousands): 
 
2012
 
2011
Rental properties, net
$
20,346

 
$
20,807

Cash
131

 
231

Long-term debt (due September 2013)
12,028

 
12,413

Note payable to EPR
117

 
117

Partners’ equity
8,059

 
8,140

Rental revenue
1,444

 
1,444

Net income
728

 
679



The partnership agreements for Atlantic-EPR I and Atlantic-EPR II allow the Company’s partner, Atlantic of Hamburg, Germany (Atlantic), to exchange up to a maximum of 10% of its ownership interest per year in each of the joint ventures for common shares of the Company or, at the Company's discretion, the cash value of those shares as defined in each of the partnership agreements. During 2011, the Company paid Atlantic cash of $2.5 million and $258 thousand in exchange for additional ownership of 11.3% (a portion of which related to 2010) and 2.0% for Atlantic-EPR I and Atlantic-EPR II, respectively. During 2012, the Company has paid Atlantic cash of $688 thousand and $443 thousand in exchange for additional ownership of 3.0% and 3.5% for Atlantic-EPR I and Atlantic-EPR II, respectively. These exchanges did not impact total partners’ equity in either Atlantic-EPR I or Atlantic-EPR II.

In addition, as of June 30, 2012 and December 31, 2011, the Company had invested $4.4 million and $4.2 million, respectively, in unconsolidated joint ventures for three theatre projects located in China. The Company recognized income of $140 thousand and $11 thousand from its investment in these joint ventures for the six months ended June 30, 2012 and 2011, respectively.

14



9. Long-Term Debt

On January 5, 2012, the Company entered into a new $240.0 million five-year unsecured term loan facility. The loan matures on January 5, 2017. The facility is priced based on a grid related to the Company's senior unsecured credit ratings, with pricing at closing of LIBOR plus 175 basis points. The Company also entered into interest rate swaps that effectively mitigate the Company's risk to variable interest rates and provide a fixed interest stream (when cash flows from the debt and interest rate swaps are combined) at 2.66% for four years. The new facility contains an “accordion” feature allowing it to be increased by up to an additional $110.0 million upon satisfaction of certain conditions. The net proceeds from this new unsecured term loan facility were primarily utilized to reduce the outstanding balance of the Company's unsecured revolving credit facility to zero at closing. At June 30, 2012, the Company had $112.0 million in debt outstanding under its $400.0 million unsecured revolving credit facility, and thus had $288.0 million of available capacity.

10. Variable Interest Entities

The Company’s variable interest in VIEs currently are in the form of equity ownership and loans provided by the Company to a VIE or other partner. The Company examines specific criteria and uses its judgment when determining if the Company is the primary beneficiary of a VIE. Factors considered in determining whether the Company is the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, and level of economic disproportionality between the Company and the other partner(s).

Consolidated VIEs
As of June 30, 2012, the Company has invested in one 50% joint venture which is a VIE. This joint venture did not have any significant assets and liabilities at June 30, 2012 and was established to explore certain investment opportunities.

Unconsolidated VIE
At June 30, 2012, the Company’s recorded investment in SVVI, a VIE that is unconsolidated, was $178.5 million. The Company’s maximum exposure to loss associated with SVVI is limited to the Company’s outstanding mortgage note and related accrued interest receivable of $178.5 million because there are no commitments to fund above this amount.

While this entity is a VIE, the Company has determined that the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance is not held by the Company. The Company does not have the power to direct these activities. Additionally, the Company does not have the right to receive benefits (beyond its interest payments per the note agreement) and does not have the obligation to absorb losses of SVVI, as its equity at risk is limited to the amount invested in the note.

11. Derivative Instruments

Risk Management Objective of Using Derivatives
The Company is exposed to the effect of changes in foreign currency exchange rates and interest rates on its LIBOR based borrowings. The Company limits 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’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements on its LIBOR based borrowings. To accomplish this objective, the Company currently uses interest rate swaps as its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making

15


fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
 
On February 7, 2011, the Company terminated six of its interest rate swap agreements as the related loan agreements were paid in full. These interest rate swaps had a combined notional amount of $87.7 million at termination and $4.6 million was reclassified into earnings as an expense during the six months ended June 30, 2011, as the forecasted future transactions were no longer probable.

