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Section 1: 10-K (10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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
 
EPR PROPERTIES
(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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common shares of beneficial interest, par value $.01 per share
 
New York Stock Exchange
5.75% Series C cumulative convertible preferred shares of beneficial interest, par value $.01 per share
 
New York Stock Exchange
9.00% Series E cumulative convertible preferred shares of beneficial interest, par value $.01 per share
 
New York Stock Exchange
5.75% Series G cumulative redeemable preferred shares of beneficial interest, par value $.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ý     No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.     Yes  ¨    No  ý
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 every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ 
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  ¨    No  ý
The aggregate market value of the common shares of beneficial interest (“common shares”) of the registrant held by non-affiliates, based on the closing price on the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the New York Stock Exchange, was $4,853,135,832.
At February 27, 2019, there were 74,905,631 common shares outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2019 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A are incorporated by reference in Part III of this Annual Report on Form 10-K.



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 and financial condition. 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,” “pipeline,” “estimates,” “offers,” “plans,” “would,” or other similar expressions or other comparable terms or discussions of strategy, plans or intentions in this Annual Report on Form 10-K. 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:

Global economic uncertainty and disruptions in financial markets;
Reduction in discretionary spending by consumers;
Adverse changes in our credit ratings;
Fluctuations in interest rates;
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;
Our ability to renew maturing leases on terms comparable to prior leases and/or our ability to locate substitute lessees for these properties on economically favorable terms;
Risks of operating in the entertainment industry;
Our ability to compete effectively;
Risks associated with a single tenant representing a substantial portion of our lease revenues;
The ability of our public charter school tenants to comply with their charters and continue to receive funding from local, state and federal governments, 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;
The ability of our build-to-suit tenants to achieve sufficient operating results within expected timeframes and therefore have capacity to pay their agreed upon rent;
The ability of our early childhood education tenant, Children's Learning Adventure, to successfully transition our properties to one or more third party operators;
Risks associated with potential criminal proceedings against one of our waterpark mortgagors and certain related parties, which could negatively impact the likelihood of repayment of the related mortgage loans secured by the waterpark and other collateral;
Risks relating to our tenants' exercise of purchase options or borrowers' exercise of prepayment options related to our education properties;
Risks associated with our dependence on third-party managers to operate certain of our recreation anchored lodging properties;
Risks associated with our level of indebtedness;
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;
The concentration and lack of diversification of our investment portfolio;
Our continued qualification as a real estate investment trust for U.S. federal income tax purposes and related tax matters;
The ability of our subsidiaries to satisfy their obligations;
Financing arrangements that expose us to funding or purchase risks;
Our reliance on a limited number of employees, the loss of which could harm operations;

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Risks associated with the employment of personnel by managers of our recreation anchored lodging properties;
Risks associated with security breaches and other disruptions;
Changes in accounting standards that may adversely affect our financial statements;
Fluctuations in the value of real estate income and investments;
Risks relating to real estate ownership, leasing and development, including 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 or other customers, 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;
Risks associated with the relatively illiquid nature of our real estate investments;
Risks with owning assets in foreign countries;
Risks associated with owning, operating or financing properties for which the tenants', mortgagors' or our operations may be impacted by weather conditions and climate change;
Risks associated with the development, redevelopment and expansion of properties and the acquisition of other real estate related companies;
Our ability to pay dividends in cash or at current 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 that could dilute the value of our shares;
Future offerings of debt or equity securities, which may rank senior to our common shares;
Risks associated with changes in foreign exchange rates; and
Changes in laws and regulations, including tax laws and regulations.

Our 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 Annual Report on Form 10-K.

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 Annual Report on Form 10-K 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. Except as required by law, 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 Annual Report on Form 10-K.



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TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
Item 1A.
 
 
Item 1B.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
Item 5.
 
 
Item 6.
 
 
Item 7.
 
 
Item 7A.
 
 
Item 8.
 
 
Item 9.
 
 
Item 9A.
 
 
Item 9B.
 
 
 
 
 
 
 
 
 
 
 
 
Item 10.
 
 
Item 11.
 
 
Item 12.
 
 
Item 13.
 
 
Item 14.
 
 
 
 
 
 
 
 
 
 
 
 
Item 15.
 
 
Item 16.
 

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PART I

Item 1. Business

General

EPR Properties (“we,” “us,” “our,” “EPR” or the “Company”) was formed on August 22, 1997 as a Maryland real estate investment trust (“REIT”), and an initial public offering of our common shares of beneficial interest (“common shares”) was completed on November 18, 1997. Since that time, the Company has grown into a leading specialty REIT with an investment portfolio that includes primarily entertainment, recreation and education properties. The underwriting of our investments is centered on key industry and property cash flow criteria, as well as the credit metrics of our tenants and customers. As further explained under “Growth Strategies” below, our investments are also guided by a focus on inflection opportunities that are associated with or support enduring uses, excellent executions, attractive economics and an advantageous market position.

We are a self-administered REIT. As of December 31, 2018, our total assets were approximately $6.1 billion (after accumulated depreciation of approximately $0.9 billion). Our investments are generally structured as long-term triple-net leases that require the tenants to pay substantially all expenses associated with the operation and maintenance of the property, or as long-term mortgages with economics similar to our triple-net lease structure.

Our total investments (a non-GAAP financial measure) were approximately $6.9 billion at December 31, 2018. See "Non-GAAP Financial Measures" for the calculation of total investments and reconciliation of total investments to "Total assets" in the consolidated balance sheet at December 31, 2018 and 2017. We group our investments into four reportable operating segments: Entertainment, Recreation, Education and Other. Our total investments at December 31, 2018 consisted of interests in the following:

$3.0 billion or 43% related to entertainment properties, which includes megaplex theatres, entertainment retail centers (centers typically anchored by an entertainment component such as a megaplex theatre and containing other entertainment-related or retail properties), family entertainment centers and other retail parcels;

$2.3 billion or 33% related to recreation properties, which includes ski properties, attractions, golf entertainment complexes and other recreation facilities;

$1.4 billion or 21% related to education properties, which consists of investments in public charter schools, early education centers and K-12 private schools; and

$194.9 million or 3% related to other properties, which relates to the Resorts World Catskills (formerly Adelaar) casino and resort project in Sullivan County, New York.

We believe entertainment, recreation and education are highly enduring sectors of the real estate industry and that, as a result of our focus on properties in these sectors, industry relationships and the knowledge of our management, we have a competitive advantage in providing capital to operators of these types of properties. We believe this focused niche approach, particularly as it relates to experiential real estate, aligns with the trends in consumer demand, and offers the potential for higher growth and better yields.

We believe our management’s knowledge and industry relationships have facilitated favorable opportunities for us to acquire, finance and lease properties. Historically, our primary challenges have been locating suitable properties, negotiating favorable lease or financing terms, and managing our real estate portfolio as we have continued to grow.

We are particularly focused on property categories which allow us to use our experience to mitigate some of the risks inherent in a changing economic environment. We cannot provide any assurance that any such potential investment or acquisition opportunities will arise in the near future, or that we will actively pursue any such opportunities.


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Although we are primarily a long-term investor, we may also sell assets if we believe that it is in the best interest of our shareholders or pursuant to contractual rights of our tenants or our customers.

Entertainment

As of December 31, 2018, our Entertainment segment consisted of investments in megaplex theatres, entertainment retail centers, family entertainment centers and other retail parcels totaling approximately $3.0 billion with interests in:
152 megaplex theatres located in 35 states;
seven entertainment retail centers (which included seven additional megaplex theatres) located in three states, and Canada;
11 family entertainment centers located in six states;
land parcels leased to restaurant and retail operators adjacent to several of our theatre properties;
$20.0 million in construction in progress primarily for real estate development and redevelopment of megaplex theatres as well as other retail redevelopment projects; and
$4.5 million in undeveloped land inventory.

As of December 31, 2018, our owned real estate portfolio of megaplex theatres consisted of approximately 11.3 million square feet and was 100% leased and our remaining owned entertainment real estate portfolio consisted of 2.1 million square feet and was 90% leased. The combined owned entertainment real estate portfolio consisted of 13.4 million square feet and was 98% leased. Our owned theatre properties are leased to 15 different leading theatre operators. A significant portion of our total revenue was derived from rental payments by American Multi-Cinema, Inc. ("AMC"). For the year ended December 31, 2018, approximately $115.8 million or 16.5% of the Company's total revenues were derived from rental payments by AMC.

A significant portion of our entertainment assets consist of modern megaplex theatres. The modern megaplex theatre provides a significantly enhanced audio and visual experience for the patrons versus other formats. A significant trend currently exists among national and local exhibitors to further enhance the customer experience. These enhancements include reserved, luxury seating and expanded food and beverage offerings, including the addition of alcohol and more efficient point of sale systems. The evolution of the theatre industry over the last 20 years from the sloped floor theatre to the megaplex stadium theatre to the expanded amenity theatre has demonstrated that exhibitors and their landlords are willing to make investments in their theatres to take the customer experience to the next level.

As exhibitors improve the customer experience with more spacious and comfortable seating options, they are required to make physical changes to the existing seating configurations that typically result in a significant loss of existing seats. It was once a concern that such seat loss would be a negative to theatres that thrive on opening weekend business of new movie releases; however, customers have responded favorably to these changes. Exhibitors are learning that enhanced amenities are changing the patrons’ movie-going habits resulting in significantly increased seat utilization and increased food and beverage revenue.

As exhibitors pursue the renovation of theatres with enhanced amenities, we are working with our tenants, generally toward the end of their primary lease terms, to extend the terms of their leases beyond the initial option periods, finance improvements where applicable and to recapture land where seat count reductions alleviate parking requirements. In conjunction with these changes, we may also make changes to the rental rates to better reflect the existing market demands and additional capital invested. In addition to positioning expiring theatre assets for continued success, the renovation of these assets creates an opportunity to diversify the Company's tenant base into other entertainment or retail uses adjacent to a movie theatre.

The theatre box office had a record year in 2018 with revenues of approximately $11.9 billion per Box Office Mojo, an increase of over 7% versus the prior year and an increase of over 4% versus the previous record year set in 2016. We expect the development of new megaplex theatres and the conversion or partial conversion of existing theatres to enhanced amenity formats to continue in the United States and abroad over the long-term. As a result of the significant

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capital commitment involved in building new megaplex theatres and redeveloping existing theatres, as well as the experience and industry relationships of our management, we believe we will continue to have opportunities to provide capital to exhibition businesses in the future.

We also continue to seek opportunities for the development of additional restaurant, retail and other entertainment venues around our existing portfolio. The opportunity to capitalize on the traffic generation of our market-dominant theatres to create entertainment retail centers (“ERCs”) not only strengthens the execution of the megaplex theatre but adds diversity to our tenant and asset base. We have and will continue to evaluate our existing portfolio for additional development of entertainment and retail density, and we will also continue to evaluate the purchase or financing of existing ERCs that have demonstrated strong financial performance and meet our quality standards. The leasing and property management requirements of our ERCs are generally met through the use of third-party professional service providers.

Our family entertainment center operators offer a variety of entertainment options including bowling, bocce ball and karting.

We will continue to seek opportunities for the development of, or acquisition of, other entertainment related properties that leverage our expertise in this area.

Recreation

As of December 31, 2018, our Recreation segment consisted of investments in ski properties, attractions, golf entertainment complexes and other recreation properties totaling approximately $2.3 billion with interests in:
12 ski properties located in seven states;
21 attractions located in 13 states;
34 golf entertainment complexes located in 19 states;
13 other recreation properties located in six states; and
$249.9 million in construction in progress primarily for the development of an indoor waterpark hotel at the Resorts World Catskills casino and resort project located in Sullivan County, New York and golf entertainment complexes.
As of December 31, 2018, our owned recreation real estate portfolio was 100% leased.

Our ski properties provide a sustainable advantage for the experience conscious consumer, providing outdoor entertainment in the winter and, in some cases, year-round. All of the ski properties that serve as collateral for our mortgage notes in this area, as well as our five owned properties, offer snowmaking capabilities and provide a variety of terrains and vertical drop options. We believe that the primary appeal of our ski properties lies in the convenient and reliable experience consumers can expect. Given that all of our ski properties are located near major metropolitan areas, they offer skiing, snowboarding and other activities without the expense, travel, or lengthy preparations of remote ski resorts. Furthermore, advanced snowmaking capabilities increase the reliability of the experience during the winter versus other ski properties that do not have such capabilities. Our ski properties are leased to, or we have mortgage notes receivable from, five different operators. We expect to continue to pursue opportunities in this area.