On January 5, 2012, the Company entered into three interest rate swap agreements to fix the interest rate on a $240.0 million unsecured term loan facility that closed on the same day. These agreements have a combined outstanding notional amount of $240.0 million, a termination date of January 5, 2016 and a fixed rate of 2.66%.

The effective portion of changes 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. During the six months ended June 30, 2012 and 2011, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. No hedge ineffectiveness on cash flow hedges was recognized during the six months ended June 30, 2012 and 2011.

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of June 30, 2012, the Company estimates that during the twelve months ending June 30, 2013, $1.5 million will be reclassified from AOCI to interest expense.

Cash Flow Hedges of Foreign Exchange Risk
The Company is exposed to foreign currency exchange risk against its functional currency, the U.S. dollar, on its four Canadian properties. The Company uses cross currency swaps and foreign currency forwards to mitigate its exposure to fluctuations in the CAD to U.S. dollar exchange rate on its Canadian properties. These foreign currency derivatives should hedge a significant portion of the Company's expected CAD denominated cash flow of the Canadian properties through February 2014 as their impact on the Company's cash flow when settled should move in the opposite direction of the exchange rates utilized to translate revenues and expenses of these properties.

At June 30, 2012, the Company’s cross-currency swaps had a fixed original notional value of $76.0 million CAD and $71.5 million U.S. The net effect of these swaps is to lock in an exchange rate of $1.05 CAD per U.S. dollar on approximately $13 million of annual CAD denominated cash flows on the properties through February 2014.

The Company entered into foreign currency forward agreements to further hedge the currency fluctuations related to the cash flows of these properties. These foreign currency forwards settle at the end of each month from February to December 2012 and lock in an exchange rate of $1.00 CAD to $1.01 CAD per U.S. dollar on approximately $500 thousand of monthly CAD denominated cash flows.

The effective portion of changes in the fair value of foreign currency derivatives designated and that qualify as cash flow hedges of foreign exchange risk is recorded in AOCI and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivative, as well as amounts excluded from the assessment of hedge effectiveness, is recognized directly in earnings. No hedge ineffectiveness on foreign currency derivatives has been recognized for the six months ended June 30, 2012 and 2011. As of June 30, 2012, the Company estimates that during the twelve months ending June 30, 2013, $0.3 million will be reclassified from AOCI to other expense.

Net Investment Hedges
As discussed above, the Company is exposed to fluctuations in foreign exchange rates on its four Canadian properties. As such, the Company uses currency forward agreements to hedge its exposure to changes in foreign exchange rates. Currency forward agreements involve fixing the CAD to U.S. dollar exchange rate for delivery of a specified amount of foreign currency on a specified date. The currency forward agreements are typically cash settled in US dollars for their fair value at or close to their settlement date. In order to hedge the net investment in four of the Canadian properties, the Company entered into a forward contract with a fixed notional value of $100.0 million CAD and $96.1 million

16


U.S. with a February 2014 settlement which coincides with the maturity of the Company’s underlying mortgage on these four properties. The exchange rate of this forward contract is approximately $1.04 CAD per U.S. dollar. This forward contract should hedge a significant portion of the Company’s CAD denominated net investment in these four centers through February 2014 as the impact on AOCI from marking the derivative to market should move in the opposite direction of the translation adjustment on the net assets of these four Canadian properties.

In addition, on February 3, 2011, in order to hedge the foreign currency exposure related to the proceeds from the March 29, 2011 sale of a Canadian property, the Company entered into a forward contract to sell $200.0 million CAD for $201.5 million U.S. dollars. The contract settled in conjunction with the sale of the property on March 29, 2011 and the $4.3 million loss related to the settlement was recognized with the gain on sale of the property.

For foreign currency derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in AOCI as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. No hedge ineffectiveness on net investment hedges has been recognized for six months ended June 30, 2012 and 2011. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.
 
See Note 12 for disclosure relating to the fair value of the Company’s derivative instruments. Below is a summary of the effect of derivative instruments on the consolidated statements of changes in equity and income for the three and six months ended June 30, 2012 and 2011.
 
Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and
Income for the Three and Six Months Ended June 30, 2012 and 2011
(Dollars in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Description
2012
 
2011
 
2012
 
2011
Interest Rate Swaps
 
 
 
 
 
 
 
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
$
(2,560
)
 
$

 
$
(3,926
)
 
$
(4,125
)
Amount of Income (Expense) Reclassified from AOCI into Earnings (Effective Portion) (1)
(406
)
 

 
(778
)
 
(4,722
)
Cross Currency Swaps
 
 
 
 
 
 
 
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
407

 
(339
)
 
(114
)
 
(1,479
)
Amount of Income (Expense) Reclassified from AOCI into Earnings (Effective Portion) (2)
(108
)
 
(286
)
 
(275
)
 
(499
)
Currency Forward Agreements
 
 
 
 
 
 
 
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
1,484

 
(863
)
 
344

 
(7,777
)
Amount of Income (Expense) Reclassified from AOCI into Earnings (Effective Portion) (3)
16

 
(52
)
 
16

 
(4,314
)
Total
 
 
 
 
 
 
 
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
$
(669
)
 
$
(1,202
)
 
$
(3,696
)
 
$
(13,381
)
Amount of Income (Expense) Reclassified from AOCI into Earnings (Effective Portion)
(498
)
 
(338
)
 
(1,037
)
 
(9,535
)
 
(1)
Included in "Interest expense, net" in accompanying consolidated statements of income for the three and six months ended June 30, 2012. $4.6 million included in “Costs associated with loan refinancing or payoff” and $137 thousand included in “Interest expense, net” in accompanying consolidated statements of income for the six months ended June 30, 2011.
(2)
Included in “Other expense” in the accompanying consolidated statements of income.

17


(3)
Included in "Other expense" in the accompanying consolidated statements of income for the three and six months ended June 30, 2012. $4.3 million included in "Gain on sale or acquisition of real estate" in the accompanying consolidated statements of income for the six months ended June 30, 2011. $52 thousand included in "Other expense" in the accompanying consolidated statements of income for the three and six months ended June 30, 2011.

Credit-risk-related Contingent Features
The Company has agreements with each of its interest rate derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its interest rate derivative obligations.

As of June 30, 2012, the fair value of the Company’s derivatives in a liability position related to these agreements was $4.7 million. If the Company breached any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the agreements at their termination value of $4.7 million.

12. Fair Value Disclosures

The Company’s has certain financial instruments that are required to be measured under the FASB’s Fair Value Measurements and Disclosures guidance. The Company currently does not have any non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis.

As a basis for considering market participant assumptions in fair value measurements, the FASB’s Fair Value Measurements and Disclosures guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Derivative Financial Instruments

The Company uses interest rate swaps, foreign currency forwards and cross currency swaps to manage its interest rate and foreign currency risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. In conjunction with the FASB's fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Although the Company has 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 utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of June 30, 2012, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives and therefore, has classified its derivatives as Level 2 within the fair value

18


reporting hierarchy.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 aggregated by the level in the fair value hierarchy within which those measurements are classified and by derivative type.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2012
(Dollars in thousands)
Description
Quoted Prices in
Active Markets
for Identical
Assets (Level I)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Balance at
June 30, 2012
Cross Currency Swaps*
$

 
$
(481
)
 
$

 
$
(481
)
Currency Forward Agreements*
$

 
$
(1,067
)
 
$

 
$
(1,067
)
Interest Rate Swap Agreements*
$

 
$
(3,149
)
 
$

 
$
(3,149
)
*Included in "Accounts payable and accrued liabilities" in the accompanying consolidated balance sheet.

Non-recurring fair value measurements
The table below presents the Company’s assets measured at fair value on a non-recurring basis during the six months ended June 30, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall. 
Assets Measured at Fair Value on a Non-Recurring Basis During the Six Months Ended June 30, 2012
(Dollars in thousands)
Description
Quoted Prices in
Active Markets
for Identical
Assets (Level I)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Balance at
June 30, 2012
Rental properties held for sale, net
$

 
$

 
$
3,895

 
$
3,895

Rental properties, net
$

 
$

 
$
43,233

 
$
43,233


As further discussed in Note 4, during the six months ended June 30, 2012, the Company recorded impairment charges of $12.8 million relating to adjustments to the carrying values of certain of the Company's vineyard and winery properties.  The $12.8 million is the amount that the carrying values of the assets exceed the estimated fair market values. Of this amount, $12.0 million relates to rental properties, net and $0.8 million relates to rental properties held for sale, net.   Management estimated the fair values of these properties taking into account the various purchase offers, pending purchase agreements, input from an outside broker and previous appraisals.  Based on these inputs, the Company determined that its valuation of these investments was classified within Level 3 of the fair value hierarchy. 

Fair Value of Financial Instruments
Management compares the carrying value and the estimated fair value of the Company’s financial instruments. The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments at June 30, 2012:

Mortgage notes receivable and related accrued interest receivable:
The fair value of the Company’s mortgage notes and related accrued interest receivable is estimated by discounting the future cash flows of each instrument using current market rates. At June 30, 2012, the Company had a carrying value of $403.6 million in fixed rate mortgage notes receivable outstanding, including related accrued interest, with a weighted average interest rate of approximately 8.80%. The fixed rate mortgage notes bear interest at rates of 7.00% to 10.65%. Discounting the future cash flows for fixed rate mortgage notes receivable using an estimated weighted average market rate of 10.06%, management estimates the fair value of the fixed rate mortgage notes receivable to be approximately $378.7 million at June 30, 2012 .

Investment in a direct financing lease, net:
The fair value of the Company’s investment in a direct financing lease as of June 30, 2012 is estimated by discounting the future cash flows of the instrument using current market rates. At June 30, 2012, the Company

19


had an investment in a direct financing lease with a carrying value of $236.2 million and a weighted average effective interest rate of 12.02%. The investment in direct financing lease bears interest at effective interest rates of 11.93% to 12.38%. The carrying value of the investment in a direct financing lease approximates the fair market value at June 30, 2012.

Cash and cash equivalents, restricted cash:
Due to the highly liquid nature of the Company's short term investments, the carrying values of its cash and cash equivalents and restricted cash approximate the fair market values at June 30, 2012.

Accounts receivable, net:
The carrying values of accounts receivable approximate the fair market value at June 30, 2012.

Notes and related accrued interest receivable, net:
The fair value of the Company’s notes and related accrued interest receivable as of June 30, 2012 is estimated by discounting the future cash flows of each instrument using current market rates. At June 30, 2012, the Company had a carrying value of $5.0 million in fixed rate notes receivable outstanding, including related accrued interest and net of loan loss reserve, with a weighted average interest rate of approximately 8.45%. The fixed rate notes bear interest at rates of 6.00% to 15.00%. Discounting the future cash flows for fixed rate notes receivable using an estimated weighted average market rate of 9.40%, management estimates the fair value of the fixed rate notes receivable to be approximately $4.9 million at June 30, 2012.

Derivative instruments:
Derivative instruments are carried at their fair market value.

Debt instruments:
The fair value of the Company's debt as of June 30, 2012 is estimated by discounting the future cash flows of each instrument using current market rates. At June 30, 2012, the Company had a carrying value of $362.6 million in variable rate debt outstanding with a weighted average interest rate of approximately 1.89%. The carrying value of the variable rate debt outstanding approximates the fair market value at June 30, 2012. As described in Note 11, $240.0 million of variable rate debt outstanding at June 30, 2012 under our unsecured term loan facility has been effectively converted to a fixed rate through January 5, 2016 by interest rate swap agreements.

At June 30, 2012, the Company had a carrying value of $907.9 million in fixed rate long-term debt outstanding with a weighted average interest rate of approximately 6.56%. Discounting the future cash flows for fixed rate debt using an estimated weighted average market rate of 4.64%, management estimates the fair value of the fixed rate debt to be approximately $961.6 million at June 30, 2012.

Accounts payable and accrued liabilities:
The carrying value of accounts payable and accrued liabilities approximates fair value at June 30, 2012 due to the short term maturities of these amounts.