Our attraction portfolio consists of waterparks (including related lodging), amusement parks and an interactive museum, each of which draw a diverse segment of customers. Our attraction operators continue to deliver innovative and compelling attractions along with high standards of service, making our attractions a day of fun that's accessible for families, teens, locals and tourists. These attractions offer experiences designed to appeal to all ages while remaining accessible in both cost and proximity. As many waterparks are growing from single-day attendance to a destination getaway, we believe indoor waterpark hotels increase the four-season appeal at many resorts. Our attraction properties are leased to, or we have mortgage notes receivable from, eight different operators. We expect to continue to pursue opportunities in this area.


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Our golf entertainment complexes combine golf with entertainment, competition and food and beverage service, and are leased to, or under mortgage with, Topgolf. By combining an interactive entertainment and food and beverage experience with a long-lived recreational activity, we believe Topgolf provides an innovative, enjoyable and repeatable customer experience. We expect to continue to pursue opportunities related to golf entertainment complexes.

Our other recreation portfolio consists of both classic and innovative activities and includes investments in fitness and wellness properties, recreation anchored lodging and indoor sky-diving facilities. Our investments in recreation anchored lodging (including lodging associated with indoor waterparks included in our attraction portfolio) have been structured using triple-net leases or more traditional REIT lodging structures. In the traditional REIT lodging structure, we hold qualified lodging facilities under the REIT and we separately hold the operations of the facilities in taxable REIT subsidiaries ("TRSs") which are facilitated by management agreements with eligible independent contractors. We expect to continue to pursue opportunities for investments in recreation anchored lodging under either triple-net leases or more traditional REIT lodging structures.

We will continue to seek opportunities for the development of, or acquisition of, other recreation related properties that leverage our expertise in this area.

Education

As of December 31, 2018, our Education segment consisted of investments in public charter schools, early education centers and K-12 private schools totaling approximately $1.4 billion with interests in:
59 public charter schools located in 19 states;
69 early education centers located in 21 states;
15 private schools located in nine states;
$17.6 million in construction in progress for real estate development or expansions of public charter schools and early education centers; and
$9.6 million in undeveloped land inventory.

As of December 31, 2018, our owned education real estate portfolio consisted of approximately 4.7 million square feet and was 98% leased. This includes properties operated by Children's Learnings Adventure USA, LLC (“CLA”) as 100% leased, as further discussed in Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments”.

Public charter schools are tuition-free, independent schools that are publicly funded by local, state and federal tax dollars based on enrollment. Driven by the need to improve the quality of public education and provide more school choices in the U.S., public charter schools are one of the fastest growing segments of the multi-billion dollar educational facilities sector, and we believe a critical need exists for the financing of new and refurbished educational facilities. To meet this need, we have established relationships with public charter school operators, authorizers and developers across the country. Public charter schools are operated pursuant to charters granted by various state or other regulatory authorities and are dependent upon funding from local, state and federal tax dollars. Like public schools, public charter schools are required to meet both state and federal academic standards. We have 44 different operators for our owned public charter schools.

Various government bodies that provide educational funding have pressure to reduce their spending budgets and have reduced educational funding in some cases and may continue to reduce educational funding in the future. This can impact our tenants' operations and potentially their ability to pay our scheduled rent. However, these reductions differ state by state and have historically been more significant at the post-secondary education level than at the K-12 level that our tenants serve. Furthermore, while there can be no assurance as to the level of these cuts, we analyze each state's fiscal situation and commitment to the charter school movement before providing financing in a new state, and also factor in anticipated reductions (as applicable) in the states in which we do decide to do business.


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As with public charter schools, the Company's expansion into both early education centers and private schools is supported by strong unmet demand, and we expect to increase our investment in both of these areas.

Early education centers continue to see demand due to the proliferation of dual income families and the increasing emphasis on early childhood education, beyond traditional daycare. There is increased demand for curriculum-based, child-centered learning. We believe this property type is a logical extension of our education platform and allows us to increase our diversity and geographical reach with these assets. We have 11 different operators for our owned early education centers.

We believe K-12 private schools have significant growth potential when they have differentiated, high quality offerings. Many private schools in large urban and suburban areas are at capacity and have large waiting lists making admission more difficult. The demand for nonsectarian private education has increased in recent years as parents and students become more focused on the comprehensive impact of a strong school environment.

We will continue to seek opportunities for the development of, or acquisition of, other education related properties that leverage our expertise in this area.

Many of our education lease and mortgage agreements contain purchase or prepayment options whereby the tenant or borrower can acquire the property or prepay the mortgage loan for a premium over the total development cost at certain points during the terms of the agreements. If these properties meet certain criteria, the tenants may be able to obtain bond or other financing at lower rates and therefore be motivated to exercise these options. We do not anticipate that all of these options will be exercised but cannot determine at this time the amount of such option exercises. Additionally, it is difficult to forecast when these options will be exercised, which can create volatility in our earnings. In accordance with GAAP, prepayment penalties related to mortgage agreements are included in mortgage and other financing income and are included in Funds From Operations ("FFO") as adjusted (See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Funds From Operations” for a discussion of FFO and FFO as adjusted ("FFOAA"), which are non-GAAP measures). However, if a tenant exercises the option to purchase a property under lease, GAAP requires that a gain on sale be recognized for the amount of cash received over the carrying value of the property and gains on sale are typically excluded from FFOAA. Accordingly, for consistency in presentation and with the wording and intent of the lease provisions, we treat the premium over the total development cost (i.e. the undepreciated cost) as a termination fee and include such fees in FFOAA, and only the difference between the total development cost and the carrying value is treated as gain on sale and excluded from FFOAA.

During the year ended December 31, 2018, we received prepayment of $38.1 million on five mortgage notes receivable that were secured by four public charter schools and land located in Arizona and we received associated prepayment fees of $3.4 million. In addition, pursuant to a tenant purchase option, we completed the sale of one public charter school located in California for net proceeds of $12.0 million. In connection with this sale, we recognized a gain on sale of $1.9 million, which has been included in termination fees in FFOAA per the methodology discussed above.


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As of December 31, 2018, an estimate of the number of education properties potentially impacted by option exercises, the total development cost and the total potential amount of the prepayment penalties or lease termination fees in the option period by year are as follows (dollars in thousands):
Year Option Exercisable
 
Number of Education Properties
 
Total Development Cost
 
Total Potential Termination Fees/Prepayment Penalties in Option Period
2019
 
10
 
$
122,833

 
$
19,152

2020
 
15
 
126,896

 
22,967

2021
 
13
 
131,709

 
22,103

2022
 
4
 
40,160

 
8,915

2023
 
 

 

Thereafter
 
4
 
155,888

 
22,746


Other

As of December 31, 2018, our Other segment consisted primarily of land under ground lease, property under development and land held for development totaling approximately $194.9 million related to the Resorts World Catskills casino and resort project in Sullivan County, New York, which we previously referred to as the Adelaar casino and resort project. Our ground lease tenant is expected to ultimately invest in excess of $925.0 million in the construction of the casino and resort project, and the casino first opened for business in February 2018.

Business Objectives and Strategies

Our vision is to become the leading specialty REIT by focusing our unique knowledge and resources on select real estate segments which provide the potential for outsized returns.

Our long-term primary business objective is to enhance shareholder value by achieving predictable and increasing FFO and dividends per share (See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Funds From Operations” for a discussion of FFO, which is a non-GAAP measure). Our prevailing strategy is to focus on long-term investments in a limited number of categories in which we maintain a depth of knowledge and relationships, and which we believe offer sustained performance throughout all economic cycles. We intend to achieve this objective by continuing to execute the Growth Strategies, Operating Strategies and Capitalization Strategies described below.

Growth Strategies

Central to our growth is remaining focused on acquiring or developing properties in our primary investment segments: Entertainment, Recreation and Education. We may also pursue opportunities to provide mortgage financing for these investment segments in certain situations where this structure is more advantageous than owning the underlying real estate.

Our segment focus is consistent with our strategic organizational design which is structured around building centers of knowledge and strong operating competencies in each of our primary segments. Retention and building of this knowledge depth creates a competitive advantage allowing us to more quickly identify key market trends.

To this end, we will deliberately apply information and our ingenuity to identify properties which represent potential logical extensions within each of our segments, or potential future investment segments. As part of our strategic planning and portfolio management process we assess new opportunities against the following five key underwriting principles:


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Inflection Opportunity
Specialty versus commodity real estate
New or emerging generation of real estate as a result of age, technology or change in consumer lifestyle or habits

Enduring Value
Underlying activity long-lived
Real estate that supports commercially successful activities
Outlook for business stable or growing

Excellent Execution
Best-of-class executions that create market-dominant properties
Sustainable customer demand within the category despite a potential change in tenancy
Tenants with a reliable track record of customer service and satisfaction

Attractive Economics
Initially accretive with escalating yield over time
Rent participation features which allow for participation in financial performance
Scalable depth of opportunity
Strong, stable rent coverage and the potential for cross-default features

Advantageous Position
First mover advantage and/or dominant player in real estate ownership or financing
Preferred tenant or borrower relationship that provides access to sites and development projects
Data available to assess and monitor performance

Operating Strategies

Lease Risk Minimization
To avoid initial lease-up risks and produce a predictable income stream, we typically acquire or develop single-tenant properties that are leased under long-term leases. We believe our willingness to make long-term investments in properties offers our tenants financial flexibility and allows tenants to allocate capital to their core businesses. Although we will continue to emphasize single-tenant properties, we have acquired or developed, and may continue to acquire or develop, multi-tenant properties we believe add shareholder value.

Lease Structure
We have structured our leasing arrangements to achieve a positive spread between our cost of capital and the rents paid by our tenants. We typically structure leases on a triple-net basis under which the tenants bear the principal portion of the financial and operational responsibility for the properties. During each lease term and any renewal periods, the leases typically provide for periodic increases in rent and/or percentage rent based upon a percentage of the tenant’s gross sales over a pre-determined level. In our multi-tenant property leases and some of our theatre leases, we generally require the tenant to pay a common area maintenance (“CAM”) charge to defray its pro rata share of insurance, taxes and maintenance costs.

Mortgage Structure
We have structured our mortgages to achieve economics similar to our triple-net lease structure with a positive spread between our cost of capital and the interest paid by our tenants. During each mortgage term and any renewal periods, the notes typically provide for periodic increases in interest and/or participating features based upon a percentage of the tenant’s gross sales over a pre-determined level.

Traditional REIT Lodging Structure
We may from time to time use traditional REIT lodging structures, where we hold qualified lodging facilities under the REIT and we separately hold the operations of the facilities in TRSs which are facilitated by management agreements

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with eligible independent contractors. However, we do not currently anticipate that these investments will exceed 10% of our total assets.

Development and Redevelopment
We intend to continue developing properties and redeveloping existing properties that are consistent with our growth strategies. We generally do not begin development of a single-tenant property without a signed lease providing for rental payments that are commensurate with our level of capital investment. In the case of a multi-tenant development, we generally require a significant amount of the development to be pre-leased prior to construction to minimize lease-up risks. In addition, to minimize overhead costs and to provide the greatest amount of flexibility, we generally outsource construction management to third-party firms.

We believe our build-to-suit development program is a competitive advantage. First, we believe our strong relationships with our tenants and developers drive new investment opportunities that are often exclusive to us, rather than bid broadly, and with our deep knowledge of their businesses, we believe we are a value-added partner in the underwriting of each new investment. Second, we offer financing from start to finish for a build-to-suit project such that there is no need for a tenant to seek separate construction and permanent financing, which we believe makes us a more attractive partner. Third, we are actively developing strong relationships with tenants in our select segments leading to multiple investments without strict investment portfolio allocations. Finally, multiple investments with the same tenant allows us in most cases to include cross-default provisions in our lease or financing contracts, meaning a default in an obligation to us at one location is a default under all obligations with that tenant.
We will also investigate opportunities to redevelop certain of our existing properties. We may redevelop properties in conjunction with a lease renewal or new tenant, or we may redevelop properties that have more earnings potential due to the redevelopment. Additionally, certain of our properties have excess land where we will proactively seek opportunities to further develop.
Tenant and Customer Relationships
We intend to continue developing and maintaining long-term working relationships with entertainment, recreation, education and other specialty business operators and developers by providing capital for multiple properties on a regional, national and international basis, thereby creating efficiency and value for both the operators and the Company.