Common and preferred dividends payable:
The carrying values of common and preferred dividends payable approximate fair value at June 30, 2012 due to the short term maturities of these amounts.


20


13. Earnings Per Share

The following table summarizes the Company’s computation of basic and diluted earnings per share (EPS) for the three months ended June 30, 2012 and 2011 (amounts in thousands except per share information):
 
Three Months Ended June 30, 2012
 
Six Months Ended June 30, 2012
 
Income
(numerator)
 
Shares
(denominator)
 
Per Share
Amount
 
Income
(numerator)
 
Shares
(denominator)
 
Per Share
Amount
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
36,439

 
 
 
 
 
$
62,433

 
 
 
 
Less: preferred dividend requirements
(6,002
)
 
 
 
 
 
(12,003
)
 
 
 
 
Noncontrolling interest adjustments
(19
)
 
 
 
 
 
(37
)
 
 
 
 
Income from continuing operations available to common shareholders
$
30,418

 
46,826

 
$
0.65

 
$
50,393

 
46,751

 
$
1.08

Income (loss) from discontinued operations available to common shareholders
$
379

 
46,826

 
$
0.01

 
$
(4,225
)
 
46,751

 
$
(0.09
)
Net income available to common shareholders
$
30,797

 
46,826

 
$
0.66

 
$
46,168

 
46,751

 
$
0.99

Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations available to common shareholders
$
30,418

 
46,826

 
 
 
$
50,393

 
46,751

 

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Share options

 
242

 
 
 

 
255

 
 
Income from continuing operations available to common shareholders
$
30,418

 
47,068

 
$
0.64

 
$
50,393

 
47,006

 
$
1.07

Income (loss) from discontinued operations available to common shareholders
$
379

 
47,068

 
$
0.01

 
$
(4,225
)
 
47,006

 
$
(0.09
)
Net income available to common shareholders
$
30,797

 
47,068

 
$
0.65

 
$
46,168

 
47,006

 
$
0.98





21


 
Three Months Ended June 30, 2011
 
Six Months Ended June 30, 2011
 
Income
(numerator)
 
Shares
(denominator)
 
Per Share
Amount
 
Income
(numerator)
 
Shares
(denominator)
 
Per Share
Amount
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
9,394

 
 
 
 
 
$
34,583

 
 
 
 
Less: preferred dividend requirements
(7,551
)
 
 
 
 
 
(15,103
)
 
 
 
 
Noncontrolling interest adjustments

 
 
 
 
 
(2
)
 
 
 
 
Income from continuing operations available to common shareholders
$
1,843

 
46,648

 
$
0.04

 
$
19,478

 
46,576

 
$
0.42

Income (loss) from discontinued operations available to common shareholders
$
(9,392
)
 
46,648

 
$
(0.20
)
 
$
7,152

 
46,576

 
$
0.15

Net income (loss) available to common shareholders
$
(7,549
)
 
46,648

 
$
(0.16
)
 
$
26,630

 
46,576

 
$
0.57

Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations available to common shareholders
$
1,843

 
46,648

 
 
 
$
19,478

 
46,576

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Share options

 
308

 
 
 

 
304

 
 
Income from continuing operations available to common shareholders
$
1,843

 
46,956

 
$
0.04

 
$
19,478

 
46,880

 
$
0.42

Income (loss) from discontinued operations available to common shareholders
$
(9,392
)
 
46,956

 
$
(0.20
)
 
$
7,152

 
46,880

 
$
0.15

Net income (loss) available to common shareholders
$
(7,549
)
 
46,956

 
$
(0.16
)
 
$
26,630

 
46,880

 
$
0.57


The additional 1.9 million common shares that would result from the conversion of the Company’s 5.75% Series C cumulative convertible preferred shares and the additional 1.6 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 are not included in the calculation of diluted earnings per share for the three and six months ended June 30, 2012 and 2011 because the effect is anti-dilutive.

14. Equity Incentive Plan

All grants of common shares and options to purchase common shares were issued under the Company's 1997 Share Incentive Plan prior to May 9, 2007, and under the Company's 2007 Equity Incentive Plan on and after May 9, 2007. Under the 2007 Equity Incentive Plan, an aggregate of 1,950,000 common shares, options to purchase common shares and restricted share units, subject to adjustment in the event of certain capital events, may be granted. At June 30, 2012, there were 455,500 shares available for grant under the 2007 Equity Incentive Plan.