Portfolio Diversification
We will endeavor to further diversify our asset base by property type, geographic location and tenant or customer. In pursuing this diversification strategy, we will target entertainment, recreation, education and other specialty business operators that we view as leaders in their market segments and have the ability to compete effectively and perform under their agreements with the Company.

Dispositions
We will consider property dispositions for reasons such as creating price awareness of a certain property type, opportunistically taking advantage of an above-market offer or reducing exposure related to a certain tenant, property type or geographic area.

Capitalization Strategies

Debt and Equity Financing
Our ratio of net debt to adjusted EBITDA, a non-GAAP measure (see "Non-GAAP Financial Measures" for definitions and reconciliations), is our primary measure to evaluate our capital structure and the magnitude of our debt against our operating performance. Additionally, we utilize our ratio of net debt to gross assets as a secondary measure to evaluate our capital structure. We expect to maintain our net debt to adjusted EBITDA ratio between 4.6x to 5.6x. See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for a further discussion of this ratio.

We rely primarily on an unsecured debt structure. In the future, while we may obtain secured debt from time to time or assume secured debt financing obligations in acquisitions, we intend to issue primarily unsecured debt securities to

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satisfy our debt financing needs. We believe this strategy increases our access to capital and permits us to more efficiently match available debt and equity financing to our ongoing capital requirements.

Our sources of equity financing consist of the issuance of common shares as well as the issuance of preferred shares (including convertible preferred shares). In addition to larger underwritten registered public offerings of both common and preferred shares, we have also offered shares pursuant to registered public offerings through the direct share purchase component of our Dividend Reinvestment and Direct Share Purchase Plan (“DSP Plan”). While such offerings are generally smaller than a typical underwritten public offering, issuing common shares under the direct share purchase component of our DSP Plan allows us to access capital on a more frequent basis in a cost-effective manner. We expect to opportunistically access the equity markets in the future and, depending primarily on the size and timing of our equity capital needs, may continue to issue shares under the direct share purchase component of our DSP Plan. Furthermore, we may issue shares in connection with acquisitions in the future.
 
Joint Ventures
We will examine and may pursue potential additional joint venture opportunities with institutional investors or developers if the investments to which they relate meet our guiding principles discussed above. We may employ higher leverage in joint ventures.

Payment of Regular Dividends
We pay dividend distributions to our common shareholders on a monthly basis (as opposed to a quarterly basis). We expect to continue to pay dividend distributions to our preferred shareholders on a quarterly basis. Our Series C cumulative convertible preferred shares (“Series C preferred shares”) have a dividend rate of 5.75%, our Series E cumulative convertible preferred shares (“Series E preferred shares”) have a dividend rate of 9.00% and our Series G cumulative redeemable preferred shares ("Series G preferred shares") have a dividend rate of 5.75%. Among the factors the Company’s board of trustees (“Board of Trustees”) considers in setting the common share dividend rate are the applicable REIT tax rules and regulations that apply to dividends, the Company’s results of operations, including FFO and FFOAA per share, and the Company’s Cash Available for Distribution (defined as net cash flow available for distribution after payment of operating expenses, debt service, preferred dividends and other obligations).

Competition

We compete for real estate financing opportunities with other companies that invest in real estate, as well as traditional financial sources such as banks and insurance companies. REITs have financed, and may continue to seek to finance, entertainment, recreation, education and other specialty properties as new properties are developed or become available for acquisition.

Employees

As of December 31, 2018, we had 64 full-time employees.

Principal Executive Offices

The Company’s principal executive offices are located at 909 Walnut Street, Suite 200, Kansas City, Missouri 64106; telephone (816) 472-1700.


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Materials Available on Our Website

Our internet website address is www.eprkc.com. We make available, free of charge, through our website copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “Commission” or “SEC”). You may also view our Code of Business Conduct and Ethics, Company Governance Guidelines, Independence Standards for Trustees and the charters of our Audit, Nominating/Company Governance, Finance and Compensation and Human Capital Committees on our website. Copies of these documents are also available in print to any person who requests them. We do not intend for information contained in our website to be part of this Annual Report on Form 10-K.

Item 1A. Risk Factors
There are many risks and uncertainties that can affect our current or future business, operating results, financial performance or share price. The following discussion describes important factors which could adversely affect our current or future business, operating results, financial condition or share price. This discussion includes a number of forward-looking statements. See “Cautionary Statement Concerning Forward-Looking Statements.”  

Risks That May Impact Our Financial Condition or Performance

Global economic uncertainty and disruptions in the financial markets may impair our ability to refinance existing obligations or obtain new financing for acquisition or development of properties.
There continues to be global economic uncertainty. Increased uncertainty in the wake of the "Brexit" referendum in the United Kingdom in June 2016, in which the majority of voters voted in favor of an exit from the European Union, the formal notice by the United Kingdom in March 2017 of its exit from the European Union and the pending negotiations of such exit, as well as political changes in the U.S. and abroad, have contributed to volatility in the global financial markets. Although the U.S. economy has continued to improve, there can be no assurances that the U.S. economy will continue to improve or that a future recession will not occur. We rely in part on debt financing to finance our investments and development. To the extent that turmoil in the financial markets returns or intensifies, it has the potential to adversely affect our ability to refinance our existing obligations as they mature or obtain new financing for acquisition or development of properties and adversely affect the value of our investments. If we are unable to refinance existing indebtedness on attractive terms at its maturity, we may be forced to dispose of some of our assets. Uncertain economic conditions and disruptions in the financial markets could also result in a substantial decrease in the value of our investments, which could also make it more difficult to refinance existing obligations or obtain new financing.

Most of our customers, consisting primarily of tenants and borrowers, operate properties in market segments that depend upon discretionary spending by consumers. Any reduction in discretionary spending by consumers within the market segments in which our customers or potential customers operate could adversely affect such customers' operations and, in turn, reduce the demand for our properties or financing solutions.
Most of our portfolio is leased to or financed with customers operating service or retail businesses on our property locations. Movie theatres, entertainment retail centers, recreation and entertainment venues, early childhood education centers, private K-12 schools, ski properties and attractions represent some of the largest market investments in our portfolio; and AMC, Topgolf, Regal Cinemas, Inc. and Cinemark USA, Inc. represented our largest customers for the year ended December 31, 2018. The success of most of these businesses depends on the willingness or ability of consumers to use their discretionary income to purchase our customers' products or services. In addition, the lodging industry is also highly sensitive to consumer discretionary spending. A downturn in the economy, or a trend to not want to go "out of home" for entertainment, recreation or education, could cause consumers to reduce their discretionary spending within the market segments in which our customers or potential customers operate, which could adversely affect such customers' operations and, in turn, reduce the demand for our properties or financing solutions.

Adverse changes in our credit ratings could impair our ability to obtain additional debt and equity financing on favorable terms, if at all, and negatively impact the market price of our securities, including our common shares.
The credit ratings of our senior unsecured debt and preferred equity securities are based on our operating performance,

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liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies in their rating analyses of us. Our credit ratings can affect the amount and type of capital we can access, as well as the terms of any financings we may obtain. There can be no assurance that we will be able to maintain our current credit ratings and in the event that our current credit ratings deteriorate, we would likely incur a higher cost of capital and it may be more difficult or expensive to obtain additional financing or refinance existing obligations and commitments. Also, a downgrade in our credit ratings would trigger additional costs or other potentially negative consequences under our current and future credit facilities and debt instruments.

An increase in interest rates could increase interest cost on new debt and could materially adversely impact our ability to refinance existing debt, sell assets and limit our acquisition and development activities.
The U.S. Federal Reserve increased its benchmark interest rate multiple times in 2018 and has continued signaling that rates could continue to rise. If interest rates continue to increase, so could our interest costs for any new debt. This increased cost could make the financing of any acquisition and development activity more costly. Rising interest rates could limit our ability to refinance existing debt when it matures, or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to reposition our portfolio promptly in response to changes in economic or other conditions.

We depend on leasing space to tenants on economically favorable terms and collecting rent from our tenants, who may not be able to pay.
At any time, a tenant may experience a downturn in its business that may weaken its financial condition. Similarly, a general decline in the economy may result in a decline in demand for space at our commercial properties. Our financial results depend significantly on leasing space at our properties to tenants on economically favorable terms. In addition, because a majority of our income comes from leasing real property, our income, funds available to pay indebtedness and funds available for distribution to our shareholders will decrease if a significant number of our tenants cannot pay their rent or if we are not able to maintain our levels of occupancy on favorable terms. If our tenants cannot pay their rent or we are not able to maintain our levels of occupancy on favorable terms, there is also a risk that the fair value of the underlying property will be considered less than its carrying value and we may have to take a charge against earnings. In addition, if a tenant does not pay its rent, we might not be able to enforce our rights as landlord without significant delays and substantial legal costs.

If a tenant becomes bankrupt or insolvent, that could diminish or eliminate the income we expect from that tenant's leases. If a tenant becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in a bankruptcy proceeding relating to the tenant. On the other hand, a bankruptcy court might authorize the tenant to terminate its leases with us. If that happens, our claim against the bankrupt tenant for unpaid future rent would be subject to statutory limitations that might be substantially less than the remaining rent owed under the leases. In addition, any claim we have for unpaid past rent would likely not be paid in full and we would also have to take a charge against earnings for any accrued straight-line rent receivable related to the leases.

We are exposed to the credit risk of our customers and counterparties and their failure to meet their financial obligations could adversely affect our business.
Our business is subject to credit risk. There is a risk that a customer or counterparty will fail to meet its obligations when due. Customers and counterparties that owe us money may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Although we have procedures for reviewing credit exposures to specific customers and counterparties to address present credit concerns, default risk may arise from events or circumstances that are difficult to detect or foresee. Some of our risk management methods depend upon the evaluation of information regarding markets, clients or other matters that are publicly available or otherwise accessible by us. That information may not, in all cases, be accurate, complete, up-to-date or properly evaluated. In addition, concerns about, or a default by, one customer or counterparty could lead to significant liquidity problems, losses or defaults by other customers or counterparties, which in turn could adversely affect us. We may be materially and adversely affected in the event of a significant default by our customers and counterparties.


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We could be adversely affected by a borrower's bankruptcy or default.
If a borrower becomes bankrupt or insolvent or defaults under its loan, that could force us to declare a default and foreclose on any available collateral. As a result, future interest income recognition related to the applicable note receivable could be significantly reduced or eliminated. There is also a risk that the fair value of the collateral, if any, will be less than the carrying value of the note and accrued interest receivable at the time of a foreclosure and we may have to take a charge against earnings. If a property serves as collateral for a note, we may experience costs and delays in recovering the property in foreclosure or finding a substitute operator for the property. If a mortgage we hold is subordinated to senior financing secured by the property, our recovery would be limited to any amount remaining after satisfaction of all amounts due to the holder of the senior financing. In addition, to protect our subordinated investment, we may desire to refinance any senior financing. However, there is no assurance that such refinancing would be available or, if it were to be available, that the terms would be attractive.

From time to time, the base terms of some of our leases will expire and there is no assurance that such leases will be renewed at existing lease terms, at otherwise economically favorable terms or at all.
From time to time, the base terms of some of our leases with our tenants will expire. These tenants have and may continue to seek rent or other concessions from us, including requiring us to modify the properties in order to renew their leases. There is no guarantee that we will be able to renew these leases at existing lease terms, at otherwise economically favorable terms or at all. In addition, if we fail to renew these leases, there can be no assurances that we will be able to locate substitute tenants for such properties or enter into leases with these substitute tenants on economically favorable terms.

Operating risks in the entertainment industry may affect the ability of our tenants to perform under their leases.
The ability of our tenants to operate successfully in the entertainment industry and remain current on their lease obligations depends on a number of factors, including the availability and popularity of motion pictures, the performance of those pictures in tenants' markets, the allocation of popular pictures to tenants, the release window (represents the time that elapses from the date of a picture's theatrical release to the date it is available on other mediums) and the terms on which the pictures are licensed. Neither we nor our tenants control the operations of motion picture distributors. There can be no assurances that motion picture distributors will continue to rely on theatres as the primary means of distributing first-run films, and motion picture distributors may in the future consider alternative film delivery methods.

In addition, some of our theatre tenants have disclosed that they are subject to pending anti-trust investigations by the U.S. Department of Justice and several states regarding such tenants' alleged anticompetitive practices, including seeking agreements with motion picture distributors for exclusive rights to releases in certain markets. The U.S. Department of Justice has also announced that it is reviewing anti-trust rules that prohibit movie studios from owning theatres or utilizing "block booking," a practice whereby movie studios sell multiple films as a package to theatres. There can be no assurances as to the outcome of such investigations or reviews or whether such investigations or reviews will materially adversely affect such tenants' operations and, in turn, their ability to perform under their leases.

Real estate is a competitive business.
Our business operates in highly competitive environments. We compete with a large number of real estate property owners and developers, some of which may be willing to accept lower returns on their investments. Principal factors of competition are rent or interest charged, attractiveness of location, the quality of the property and breadth and quality of services provided. If our competitors offer space at rental rates below the rental rates we are currently charging our tenants, we may lose potential tenants, and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants' leases expire. Our success depends upon, among other factors, trends of the national and local economies, financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.

A single tenant represents a substantial portion of our lease revenues.
AMC theatres, one of the nation's largest movie exhibition companies, is the lessee of a substantial number of our megaplex theatre properties. For the year ended December 31, 2018, approximately $115.8 million or 16.5% of our total revenues were derived from rental payments by AMC. AMC Entertainment, Inc. (“AMCE”) has guaranteed AMC's performance under substantially all of its leases. We have diversified and expect to continue to diversify our real estate

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portfolio by entering into lease transactions with a number of other leading operators or by acquiring or seeking to acquire other properties. Nevertheless, our revenues and our continuing ability to service our debt and pay shareholder dividends are currently substantially dependent on AMC's performance under its leases and AMCE's performance under its guarantee.

We believe AMC occupies a strong position in the industry and we intend to continue acquiring and leasing back or developing new AMC theatres. However, AMC and AMCE are susceptible to the same risks as our other tenants described herein. If for any reason AMC failed to perform under its lease obligations and AMCE did not perform under its guarantee, we could be required to reduce or suspend our shareholder dividends and may not have sufficient funds to support operations or service our debt until substitute tenants are obtained. If that happened, we cannot predict when or whether we could obtain substitute quality tenants on acceptable terms.

Public charter schools are operated pursuant to charters granted by various state or other regulatory authorities and are dependent upon compliance with the terms of such charters in order to obtain funding from local, state and federal governments. We could be adversely affected by a public charter school's failure to comply with its charter, non-renewal of a charter upon expiration or by its reduction or loss of funding.
Our public charter school properties operate pursuant to charters granted by various state or other regulatory authorities, which are generally shorter than our lease terms, and most of the schools have undergone or expect to undergo compliance audits or reviews by such regulatory authorities. Such audits and reviews examine the financial as well as the academic performance of the school. Adverse audit or review findings could result in non-renewal or revocation of a public charter school's charter, or in some cases, a reduction in the amount of state funding, repayment of previously received state funding or other economic sanctions. Our public charter school tenants are also dependent upon funding from local, state and federal governments, which are currently experiencing budgetary constraints, and any reduction or loss of such funding could adversely affect a public charter school's ability to comply with its charter and/or pay its obligations.

Our lease agreements with Imagine Schools, Inc. and its affiliates ("Imagine"), provide certain contractual protections designed to mitigate risk, such as risk arising from the revocation of a charter of one or more of the Imagine school subtenants. Subject to our approval and certain other terms and conditions, the lease agreements allow Imagine to re-tenant any public charter school properties that are causing technical defaults within one hundred and eighty (180) days of notice of such default. However, there is no guarantee that new sub-tenants will be available for such schools. In addition, while governing authorities may approve replacement operators for failed public charter schools to ensure continuity for students, we cannot predict when or whether applicable governing authorities would approve such operators, nor can we predict whether we could reach sublease agreements with such replacement operators on acceptable terms. In addition, Imagine has, in certain previous sales of properties to third parties, agreed to pay us the difference between our carrying value and the sales price. Each of the lease agreements are guaranteed by Imagine. Imagine also has a mortgage note obligation to us as a result of sales of certain properties to Imagine. If Imagine is unable to provide adequate replacement subtenants and/or is unable to pay its obligations, we may be required to record an impairment loss or sell one or more of the public charter school properties for less than their net book value.

Our build-to-suit tenants may not achieve sufficient operating results within expected timeframes and therefore may not be able to pay their agreed upon rent, which could adversely affect our financial results.
A significant portion of our investments include investments in build-to-suit projects. When construction is completed for these projects, tenants may require some period of time to achieve targeted operating results, and we may provide them with lease terms that are more favorable to the tenant during this timeframe. Tenants that fail to achieve targeted operating results within expected timeframes may be unable to pay their rent pursuant to the agreed upon lease terms or at all. If we are required to restructure lease terms or take other action with respect to the applicable property, our financial results may be impacted by lower lease revenues, recording an impairment loss, writing off rental amounts or otherwise.

The ability of our early childhood education tenant, Children's Learning Adventure, to successfully transition our properties to one or more third party operators.
As previously disclosed, in December 2017, certain subsidiaries of Children’s Learning Adventure USA, LLC (“CLA”) that are our tenants under leases for 21 operating properties filed Chapter 11 petitions in bankruptcy seeking the

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protections of the Bankruptcy Code. In July 2018, we entered into a new lease agreement with CLA related to these properties, which have continued on a month-to-month basis. In February 2019, we entered into agreements with CLA (collectively, the "PSA") providing for the purchase and sale of certain assets associated with the businesses located at the 21 operating CLA properties whereby we can nominate a third party operator to take an assignment and transfer of such assets from CLA and to receive certain beneficial rights under various ancillary agreements. The transfers of such assets are expected to close between May 1, 2019 and March 31, 2020 as closing conditions for each such transfer are satisfied. CLA has agreed to surrender possession of any of those properties that have not been transferred to a replacement operator prior to March 31, 2020 and has agreed to lease and operate each of the 21 properties until the transfer of each property to our replacement tenant or surrender of the property.

The primary closing condition for each transfer will be the requirement that the replacement tenant has obtained all required licenses and permits. There can be no assurance that our replacement tenant of a property will timely satisfy this or other conditions which could delay or prevent the closing of one or more transfers. As a result, there can be no assurance that one or more properties will not be surrendered until after March 31, 2020, in which case we would receive such properties without the ability to provide active operations to a replacement tenant which could adversely affect the terms of our leases of such properties to replacement tenants.

CLA is required to file a motion by March 1, 2019 with the bankruptcy court ("Court") seeking authorization of the sale of certain assets pursuant to the PSA. A condition to the parties’ obligations under the PSA is the Court’s approval of the motion. There can be no assurance that this motion will be approved by the Court or that the Court will not require modifications to the PSA as a condition to its approval.

Additionally, in February 2019, we entered into leases of all 21 operating CLA properties with Crème de la Crème ("Crème"), a premium, national early childhood education operator. These leases are contingent upon us delivering possession of the properties and include different financial terms based on whether or not CLA delivers Crème the assets associated with the in-place operations of the school. The leases have 20 year terms that commence upon Crème beginning operations of the schools. Additionally, Crème and the Company each have early termination rights based on school level economic performance.

There can be no assurance as to the outcome of the contemplated transaction or whether some or all of the properties will be transferred to Crème with in-place operations. If some or all of the schools are not transferred to Crème with in-place operations, there will be a delay in re-opening such schools and a corresponding reduction in near term rents from Crème.

Potential criminal proceedings against one of the Company's waterpark mortgagors and certain related parties could negatively impact the likelihood of repayment of the related mortgage loans secured by the waterpark and other collateral and have a material adverse effect on the Company's business, operating results, cash flows, financial condition and liquidity.
The Company has provided mortgage loans to SVV I, LLC ("SVV") and certain SVV affiliates, which were originally utilized by SVV to construct the Schlitterbahn Kansas City Waterpark and develop excess property adjacent to the waterpark in Kansas City, Kansas (the "Project"). The aggregate outstanding principal balance and related accrued interest receivable for the mortgage loans was $179.8 million at December 31, 2018, and SVV accounted for approximately 2% of total revenue for the fiscal year ended December 31, 2018. The loans are secured by the Project and certain additional waterpark properties operated by affiliates of SVV located in New Braunfels, Texas and South Padre Island, Texas. In March 2018, SVV, one of the owners of SVV and certain related parties were criminally indicted on multiple counts in connection with the investigation of a 2016 fatality that occurred at the waterpark. The indictments were subsequently dismissed in February 2019. Although the original indictments were dismissed, the state attorney general could continue to pursue the matter in criminal court.
An anticipated source of repayment on the mortgage loans is the issuance of sales tax revenue bonds ("STAR Bonds") which have been committed for the Project. The STAR Bonds are issuable in tranches as the development Project is completed and require additional approval from the State of Kansas and the local government prior to each issuance. There can be no assurance that the possibility of criminal proceedings would not delay or cause the State of Kansas or the local government to refuse to provide the necessary approval for future issuances. If additional STAR Bonds cannot

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be issued, the likelihood that SVV will be able to fully repay the mortgage loans will be negatively impacted. In addition, negative publicity may have a negative impact on attendance at the Schlitterbahn waterparks, which may reduce the funds available to SVV to repay the mortgage loans.
Schlitterbahn has experienced a cash flow shortage during its off-season and we have agreed to advance additional amounts under the mortgage loan to fund this shortfall including certain costs associated with the legal matters discussed above. We engaged an independent appraiser to perform a valuation of our underlying collateral and the valuation indicates that the collateral value is in excess of our mortgage loan. In the event that SVV defaults on the mortgage loans, the Company may need to restructure the mortgage loans, foreclose on the collateral underlying the loans or take other action with respect to the property, which could reduce the Company's revenue associated with the mortgage loans, require the Company to record a provision for loan loss or incur additional expenses. The occurrence of any of the foregoing events may have a material adverse effect on the Company's business, operating results, cash flows, financial condition and liquidity.
We are subject to risks relating to provisions included in some of our leases or financing arrangements with operators of our education properties pursuant to which such operators have the option to purchase leased properties or prepay notes relating to financed education properties.
Some of our leases or financing arrangements with education operators include provisions pursuant to which tenant operators may purchase leased properties and mortgagor operators may prepay notes relating to financed education properties, in each case, subject to option exercise payments or prepayment penalties. Some of these tenant or mortgagor operators may be able to obtain alternative financing on more economically favorable terms, in which case, such operators may choose to exercise their purchase option or prepayment right. If such operators exercise their purchase options or prepayment rights, we cannot provide any assurances that we would be able to redeploy the capital associated with these properties in other investments or that such investments would provide comparable returns, which could reduce our earnings going forward. Additionally, it can be difficult to forecast when tenants will exercise their purchase option or borrowers will prepay, which can create volatility in our earnings.

We have entered into management agreements to operate certain of our recreation anchored lodging properties and we could be adversely affected if such managers do not manage our recreation anchored lodging properties successfully.
To maintain our status as a REIT, we are generally not permitted to directly operate our recreation anchored lodging properties. As a result, we have entered into management agreements with third-party managers to operate certain of our recreation anchored lodging properties. For this reason, our ability to direct and control how our recreation anchored lodging properties are operated is less than if we were able to manage these properties directly. Under the terms of our management agreements, our ability to participate in operating decisions relating to our recreation anchored lodging properties is limited to certain matters, and we do not have the authority to require any such property to be operated in any particular manner. We do not supervise any of these managers or their personnel on a day-to-day basis. We cannot provide any assurances that the managers will manage our recreation anchored lodging properties in a manner that is consistent with their respective obligations under the applicable management agreement or our obligations under any franchise agreements. We could be materially and adversely affected if any of our managers fail to effectively manage revenues and expenses, provide quality services and amenities, or otherwise fail to manage our recreation anchored lodging properties in our best interests, and we may be financially responsible for the actions and inactions of the managers. In certain situations, we may terminate the management agreement. However, we can provide no assurances that we could identify a replacement manager, that the franchisor will consent to the replacement manager, or that the replacement manager will manage our recreation anchored lodging property successfully. A failure by our third-party managers to successfully manage our recreation anchored lodging properties could lead to an increase in our operating expenses or decrease in our revenue, or both.