Share Options
Share options granted under both the 1997 Share Incentive Plan and the 2007 Equity Incentive Plan have exercise prices equal to the fair market value of a common share at the date of grant. The options may be granted for any reasonable term, not to exceed 10 years, and for employees typically become exercisable at a rate of 25% per year over a four-year period, however, this was typically at a rate of 20% per year over a five-year period for options granted prior to 2009. For non-employee Trustees, share options are vested upon issuance, however, the share options may not be exercised for a one year period subsequent to the grant date. The Company generally issues new common shares upon option exercise. A summary of the Company’s share option activity and related information is as follows:

22


 
 
Number of
shares
 
Option price
per share
 
Weighted avg.
exercise price
Outstanding at December 31, 2011
1,002,833

 
$
18.18

 

 
$
65.50

 
$
34.41

Exercised
(53,430
)
 
18.18

 

 
36.56

 
18.91

Granted
103,082

 
44.62

 

 
47.99

 
45.60

Forfeited
(396
)
 
18.18

 

 
46.69

 
40.03

Outstanding at June 30, 2012
1,052,089

 
$
18.18

 

 
$
65.50

 
$
36.29

The weighted average fair value of options granted was $12.08 and $9.29 during the six months ended June 30, 2012 and 2011 , respectively. The intrinsic value of stock options exercised was $1.4 million and $1.8 million, during the six months ended June 30, 2012 and 2011, respectively. Additionally, the Company repurchased 32,684 shares into treasury shares in conjunction with the stock options exercised during the six months ended June 30, 2012 with a total value of $1.4 million. At June 30, 2012, stock-option expense to be recognized in future periods was $1.7 million.
The following table summarizes outstanding options at June 30, 2012:
Exercise price range
Options
outstanding
 
Weighted avg.
life remaining
 
Weighted avg.
exercise price
 
Aggregate intrinsic
value  (in thousands)
$ 18.18 - 19.99
261,934

 
6.6

 
 
 
 
 20.00 - 29.99
168,971

 
0.7

 
 
 
 
 30.00 - 39.99
94,913

 
3.6

 
 
 
 
 40.00 - 49.99
412,918

 
6.3

 
 
 
 
 50.00 - 59.99
10,000

 
5.9

 
 
 
 
 60.00 - 65.50
103,353

 
4.6

 
 
 
 
 
1,052,089

 
5.1

 
$
36.29

 
$
9,047

The following table summarizes exercisable options at June 30, 2012:
Exercise price range
Options
outstanding
 
Weighted avg.
life  remaining
 
Weighted avg.
exercise price
 
Aggregate  intrinsic
value (in thousands)
$ 18.18 - 19.99
161,923

 
6.3

 
 
 
 
 20.00 - 29.99
168,971

 
0.7

 
 
 
 
 30.00 - 39.99
78,955

 
2.8

 
 
 
 
 40.00 - 49.99
247,488

 
4.5

 
 
 
 
 50.00 - 59.99
10,000

 
5.9

 
 
 
 
 60.00 - 65.50
103,353

 
4.6

 
 
 
 
 
770,690

 
4.0

 
$
36.55

 
$
6,700


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, 2011
350,863

 
$
38.11

 
 
Granted
148,095

 
45.20

 
 
Vested
(175,965
)
 
35.97

 
 
Forfeited
(185
)
 
$
41.33

 
 
Outstanding at June 30, 2012
322,808

 
$
42.52

 
1.38

The holders of nonvested shares have voting rights and receive dividends from the date of grant. These shares vest ratably over a period of three to five years. The fair value of the nonvested shares that vested was $7.7 million and $7.3

23


million for the six months ended June 30, 2012 and 2011, respectively. At June 30, 2012, unamortized share-based compensation expense related to nonvested shares was $8.4 million.