Our indebtedness may affect our ability to operate our business and may have a material adverse effect on our financial condition and results of operations.
We have a significant amount of indebtedness. As of December 31, 2018, we had total debt outstanding of approximately $3.0 billion. Our indebtedness could have important consequences, such as:

limiting our ability to obtain additional financing to fund our working capital needs, acquisitions, capital

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expenditures or other debt service requirements or for other purposes;
limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service debt;
limiting our ability to compete with other companies who are not as highly leveraged, as we may be less capable of responding to adverse economic and industry conditions;
restricting us from making strategic acquisitions, developing properties or exploiting business opportunities;
restricting the way in which we conduct our business because of financial and operating covenants in the agreements governing our existing and future indebtedness;
exposing us to potential events of default (if not cured or waived) under financial and operating covenants contained in our debt instruments that could have a material adverse effect on our business, financial condition and operating results;
increasing our vulnerability to a downturn in general economic conditions or in pricing of our investments;
negatively impacting our credit ratings; and
limiting our ability to react to changing market conditions in our industry and in our customers’ industries.

In addition to our debt service obligations, our operations require substantial investments on a continuing basis. Our ability to make scheduled debt payments, to refinance our obligations with respect to our indebtedness and to fund capital and non-capital expenditures necessary to meet our remaining commitments on existing projects and maintain the condition of our assets, as well as to provide capacity for the growth of our business, depends on our financial and operating performance, which, in turn, is subject to prevailing economic conditions and financial, business, competitive, legal and other factors.

Subject to the restrictions in our unsecured revolving credit facility, our unsecured term loan facility and the debt instruments governing our existing senior notes, we may incur significant additional indebtedness, including additional secured indebtedness. Although the terms of our unsecured revolving credit facility, our unsecured term loan facility and the debt instruments governing our existing senior notes contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be significant. If new debt is added to our current debt levels, the risks described above could increase.

There are risks inherent in having indebtedness and using such indebtedness to fund acquisitions.
We currently use debt to fund portions of our operations and acquisitions. In a rising interest rate environment, the cost of our existing variable rate debt and any new debt will increase. We have used leverage to acquire properties and expect to continue to do so in the future. Although the use of leverage is common in the real estate industry, our use of debt exposes us to some risks. If a significant number of our tenants fail to make their lease payments and we do not have sufficient cash to pay principal and interest on the debt, we could default on our debt obligations. A small amount of our debt financing is secured by mortgages on our properties and we may enter into additional secured mortgage financing in the future. If we fail to meet our mortgage payments, the lenders could declare a default and foreclose on those properties.

Most of our debt instruments contain balloon payments which may adversely impact our financial performance and our ability to pay dividends.
Most of our financing arrangements require us to make a lump-sum or "balloon" payment at maturity. There can be no assurance that we will be able to refinance such debt on favorable terms or at all. To the extent we cannot refinance such debt on favorable terms or at all, we may be forced to dispose of properties on disadvantageous terms or pay higher interest rates, either of which would have an adverse impact on our financial performance and ability to pay dividends to our shareholders.


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We must obtain new financing in order to grow.
As a REIT, we are required to distribute at least 90% of our taxable net income to shareholders in the form of dividends. Other than deciding to make these dividends in our common shares, we are limited in our ability to use internal capital to acquire properties and must continually raise new capital in order to continue to grow and diversify our investment portfolio. Our ability to raise new capital depends in part on factors beyond our control, including conditions in equity and credit markets, conditions in the industries in which our tenants are engaged and the performance of real estate investment trusts generally. We continually consider and evaluate a variety of potential transactions to raise additional capital, but we cannot assure that attractive alternatives will always be available to us, nor that our share price will increase or remain at a level that will permit us to continue to raise equity capital publicly or privately.

Covenants in our debt instruments could adversely affect our financial condition and our acquisitions and development activities.
Some of our properties are subject to mortgages that contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage. Our unsecured revolving credit facility, term loan facility, senior notes and other loans that we may obtain in the future contain certain cross-default provisions as well as customary restrictions, requirements and other limitations on our ability to incur indebtedness, including covenants involving our maximum total debt to total asset value; maximum permitted investments; minimum tangible net worth; maximum secured debt to total asset value; maximum unsecured debt to eligible unencumbered properties; minimum unsecured interest coverage; and minimum fixed charge coverage. Our ability to borrow under our unsecured revolving credit facility and our term loan facility is also subject to compliance with certain other covenants. We also have senior notes issued in a private placement transaction that are subject to certain covenants. In addition, failure to comply with our covenants could cause a default under the applicable debt instrument, and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us, or be available only on unattractive terms. Additionally, our ability to satisfy current or prospective lenders' insurance requirements may be adversely affected if lenders generally insist upon greater insurance coverage against acts of terrorism than is available to us in the marketplace or on commercially reasonable terms.

We rely on debt financing, including borrowings under our unsecured revolving credit facility, term loan facility, issuances of debt securities and debt secured by individual properties, to finance our acquisition and development activities and for working capital. If we are unable to obtain financing from these or other sources, or to refinance existing indebtedness upon maturity, our financial condition and results of operations would likely be adversely affected.

Our real estate investments are concentrated in entertainment, recreation and education properties and a significant portion of those investments are in megaplex theatre properties, making us more vulnerable economically than if our investments were more diversified.
We acquire, develop or finance entertainment, recreation and education properties. A significant portion of our investments are in megaplex theatre properties. Although we are subject to the general risks inherent in concentrating investments in real estate, the risks resulting from a lack of diversification become even greater as a result of investing primarily in entertainment, recreation and education properties. These risks are further heightened by the fact that a significant portion of our investments are in megaplex theatre properties. Although a downturn in the real estate industry could significantly adversely affect the value of our properties, a downturn in the entertainment, recreation and education industries could compound this adverse effect. These adverse effects could be more pronounced than if we diversified our investments to a greater degree outside of entertainment, recreation and education properties or, more particularly, outside of megaplex theatre properties.

If we fail to qualify as a REIT, we would be taxed as a corporation, which would substantially reduce funds available for payment of dividends to our shareholders.
If we fail to qualify as a REIT for federal income tax purposes, we will be taxed as a corporation. We are organized and believe we qualify as a REIT, and intend to operate in a manner that will allow us to continue to qualify as a REIT. However, we cannot provide any assurance that we have always qualified and will remain qualified in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), on which there are only limited judicial and administrative interpretations, and depends on facts and circumstances not entirely within our control. In addition,

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future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws, the application of the tax laws to our qualification as a REIT or the federal income tax consequences of that qualification.

If we were to fail to qualify as a REIT in any taxable year (including any prior taxable year for which the statute of limitations remains open), we would face tax consequences that could substantially reduce the funds available for the service of our debt and payment of dividends:

we would not be allowed a deduction for dividends paid to shareholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;
we could be subject to increased state and local taxes;
unless we are entitled to relief under statutory provisions, we could not elect to be treated as a REIT for four taxable years following the year in which we were disqualified; and
we could be subject to tax penalties and interest.

In addition, if we fail to qualify as a REIT, we will no longer be required to pay dividends. As a result of these factors, our failure to qualify as a REIT could adversely affect the market price for our shares.

Even if we remain qualified for taxation as a REIT under the Internal Revenue Code, we may face other tax liabilities that reduce our funds available for payment of dividends to our shareholders.
Even if we remain qualified for taxation as a REIT under the Internal Revenue Code, we may be subject to federal, state and local taxes on our income and assets, including taxes on any undistributed income, excise taxes, state or local income, property and transfer taxes, and other taxes. Also, some jurisdictions may in the future limit or eliminate favorable income tax deductions, including the dividends paid deduction, which could increase our income tax expense. In addition, in order to meet the requirements for qualification and taxation as a REIT under the Internal Revenue Code, prevent the recognition of particular types of non-cash income, or avert the imposition of a 100% tax that applies to specified gains derived by a REIT from dealer property or inventory, we may hold or dispose of some of our assets and conduct some of our operations through our TRSs or other subsidiary corporations that will be subject to corporate level income tax at regular rates. In addition, while we intend that our transactions with our TRSs will be conducted on arm's length bases, we may be subject to a 100% excise tax on a transaction that the Internal Revenue Service ("IRS") or a court determines was not conducted at arm's length. Any of these taxes would decrease cash available for distribution to our shareholders.

If arrangements involving our TRSs fail to comply as intended with the REIT qualification and taxation rules, we may fail to qualify for taxation as a REIT under the Internal Revenue Code or be subject to significant penalty taxes.
We lease some of our recreation anchored lodging properties to our TRSs pursuant to arrangements that, under the Internal Revenue Code, are intended to qualify the rents we receive from our TRSs as income that satisfies the REIT gross income tests. We also intend that our transactions with our TRSs be conducted on arm's length bases so that we and our TRSs will not be subject to penalty taxes under the Internal Revenue Code applicable to mispriced transactions. While relief provisions can sometimes excuse REIT gross income test failures, significant penalty taxes may still be imposed.

For our TRS arrangements to comply as intended with the REIT qualification and taxation rules under the Internal Revenue, a number of requirements must be satisfied, including:

our TRSs may not directly or indirectly operate or manage a lodging facility, as defined by the Internal Revenue Code;
the leases to our TRSs must be respected as true leases for federal income tax purposes and not as service contracts, partnerships, joint ventures, financings or other types of arrangements;
the leased properties must constitute qualified lodging facilities (including customary amenities and facilities) under the Internal Revenue Code;
our leased properties must be managed and operated on behalf of the TRSs by independent contractors who are less than 35% affiliated with us and who are actively engaged (or have affiliates so engaged) in the trade

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or business of managing and operating qualified lodging facilities for persons unrelated to us; and
the rental and other terms of the leases must be arm's length.

We cannot be sure that the IRS or a court will agree with our assessment that our TRS arrangements comply as intended with REIT qualification and taxation rules. If arrangements involving our TRSs fail to comply as we intended, we may fail to qualify for taxation as a REIT under the Internal Revenue Code or be subject to significant penalty taxes.

We will depend on distributions from our direct and indirect subsidiaries to service our debt and pay dividends to our shareholders. The creditors of these subsidiaries, and our direct creditors, are entitled to amounts payable to them before we pay any dividends to our shareholders.
Substantially all of our assets are held through our subsidiaries. We depend on these subsidiaries for substantially all of our cash flow. The creditors of each of our direct and indirect subsidiaries are entitled to payment of that subsidiary's obligations to them, when due and payable, before distributions may be made by that subsidiary to us. In addition, our creditors, whether secured or unsecured, are entitled to amounts payable to them before we may pay any dividends to our shareholders. Thus, our ability to service our debt obligations and pay dividends to holders of our common and preferred shares depends on our subsidiaries' ability first to satisfy their obligations to their creditors and then to pay distributions to us and our ability to satisfy our obligations to our direct creditors. Our subsidiaries are separate and distinct legal entities and have no obligations, other than limited guaranties of certain of our debt, to make funds available to us.

Our development financing arrangements expose us to funding and completion risks.
Our ability to meet our construction financing obligations which we have undertaken or may enter into in the future depends on our ability to obtain equity or debt financing in the required amounts. There is no assurance we can obtain this financing or that the financing rates available will ensure a spread between our cost of capital and the rent or interest payable to us under the related leases or mortgage notes receivable. As a result, we could fail to meet our construction financing obligations or decide to cease such funding which, in turn, could result in failed projects and penalties, each of which could have a material adverse impact on our results of operations and business.

We have a limited number of employees and loss of personnel could harm our operations and adversely affect the value of our shares.
We had 64 full-time employees as of December 31, 2018 and, therefore, the impact we may feel from the loss of an employee may be greater than the impact such a loss would have on a larger organization. We are dependent on the efforts of the following individuals: Gregory K. Silvers, our President and Chief Executive Officer; Mark A. Peterson, our Executive Vice President and Chief Financial Officer; Craig L. Evans, our Senior Vice President, General Counsel and Secretary; Michael L. Hirons, our Senior Vice President - Strategy & Asset Management; and Tonya L. Mater, our Vice President and Chief Accounting Officer. While we believe that we could find replacements for our personnel, the loss of their services could harm our operations and adversely affect the value of our shares.

We are subject to risks associated with the employment of personnel by managers of our recreation anchored lodging properties.
Managers of our recreation anchored lodging properties are responsible for hiring and maintaining the labor force as each of these properties. Although we do not directly employ or manage employees at our recreation anchored lodging properties, we are subject to many of the costs and risks associated with such labor force. From time to time, the operations of our recreation anchored lodging properties may be disrupted as a result of strikes, lockouts, public demonstrations or other negative actions and publicity. We may also incur increased legal costs and indirect labor costs as a result of contract disputes and other events. The resolution of labor disputes or renegotiated labor contracts could lead to increased labor costs, either by increases in wages or benefits or by changes in work rules.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer. Our service providers, tenants and managers of our recreation anchored lodging properties and their business partners are exposed to similar risks.
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our tenants, managers of our recreation anchored lodging properties and other customers and personally identifiable information of our employees, in our facility and on our network. Despite our security measures, our

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information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our network and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence, which could adversely affect our business. Our service providers, tenants, managers of our recreation anchored lodging properties and other customers and their business partners are exposed to similar risks and the occurrence of a security breach or other disruption with respect to their information technology and infrastructure could, in turn, have a material adverse impact on our results of operations and business.

Changes in accounting standards issued by the Financial Accounting Standards Board ("FASB") or other standard-setting bodies may adversely affect our business.
Our financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or expanded. From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB and the SEC. It is possible that accounting standards we are required to adopt may require changes to the current accounting treatment that we apply to our consolidated financial statements and may require us to make significant changes to our systems. In particular, the amended guidance for lease accounting will require lessees to capitalize substantially all leases on their balance sheet by recognizing a lessee's rights and obligations. Under the new lease accounting rules, many lessees that account for certain leases on an "off balance sheet" basis will be required to account for such leases "on balance sheet." This change will remove many of the differences in the way companies account for owned property and leased property and could have a material effect on various aspects of our tenants' businesses, including the appearance of their credit quality and other factors they consider in deciding whether to own or lease properties. The new lease accounting rules could cause lessees to prefer shorter lease terms in an effort to reduce the leasing liability required to be recorded on their balance sheet or some companies may decide to prefer property ownership to leasing. In addition, we are the lessee on certain land lease arrangements as well as our corporate office lease. We are required to record the rights and obligations associated with these leases and we cannot predict how this increase in our liabilities will impact our ability to obtain additional financing. Changes in accounting standards, including the new lease accounting rules, could result in a material adverse impact on our business, financial condition and results of operations.

Risks That Apply to Our Real Estate Business

Real estate income and the value of real estate investments fluctuate due to various factors.
The value of real estate fluctuates depending on conditions in the general economy and the real estate business. These conditions may also limit our revenues and available cash. The rents, interest and other payments we receive and the occupancy levels at our properties may decline as a result of adverse changes in any of the factors that affect the value of our real estate. If our revenues decline, we generally would expect to have less cash available to pay our indebtedness and distribute to our shareholders. In addition, some of our unreimbursed costs of owning real estate may not decline when the related rents decline.

The factors that affect the value of our real estate include, among other things:

international, national, regional and local economic conditions;
consequences of any armed conflict involving, or terrorist attack against, the United States or Canada;
the threat of domestic terrorism or pandemic outbreaks, which could cause customers of our tenants to avoid public places where large crowds are in attendance, such as megaplex theatres or recreational properties operated by our tenants or recreation anchored lodging properties operated by our managers;
our ability or the ability of our tenants or managers to secure adequate insurance;
natural disasters, such as earthquakes, hurricanes and floods, which could exceed the aggregate limits of insurance coverage;
local conditions such as an oversupply of space or lodging properties or a reduction in demand for real estate in the area;
competition from other available space or, in the case of our recreation anchored lodging properties, competition from other lodging properties or alternative lodging options in our markets;
whether tenants and users such as customers of our tenants consider a property attractive;

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the financial condition of our tenants, mortgagors and managers, including the extent of bankruptcies or defaults;
whether we are able to pass some or all of any increased operating costs through to tenants or other customers;
how well we manage our properties or how well the managers of our recreation anchored lodging properties manage those properties;
in the case of our recreation anchored lodging properties, dependence on demand from business and leisure travelers, which may fluctuate and be seasonal;
fluctuations in interest rates;
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;
government regulation;
availability of financing on acceptable terms or at all;
potential liability under environmental or other laws or regulations; and
general competitive factors.

The rents, interest and other payments we receive and the occupancy levels at our properties may decline as a result of adverse changes in any of these factors. If our revenues decline, we generally would expect to have less cash available to pay our indebtedness and distribute to our shareholders. In addition, some of our unreimbursed costs of owning real estate may not decline when the related rents decline.

There are risks associated with owning and leasing real estate.
Although our lease terms in most cases, obligate the tenants to bear substantially all of the costs of operating the properties and our managers to manage such costs, investing in real estate involves a number of risks, including:

the risk that tenants will not perform under their leases or that managers will not perform under their management agreements, reducing our income from such leases or properties under such management;
we may not always be able to lease properties at favorable rates or certain tenants may require significant capital expenditures by us to conform existing properties to their requirements;
we may not always be able to sell a property when we desire to do so at a favorable price; and
changes in tax, zoning or other laws could make properties less attractive or less profitable.

If a tenant fails to perform on its lease covenants or a manager fails to perform on its management covenants, that would not excuse us from meeting any debt obligation secured by the property and could require us to fund reserves in favor of our lenders, thereby reducing funds available for payment of dividends. We cannot be assured that tenants or managers will elect to renew their leases or management agreements when the terms expire. If a tenant or manager does not renew its lease or agreement or if a tenant or a manager defaults on its lease or management obligations, there is no assurance we could obtain a substitute tenant or manager on acceptable terms. If we cannot obtain another quality tenant or manager, we may be required to modify the property for a different use, which may involve a significant capital expenditure and a delay in re-leasing the property or obtaining a new manager.

Some potential losses are not covered by insurance.
Our leases with tenants and agreements with managers of our recreation anchored lodging properties require the tenants and managers to carry comprehensive liability, casualty, workers' compensation, extended coverage and rental loss insurance on our properties, as applicable. We believe the required coverage is of the type, and amount, customarily obtained by an owner of similar properties. We believe all of our properties are adequately insured. However, we are exposed to risks that the insurance coverage levels required under our leases with tenants and agreements with managers of our recreation anchored lodging properties may be inadequate, and these risks may be increased as we expand our portfolio into experiential properties that may present more risk of loss as compared to properties in our existing portfolio. In addition, there are some types of losses, such as catastrophic acts of nature, acts of war or riots, for which we, our tenants or managers of our recreation anchored lodging properties cannot obtain insurance at an acceptable cost. If there is an uninsured loss or a loss in excess of insurance limits, we could lose both the revenues generated by the affected property and the capital we have invested in the property. We would, however, remain obligated to repay

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any mortgage indebtedness or other obligations related to the property. In addition, the cost of insurance protection against terrorist acts has risen dramatically over the years. There can be no assurance our tenants or managers of our recreation anchored lodging properties will be able to obtain terrorism insurance coverage, as applicable, or that any coverage they do obtain will adequately protect our properties against loss from terrorist attack.

Joint ventures may limit flexibility with jointly owned investments.
We may continue to acquire or develop properties in joint ventures with third parties when those transactions appear desirable. We would not own the entire interest in any property acquired by a joint venture. Major decisions regarding a joint venture property may require the consent of our partner. If we have a dispute with a joint venture partner, we may feel it necessary or become obligated to acquire the partner's interest in the venture. However, we cannot ensure that the price we would have to pay or the timing of the acquisition would be favorable to us. If we own less than a 50% interest in any joint venture, or if the venture is jointly controlled, the assets and financial results of the joint venture may not be reportable by us on a consolidated basis. To the extent we have commitments to, or on behalf of, or are dependent on, any such “off-balance sheet” arrangements, or if those arrangements or their properties or leases are subject to material contingencies, our liquidity, financial condition and operating results could be adversely affected by those commitments or off-balance sheet arrangements.

Our multi-tenant properties expose us to additional risks.
Our entertainment retail centers in Colorado, New York, California, and Ontario, Canada, and similar properties we may seek to acquire or develop in the future, involve risks not typically encountered in the purchase and lease-back of real estate properties which are operated by a single tenant. The ownership or development of multi-tenant retail centers could expose us to the risk that a sufficient number of suitable tenants may not be found to enable the centers to operate profitably and provide a return to us. This risk may be compounded by the failure of existing tenants to satisfy their obligations due to various factors, including economic downturns. These risks, in turn, could cause a material adverse impact to our results of operations and business.

Retail centers are also subject to tenant turnover and fluctuations in occupancy rates, which could affect our operating results. Multi-tenant retail centers also expose us to the risk of potential “CAM slippage,” which may occur when the actual cost of taxes, insurance and maintenance at the property exceeds the CAM fees paid by tenants.

Failure to comply with the Americans with Disabilities Act and other laws could result in substantial costs.
Most of our properties must comply with the Americans with Disabilities Act (“ADA”). The ADA requires that public accommodations reasonably accommodate individuals with disabilities and that new construction or alterations be made to commercial facilities to conform to accessibility guidelines. Failure to comply with the ADA can result in injunctions, fines, damage awards to private parties and additional capital expenditures to remedy noncompliance. Our leases with tenants and agreements with managers of our recreation anchored lodging properties require them to comply with the ADA.

Our properties are also subject to various other federal, state and local regulatory requirements. We do not know whether existing requirements will change or whether compliance with future requirements will involve significant unanticipated expenditures. Although these expenditures would be the responsibility of our tenants in most cases and for our managers to oversee at our recreation anchored lodging properties, if these tenants or managers fail to perform these obligations, we may be required to do so.

Potential liability for environmental contamination could result in substantial costs.
Under federal, state and local environmental laws, we may be required to investigate and clean up any release of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or actual responsibility, simply because of our current or past ownership of the real estate. If unidentified environmental problems arise, we may have to make substantial payments, which could adversely affect our cash flow and our ability to service our debt and pay dividends to our shareholders. This is because:

as owner, we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination;
the law may impose clean-up responsibility and liability regardless of whether the owner or operator knew

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of or caused the contamination;
even if more than one person is responsible for the contamination, each person who shares legal liability under environmental laws may be held responsible for all of the clean-up costs; and
governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs.

These costs could be substantial and in extreme cases could exceed the value of the contaminated property. The presence of hazardous substances or petroleum products or the failure to properly remediate contamination may adversely affect our ability to borrow against, sell or lease an affected property. In addition, some environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination. Most of our loan agreements require the Company or a subsidiary to indemnify the lender against environmental liabilities. Our leases with tenants and agreements with managers of our recreation anchored lodging properties require them to operate the properties in compliance with environmental laws and to indemnify us against environmental liability arising from the operation of the properties. We believe all of our properties are in material compliance with environmental laws. However, we could be subject to strict liability under environmental laws because we own the properties. There is also a risk that tenants may not satisfy their environmental compliance and indemnification obligations under the leases or other agreements. Any of these events could substantially increase our cost of operations, require us to fund environmental indemnities in favor of our lenders, limit the amount we could borrow under our unsecured revolving credit facility and term loan facility and reduce our ability to service our debt and pay dividends to shareholders.

Real estate investments are relatively illiquid.
We have previously disclosed our intent to undertake certain asset dispositions. In addition, we may desire to sell other properties in the future because of changes in market conditions, poor tenant performance or default of any mortgage we hold, or to avail ourselves of other opportunities. We may also be required to sell a property in the future to meet debt obligations or avoid a default. Specialty real estate projects such as we have cannot always be sold quickly, and we cannot assure you that we could always obtain a favorable price. In addition, the Internal Revenue Code limits our ability to sell our properties. We may be required to invest in the restoration or modification of a property before we can sell it. The inability to respond promptly to changes in the performance of our property portfolio could adversely affect our financial condition and ability to service our debt and pay dividends to our shareholders.

There are risks in owning assets outside the United States.
Our properties in Canada are subject to the risks normally associated with international operations. The rentals under our Canadian leases are payable in Canadian dollars ("CAD"), which could expose us to losses resulting from fluctuations in exchange rates to the extent we have not hedged our position. Canadian real estate and tax laws are complex and subject to change, and we cannot assure you we will always be in compliance with those laws or that compliance will not expose us to additional expense. We may also be subject to fluctuations in Canadian real estate values or markets or the Canadian economy as a whole, which may adversely affect our Canadian investments.

Additionally, we have made investments in projects located in China and may enter other international markets, which may have similar risks as described above as well as unique risks associated with a specific country.