Restricted Share Units
A summary of the Company’s restricted share unit activity and related information is as follows:
 
Number  of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Weighted
Average
Life
Remaining
Outstanding at December 31, 2011
10,519

 
$
47.77

 
 
Granted
10,925

 
44.62

 
 
Vested
(10,519
)
 
47.77

 
 
Outstanding at June 30, 2012
10,925

 
$
44.62

 
0.86


The holders of restricted share units receive dividend equivalents from the date of grant. The share units vest upon the earlier of the day preceding the next annual meeting of shareholders or a change of control. The settlement date for the shares is selected by the non-employee trustee, and ranges from one year from the grant date to upon termination of service. At June 30, 2012, unamortized share-based compensation expense related to restricted share units was $406 thousand.

15. Discontinued Operations

Included in discontinued operations for the three and six months ended June 30, 2012 are the operations of the Pope Valley winery which was held for sale as of June 30, 2012 as well as the operations of a portion of the Buena Vista vineyard property that was sold on May 25, 2012 for a gain of $0.4 million. The Company has no continuing operations or involvement at the portion of the Buena Vista property that was sold. Additionally, included in discontinued operations for the six months ended June 30, 2012 is a gain on sale or acquisition of real estate of $0.3 million that relates the to the settlement of escrow reserves established with the March 29, 2011 sale of Toronto Dundas Square, and impairment charges of $4.6 million related to the Pope Valley winery and the sold portion of the Buena Vista vineyard property. Included in discontinued operations for the three months ended June 30, 2011 are the operations of the prior mentioned properties as well as the operations and impairment charges related to the Gary Farrell winery sold on April 28, 2011 and the EOS Winery which was sold on September 20, 2011.
 
The operating results relating to discontinued operations are as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Rental revenue
$

 
$
1,050

 
$

 
$
5,053

Tenant reimbursements

 
62

 

 
2,408

Other income

 

 

 

Mortgage and other financing income

 
21

 
21

 
61

Total revenue

 
1,133

 
21

 
7,522

Property operating expense
(87
)
 
143

 
(82
)
 
3,068

Other expense
44

 
64

 
135

 
132

Costs associated with loan refinancing or payoff

 

 

 
1,049

Interest expense, net

 

 
(12
)
 
100

Impairment charges

 
9,958

 
4,648

 
11,758

Depreciation and amortization
102

 
360

 
277

 
2,556

Loss before gain on sale or acquisition of real estate
(59
)
 
(9,392
)
 
(4,945
)
 
(11,141
)
Gain on sale or acquisition of real estate
438

 

 
720

 
18,293

Net income (loss)
$
379

 
$
(9,392
)
 
$
(4,225
)
 
$
7,152




24



16. Other Commitments and Contingencies

As of June 30, 2012, the Company had 10 entertainment development projects for which it has agreed to finance the development costs. At June 30, 2012, the Company had commitments to fund approximately $68.5 million of additional improvements which are expected to be funded in 2012. Development costs are advanced by the Company in periodic draws. If the Company determines that construction is not being completed in accordance with the terms of the development agreements, 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 agreed to finance future development costs for seven of its education properties. At June 30, 2012, the Company had commitments to fund approximately $25.3 million of additional improvements for these properties which is expected to be funded in 2012. Development costs are advanced by the Company in periodic draws. If the Company determines that construction is not being completed in accordance with the terms of the development agreement, it can discontinue funding construction draws. The Company has agreed to lease the properties to the operators at pre-determined rates upon completion of construction.

The Company has provided a guarantee of the payment of certain economic development revenue bonds related to four theatres in Louisiana for which the Company earns a fee at annual rates of 1.75% to 2.88% over the 30-year term of the bond. The Company has recorded $4.5 million as a deferred asset included in other assets and $4.5 million included in other liabilities in the accompanying consolidated balance sheet as of June 30, 2012 related to this guarantee. No amounts have been accrued as a loss contingency related to this guarantee because we have determined that payment by the Company is not probable.

The Company has certain commitments related to its mortgage note investments that it may be required to fund in the future. The Company is generally obligated to fund these commitments at the request of the borrower or upon the occurrence of events outside of its direct control. As of June 30, 2012, the Company had six mortgage notes receivable with commitments totaling approximately $36.3 million. If commitments are funded in the future, interest will be charged at rates consistent with the existing investments.

On June 7, 2011, affiliates of Louis Cappelli, Concord Associates, L.P., Concord Resort, LLC and Concord Kiamesha LLC, filed a complaint with the Supreme Court of the State of New York, County of Sullivan, against a subsidiary of the Company seeking (i) a declaratory judgment on certain of the subsidiary's obligations under a previously disclosed settlement agreement involving these entities, (ii) an order that the Company subsidiary execute the golf course lease and the “Racino Parcel” lease subject to the settlement agreement, and (iii) an extension of the restrictive covenant against ownership or operation of a casino on the Concord resort property under the settlement agreement, which covenant was set to expire on December 31, 2011. On October 20, 2011, Concord Associates, L.P., Concord Resort, LLC and Concord Kiamesha LLC filed a complaint with the Supreme Court of the State of New York, County of Westchester against the Company and certain of its subsidiaries alleging breach of contract and breach of the duty of good faith and fair dealing with respect to a casino development agreement relating to a planned casino and resort development in Sullivan County, New York. Plaintiffs are seeking specific performance with respect to such agreement and money damages of $800.0 million, plus interest and attorneys' fees. On March 7, 2012, Concord Associates, L.P. and seven other companies affiliated with Mr. Cappelli and Concord Associates, L.P. filed a new complaint against the Company and certain of its subsidiaries, as well as Empire Resorts, Inc. and its subsidiary Monticiello Raceway Management, Inc., in the United States District Court for the Southern District of New York. On June 25, 2012, an amended complaint was served against the same parties as well as Kien Huat Realty III Limited and Genting New York , LLC (Genting Parties). The amended complaint alleges unlawful restraint of trade, conspiracy to monopolize, unlawful monopolization, against the Company, the Empire Resorts parties and the Genting Parties as well as tortious interference against the Empire Resorts parties and the Genting Parties, in relation to a proposed development transaction on the same Sullivan County, New York resort property. Plaintiffs seek damages of $1.5 billion, plus interest and attorneys' fees. The Company intends to vigorously defend the claims asserted against the Company and certain of its subsidiaries by the Concord entities for which it believes it has meritorious defenses, but it is too early to assess the outcome.


25


On June 18, 2012, Concord Kiamesha Casino, LLC, an affiliate of Concord Associates, L.P., exercised the right to ground lease approximately 57 acres of former Concord Resort property from the Company, pursuant to agreements entered into as part of the June 18, 2010 settlement between the parties. The affiliate has the right to ground lease the parcel (with option to purchase) for a five year period with annual rent payments of $200 thousand due in advance. Additionally, as agreed in the June 18, 2010 settlement, Concord Associates, L.P. has the right to purchase the Company's fee simple interest underlying the ground lease for $1.00 provided that construction of the harness racetrack and casino project is completed prior to the end of the ground lease term. The ground lease covers property which is not included in the Company's separate agreements with Empire Resorts and has no effect on the Company's development plans.

Concord Associates, L.P.'s separate option to acquire all of the Company's property at the former Concord Resort expired unexercised on June 11, 2012. This option was recorded at fair value as noncontrolling interest at the time of settlement which was determined to be $27.8 million. During the three months ended June 30, 2012, the Company reduced the value of the noncontrolling interest to zero and recorded an adjustment to increase additional paid-in-capital by the same amount.




26


17. Condensed Consolidating Financial Statements

A portion of the Company's subsidiaries have guaranteed the Company’s indebtedness under the Company's unsecured 7.750% senior notes due 2020, the unsecured revolving credit facility and the unsecured term loan facility. The guarantees are joint and several, full and unconditional, subject to customary release provisions. The following summarizes the Company’s condensed consolidating information as of June 30, 2012 and 2011 and for the three and six months ended June 30, 2012 and 2011 (in thousands):
Condensed Consolidating Balance Sheet
As of June 30, 2012

 
Entertainment
Properties  Trust
(Issuer)
 
Wholly  Owned
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Consolidated
Elimination
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Rental properties, net
$

 
$
747,359

 
$
1,086,534

 
$

 
$
1,833,893

Rental properties held for sale, net