There are risks in owning or financing properties for which the tenant's, mortgagor's, or our operations may be impacted by weather conditions and climate change.
We have acquired and financed ski properties and expect to do so in the future. The operators of these properties, our tenants or mortgagors, are dependent upon the operations of the properties to pay their rents and service their loans. The ski property operator's ability to attract visitors is influenced by weather conditions and climate change in general, each of which may impact the amount of snowfall during the ski season. Adverse weather conditions may discourage visitors from participating in outdoor activities. In addition, unseasonably warm weather may result in inadequate natural snowfall, which increases the cost of snowmaking, and could render snowmaking wholly or partially ineffective in maintaining quality skiing conditions and attracting visitors. Excessive natural snowfall may materially increase the costs incurred for grooming trails and may also make it difficult for visitors to obtain access to ski properties. We also own and finance attractions (including waterparks) which would also be subject to risks relating to weather conditions such as in the case of waterparks and amusement parks, excessive rainfall or unseasonable temperatures. Prolonged

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periods of adverse weather conditions, or the occurrence of such conditions during peak visitation periods, could have a material adverse effect on the operator's financial results and could impair the ability of the operator to make rental or other payments or service our loans.

We face risks associated with the development, redevelopment and expansion of properties and the acquisition of other real estate related companies.
We may develop, redevelop or expand new or existing properties or acquire other real estate related companies, and these activities are subject to various risks. We may not be successful in pursuing such development or acquisition opportunities. In addition, newly developed or redeveloped/expanded properties or newly acquired companies may not perform as well as expected. We are subject to other risks in connection with any such development or acquisition activities, including the following:

we may not succeed in completing developments or consummating desired acquisitions on time;
we may face competition in pursuing development or acquisition opportunities, which could increase our costs;
we may encounter difficulties and incur substantial expenses in integrating acquired properties into our operations and systems and, in any event, the integration may require a substantial amount of time on the part of both our management and employees and therefore divert their attention from other aspects of our business;
we may undertake developments or acquisitions in new markets or industries where we do not have the same level of market knowledge, which may expose us to unanticipated risks in those markets and industries to which we are unable to effectively respond, such as an inability to attract qualified personnel with knowledge of such markets and industries;
we may incur construction costs in connection with developments, which may be higher than projected, potentially making the project unfeasible or unprofitable;
we may incur unanticipated capital expenditures in order to maintain or improve acquired properties;
we may be unable to obtain zoning, occupancy or other governmental approvals;
we may experience delays in receiving rental payments for developments that are not completed on time;
our developments or acquisitions may not be profitable;
we may need the consent of third parties such as anchor tenants, mortgage lenders and joint venture partners, and those consents may be withheld;
we may incur adverse tax consequences if we fail to qualify as a REIT for U.S. federal income tax purposes following an acquisition;
we may be subject to risks associated with providing mortgage financing to third parties in connection with transactions, including any default under such mortgage financing;
we may face litigation or other claims in connection with, or as a result of, acquisitions, including claims from terminated employees, tenants, former stockholders or other third parties;
the market price of our common shares, preferred shares and debt securities may decline, particularly if we do not achieve the perceived benefits of any acquisition as rapidly or to the extent anticipated by securities or industry analysts or if the effect of an acquisition on our financial condition, results of operations and cash flows is not consistent with the expectations of these analysts;
we may issue shares in connection with acquisitions resulting in dilution to our existing shareholders; and
we may assume debt or other liabilities in connection with acquisitions.

In addition, there is no assurance that planned third-party financing related to development and acquisition opportunities will be provided on a timely basis or at all, thus increasing the risk that such opportunities are delayed or fail to be completed as originally contemplated. We may also abandon development or acquisition opportunities that we have begun pursuing and consequently fail to recover expenses already incurred and have devoted management time to a matter not consummated. In some cases, we may agree to lease or other financing terms for a development project in advance of completing and funding the project, in which case we are exposed to the risk of an increase in our cost of capital during the interim period leading up to the funding, which can reduce, eliminate or result in a negative spread between our cost of capital and the payments we expect to receive from the project. Furthermore, our acquisitions of new properties or companies will expose us to the liabilities of those properties or companies, some of which we may not be aware at the time of acquisition. In addition, development of our existing properties presents similar risks. If a

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development or acquisition is unsuccessful, either because it is not meeting our expectations or was not completed according to our plans, we could lose our investment in the development or acquisition.

Risks That May Affect the Market Price of Our Shares

We cannot assure you we will continue paying cash dividends at current rates.
Our dividend policy is determined by our Board of Trustees. Our ability to continue paying dividends on our common shares, to pay dividends on our preferred shares at their stated rates or to increase our common share dividend rate will depend on a number of factors, including our liquidity, our financial condition and results of future operations, the performance of lease and mortgage terms by our tenants and customers, our ability to acquire, finance and lease additional properties at attractive rates, and provisions in our loan covenants. If we do not maintain or increase our common share dividend rate, that could have an adverse effect on the market price of our common shares and possibly our preferred shares. Furthermore, if the Board of Trustees decides to pay dividends on our common shares partially or substantially all in common shares, that could have an adverse effect on the market price of our common shares and possibly our preferred shares.

Market interest rates may have an effect on the value of our shares.
One of the factors that investors may consider in deciding whether to buy or sell our common shares or preferred shares is our dividend rate as a percentage of our share price, relative to market interest rates. If market interest rates continue to increase, prospective investors may desire a higher dividend rate on our common shares or seek securities paying higher dividends or interest.

Market prices for our shares may be affected by perceptions about the financial health or share value of our tenants, mortgagors and managers or the performance of REIT stocks generally.
To the extent any of our tenants or customers, or their competition, report losses or slower earnings growth, take charges against earnings or enter bankruptcy proceedings, the market price for our shares could be adversely affected. The market price for our shares could also be affected by any weakness in the performance of REIT stocks generally or weakness in any of the sectors in which our tenants and customers operate.

Limits on changes in control may discourage takeover attempts which may be beneficial to our shareholders.
There are a number of provisions in our Declaration of Trust and Bylaws and under Maryland law and agreements we have with others, any of which could make it more difficult for a party to make a tender offer for our shares or complete a takeover of the Company which is not approved by our Board of Trustees. These include:

a limit on beneficial ownership of our shares, which acts as a defense against a hostile takeover or acquisition of a significant or controlling interest, in addition to preserving our REIT status;
the ability of the Board of Trustees to issue preferred or common shares, to reclassify preferred or common shares, and to increase the amount of our authorized preferred or common shares, without shareholder approval;
limits on the ability of shareholders to remove trustees without cause;
requirements for advance notice of shareholder proposals at shareholder meetings;
provisions of Maryland law restricting business combinations and control share acquisitions not approved by the Board of Trustees and unsolicited takeovers;
provisions of Maryland law protecting corporations (and by extension REITs) against unsolicited takeovers by limiting the duties of the trustees in unsolicited takeover situations;
provisions in Maryland law providing that the trustees are not subject to any higher duty or greater scrutiny than that applied to any other director under Maryland law in transactions relating to the acquisition or potential acquisition of control;
provisions of Maryland law creating a statutory presumption that an act of the trustees satisfies the applicable standards of conduct for trustees under Maryland law;
provisions in loan or joint venture agreements putting the Company in default upon a change in control; and
provisions of our compensation arrangements with our employees calling for severance compensation and vesting of equity compensation upon termination of employment upon a change in control or certain events of the employees' termination of service.

25



Any or all of these provisions could delay or prevent a change in control of the Company, even if the change was in our shareholders' interest or offered a greater return to our shareholders.

We may change our policies without obtaining the approval of our shareholders.
Our operating and financial policies, including our policies with respect to acquiring or financing real estate or other companies, growth, operations, indebtedness, capitalization and dividends, are exclusively determined by our Board of Trustees. Accordingly, our shareholders do not control these policies.

Dilution could affect the value of our shares.
Our future growth will depend in part on our ability to raise additional capital. If we raise additional capital through the issuance of equity securities, the interests of holders of our common shares could be diluted. Likewise, our Board of Trustees is authorized to cause us to issue preferred shares in one or more series, the holders of which would be entitled to dividends and voting and other rights as our Board of Trustees determines, and which could be senior to or convertible into our common shares. Accordingly, an issuance by us of preferred shares could be dilutive to or otherwise adversely affect the interests of holders of our common shares. As of December 31, 2018, our Series C preferred shares are convertible, at each of the holder's option, into our common shares at a conversion rate of 0.3954 common shares per $25.00 liquidation preference, which is equivalent to a conversion price of approximately $63.23 per common share (subject to adjustment in certain events). Additionally, as of December 31, 2018, our Series E preferred shares are convertible, at each of the holder's option, into our common shares at a conversion rate of 0.4686 common shares per $25.00 liquidation preference, which is equivalent to a conversion price of approximately $53.35 per common share (subject to adjustment in certain events). Under certain circumstances in connection with a change in control of the Company, holders of our Series G preferred shares may elect to convert some or all of their Series G preferred shares into a number of our common shares per Series G preferred share equal to the lesser of (a) the $25.00 per share liquidation preference, plus accrued and unpaid dividends divided by the market value of our common shares or (b) 0.7389 shares. Depending upon the number of Series C, Series E and Series G preferred shares being converted at one time, a conversion of Series C, Series E and Series G preferred shares could be dilutive to or otherwise adversely affect the interests of holders of our common shares. In addition, we may issue a significant amount of equity securities in connection with acquisitions or investments, with or without seeking shareholder approval, which could result in significant dilution to our existing shareholders.

Future offerings of debt or equity securities, which may rank senior to our common shares, may adversely affect the market price of our common shares.
If we decide to issue debt securities in the future, which would rank senior to our common shares, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any equity securities or convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common shares and may result in dilution to owners of our common shares. We and, indirectly, our shareholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common shares will bear the risk of our future offerings reducing the market price of our common shares and diluting the value of their shareholdings in us.

Changes in foreign currency exchange rates may have an impact on the value of our shares.
The functional currency for our Canadian operations is the Canadian dollar. As a result, our future operating results could be affected by fluctuations in the exchange rate between U.S. and Canadian dollars, which in turn could affect our share price. We have attempted to mitigate our exposure to Canadian currency exchange risk by entering into foreign currency exchange contracts to hedge in part our exposure to exchange rate fluctuations. Foreign currency derivatives are subject to future risk of loss. We do not engage in purchasing foreign exchange contracts for speculative purposes.

Additionally, we have made investments in China and may enter other international markets which pose similar currency fluctuation risks as described above.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our shares.

26


At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be changed, possibly with retroactive effect. In addition, there have been a number of proposals in Congress with respect to tax laws, including proposals to adopt a flat tax or replace the income tax system with a national sales tax or value-added tax.

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act made many significant changes to the U.S. federal income tax laws applicable to businesses and their owners, including REITs and their shareholders. Pursuant to this legislation, as of January 1, 2018, (1) the federal income tax rate applicable to corporations was reduced to 21%, (2) the highest marginal individual income tax rate was reduced to 37%, and (3) the corporate alternative minimum tax was repealed. In addition, individuals, estates and trusts may deduct up to 20% of certain pass-through income, including ordinary REIT dividends that are not “capital gain dividends” or “qualified dividend income,” subject to complex limitations. For taxpayers qualifying for the full deduction, the effective maximum tax rate on ordinary REIT dividends would be 29.6% (through taxable years ending in 2025). The maximum rate of withholding with respect to our distributions to non-U.S. shareholders that are treated as attributable to gains from the sale or exchange of U.S. real property interests was also reduced from 35% to 21%. The deduction of net interest expense is limited for all businesses, other than certain electing businesses, including real estate businesses, which limitation could adversely affect our taxable REIT subsidiaries.

While the changes in the Tax Cuts and Jobs Act generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Internal Revenue Code may have unanticipated effects on us or our shareholders. Moreover, Congressional leaders have recognized that the process of adopting extensive tax legislation in a short amount of time without hearings and substantial time for review is likely to have led to drafting errors, issues needing clarification and unintended consequences that will have to be reviewed in subsequent tax legislation. To date, the IRS has issued only limited guidance on the changes made in the Tax Cuts and Jobs Act. It is not clear at this time whether Congress will address these issues or when the IRS will issue additional administrative guidance.

We cannot predict if or when any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect retroactively. We and our shareholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation. Furthermore, any proposals seeking broader reform of U.S. federal income tax laws, if enacted, could change the federal income tax laws applicable to REITs, subject us to federal tax or reduce or eliminate the current deduction for dividends paid to our shareholders, any of which could negatively affect the market for our shares.

Item 1B. Unresolved Staff Comments

There are no unresolved comments from the staff of the SEC required to be disclosed herein as of the date of this Annual Report on Form 10-K.


27


Item 2. Properties

As of December 31, 2018, our real estate portfolio consisted of investments in each of our four operating segments. Except as otherwise noted, all of the real estate investments listed below are owned or ground leased directly by us.

The following table sets forth our owned properties (excludes properties under development, land held for development and properties securing our mortgage notes) listed by segment, gross square footage (except for certain attraction properties where such number is not meaningful), percentage leased and total rental revenue for the year ended December 31, 2018 (dollars in thousands). At certain properties included below, we are the tenant under third-party ground leases and have assumed responsibility for performing the obligations thereunder. However, pursuant to the facility leases, the tenants are responsible for performing substantially all of our obligations under the ground leases.

 
Number of Properties
 
Building Gross Square Footage
 
Percentage Leased
 
Rental Revenue for the Year
Ended December 31, 2018
 
% of Company's Rental Revenue
Entertainment
 
 
 
 
 
 
 
 
 
Megaplex Theatres
152

 
10,679,882

 
 
 
$
229,413

 
41.2
%
ERCs/Retail
7

 
2,071,566

 
 
 
61,395

 
11.0
%
Other Entertainment
11

 
690,369

 
 
 
10,974

 
2.0
%
Total Entertainment
170

 
13,441,817

 
98.4
%
 
301,782

 
54.2
%
Recreation
 
 
 
 
 
 
 
 
 
Ski Properties
5

 
608,255

 
 
 
24,981

 
4.5
%
Attractions
18

 
952,527

 
 
 
50,973

 
9.2
%
Golf Entertainment Complexes
31

 
1,974,304

 
 
 
59,533

 
10.7
%
Other Recreation
10

 
498,995

 
 
 
7,335

 
1.3
%
Total Recreation
64

 
4,034,081

 
100
%
 
142,822

 
25.7
%
Education
 
 
 
 
 
 
 
 
 
Public Charter Schools
51

 
2,823,965

 
 
 
47,905

 
8.6
%
Early Childhood Education
68

 
1,168,962

 
 
 
25,064

 
4.5
%
Private Schools
14

 
710,667

 
 
 
29,673

 
5.3
%
Total Education
133

 
4,703,594

 
97.8
%
 
102,642

 
18.4
%
Other
1

 

 
100
%
 
9,117

 
1.7
%
 
 
 
 
 
 
 
 
 
 
Total
368

 
22,179,492

 
98.6
%
 
$
556,363

 
100.0
%



28


The following table sets forth lease expirations regarding EPR’s owned megaplex theatre portfolio as of December 31, 2018 (dollars in thousands):
Megaplex Theatre Portfolio
 
Year
 

Number of
Properties
 
Square
Footage
 
Revenue for the Year
Ended December 31, 2018
 
% of Company's Total
Revenue
 
2019
 
3

 
303,831

 
$
6,511

 
1
%
 
2020
 
3

 
186,512

 
3,986

 
1
%
 
2021
 
9

 
643,849

 
11,106

 
2
%
 
2022
 
10

 
822,146

 
20,573

 
3
%
 
2023
 
9

 
892,232

 
21,257

 
3
%
 
2024
 
14

 
1,133,549

 
28,183

 
4
%
 
2025
 
5

 
287,555

 
10,028

 
2
%
 
2026
 
8

 
500,648

 
16,354

 
2
%
 
2027
 
17

 
992,828

 
24,184

 
4
%
 
2028
 
14

 
992,578

 
27,451

 
4
%
 
2029
 
10

 
714,593

 
12,486

 
2
%
 
2030
 
16

 
1,323,531

 
21,594

 
3
%
 
2031
 
14

 
1,025,239

 
22,847

 
3
%
 
2032
 
7

 
344,370

 
6,565

 
1
%
 
2033
 
9

 
462,822

 
6,708

 
1
%
 
2034
 
2

 
111,493

 
1,977

 
%
 
2035
 
2

 
51,037

 
2,297

 
%
 
2036
 
2

 
103,164

 
2,393

 
%
 
2037
 
3

 
310,360

 
7,726

 
1
%
 
2038
 
2

 
116,464

 
2,294

 
%
 
 
 
159

 
11,318,801

 
$
256,520

 
37
%
 



























29


The following table sets forth lease expirations regarding EPR’s owned recreation portfolio as of December 31, 2018, excluding two properties recorded as investment in joint ventures (dollars in thousands):
 
Recreation Portfolio
 
 
Year
 

Number of
Properties
 
Square
Footage
 
Revenue for the Year
Ended December 31, 2018
 
% of Company's Total
Revenue
 
2019
 

 

 
$

 
%
 
2020
 

 

 

 
%
 
2021
 

 

 

 
%
 
2022
 

 

 

 
%
 
2023
 

 

 

 
%
 
2024
 

 

 

 
%
 
2025
 
1

 

 
1,850

 
%
 
2026
 
1

 

 
4,922

 
1
%
 
2027
 
2

 
239,547

 
17,715

 
2
%
 
2028
 

 

 

 
%
 
2029
 
2

 

 
3,068

 
%
 
2030
 

 

 

 
%
 
2031
 

 

 

 
%
 
2032
 
5

 
183,723

 
6,235

 
1
%
 
2033
 
2

 
64,100

 
3,726

 
1
%
 
2034
 
7

 
399,205

 
11,706

 
2
%
 
2035
 
13

 
1,481,200

 
41,380

 
6
%
 
2036
 
5

 
263,758

 
10,124

 
1
%
 
2037
 
15

 
433,008

 
35,326

 
5
%
 
2038
 
7

 
748,340

 
5,824

 
1
%
 
Thereafter
 
2

 

 
1,008

 
%
 
 
 
62

 
3,812,881

 
$
142,884

 
20
%
 


























30


The following table sets forth lease expirations regarding EPR’s owned education portfolio as of December 31, 2018, (dollars in thousands):
 
Education Portfolio
 
 
Year
 

Number of
Properties
 
Square
Footage
 
Revenue for the Year
Ended December 31, 2018
 
% of Company's Total
Revenue
 
2019
 
22

 
642,042

 
$
9,394

 
1
%
 
2020
 

 

 

 
%
 
2021
 

 

 

 
%
 
2022
 

 

 

 
%
 
2023
 
1

 
26,872

 
313

 
%
 
2024
 
1

 
59,024

 
1,216

 
%
 
2025
 

 

 

 
%
 
2026
 

 

 

 
%
 
2027
 
6

 
358,498

 
4,558

 
1
%
 
2028
 
1

 
4,950

 
64

 
%
 
2029
 

 

 

 
%
 
2030
 

 

 

 
%
 
2031
 
10

 
209,948

 
3,965

 
1
%
 
2032
 
6

 
324,148

 
7,405

 
1
%
 
2033
 
5

 
256,388

 
4,151

 
1
%
 
2034
 
11

 
714,590

 
23,936

 
3
%
 
2035
 
9

 
455,771

 
9,955

 
1
%
 
2036
 
10

 
555,335

 
15,348

 
2
%
 
2037
 
9

 
281,367

 
6,384

 
1
%
 
2038
 
8

 
239,945

 
4,580

 
1
%
 
Thereafter
 
32

 
472,852

 
13,766

 
2
%
 
 
 
131

 
4,601,730

 
$
105,035

 
15
%
 











31


Our properties are located in 42 states and in the Canadian province of Ontario. The following table sets forth certain state-by-state and Ontario, Canada information regarding our owned real estate portfolio as of December 31, 2018, excluding public charter schools recorded as investment in direct financing leases (dollars in thousands):
Location
 
Building (gross
sq. ft)
 
Rental Revenue for the Year Ended
December 31, 2018
 
% of
Rental
Revenue
Texas
 
3,148,261

 
$
77,801

 
14.0
%
Florida
 
1,572,118

 
40,723

 
7.3
%
Ontario, Canada
 
1,172,535

 
33,834

 
6.1
%
California
 
1,172,423

 
60,115

 
10.8
%
Ohio
 
1,097,201

 
15,421

 
2.8
%
Illinois
 
1,056,903

 
27,330

 
4.9
%
Virginia
 
1,052,528

 
23,824

 
4.3
%
Pennsylvania
 
1,002,204

 
24,088

 
4.3
%
North Carolina
 
869,989

 
23,782

 
4.3
%
Colorado
 
812,554

 
19,176

 
3.4
%
Arizona
 
753,503

 
20,301

 
3.6
%
New York
 
702,917

 
35,245

 
6.3
%
Michigan
 
699,275

 
12,547

 
2.3
%
Georgia
 
679,175

 
13,326

 
2.4
%
Louisiana
 
661,262

 
14,964

 
2.7
%
Tennessee
 
577,629

 
13,167

 
2.4
%
Missouri
 
517,613

 
1,970

 
0.4
%
Kansas
 
512,002

 
11,798

 
2.1
%
New Jersey
 
464,105

 
9,197

 
1.7
%
Indiana
 
457,998

 
7,424

 
1.3
%
Alabama
 
323,972

 
7,745

 
1.4
%
South Carolina
 
316,862

 
5,787

 
1.0
%
Kentucky
 
298,196

 
5,474

 
1.0
%
Minnesota
 
181,764

 
5,227

 
0.9
%
Idaho
 
179,036

 
2,763

 
0.5
%
Maryland
 
176,441

 
4,151

 
0.7
%
Connecticut
 
171,907

 
3,561

 
0.6
%
Arkansas
 
165,219

 
3,834

 
0.7
%
Massachusetts
 
165,028

 
1,496

 
0.3
%
Utah
 
160,000

 
2,485

 
0.4
%
Mississippi
 
116,900

 
3,439

 
0.6
%
Nebraska
 
107,402

 
1,836

 
0.3
%
Maine
 
107,000

 
1,870

 
0.3
%
New Hampshire
 
97,400

 
2,279

 
0.4
%
Iowa
 
93,755

 
1,339

 
0.2
%
Nevada
 
92,697

 
1,804

 
0.3
%
Oklahoma
 
90,737

 
6,374

 
1.2
%
Oregon
 
72,546

 
2,434

 
0.4
%
New Mexico
 
71,297

 
1,257

 
0.2
%
Washington
 
47,004

 
2,330

 
0.5
%
Montana
 
44,650

 
992

 
0.3
%
Wisconsin
 
22,580

 
377

 
0.1
%
Hawaii
 

 
1,476

 
0.3
%
 
 
22,084,588

 
$
556,363

 
100.0
%
 




32


Office Location
Our executive office is located in Kansas City, Missouri and is leased from a third-party landlord. The lease has projected 2019 annual rent of approximately $856 thousand and is scheduled to expire on September 30, 2026, with two separate five-year extension options available.
Tenants and Leases
Our existing leases on rental property (on a consolidated basis - excluding unconsolidated joint venture properties) provide for aggregate annual minimum rentals of approximately $520.1 million (not including periodic rent escalations, percentage rent or straight-line rent). Our entertainment portfolio has an average remaining base lease term life of approximately nine years, our recreation portfolio has an average remaining base lease term life of approximately 16 years, and our education portfolio has an average remaining base lease term life of approximately 14 years. These leases may be extended for predetermined extension terms at the option of the tenant. Our leases are typically triple-net leases that require the tenant to pay substantially all expenses associated with the operation of the properties, including taxes, other governmental charges, insurance, utilities, service, maintenance and any ground lease payments.

Property Acquisitions and Developments in 2018
Our property acquisitions and developments in 2018 consisted primarily of spending in each of our primary segments of Entertainment, Recreation and Education. The percentage of total investment spending related to build-to-suit projects, including investment spending for mortgage notes, increased to approximately 58% in 2018, from approximately 47% in 2017. Build-to-suit projects remain a significant component of our investment spending and we expect this to continue to be the case in future years. Many of our build-to-suit opportunities come to us from our existing strong relationships with property operators and developers and we expect to continue to pursue these opportunities.

Item 3. Legal Proceedings

We are subject to certain claims and lawsuits in the ordinary course of business, the outcome of which cannot be determined at this time. In the opinion of management, any liability we might incur upon the resolution of these claims and lawsuits will not, in the aggregate, have a material adverse effect on our consolidated financial position or results of operations.

Early Childhood Education Tenant
On December 18, 2017, ten subsidiaries of CLA (the "CLA Debtors") filed separate voluntary petitions for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the District of Arizona ("Court") (Jointly Administered under Case No. 2:17-bk-14851-BMW). The CLA Debtors in those cases consist of CLA Properties SPE, LLC, CLA Maple Grove, LLC, CLA Carmel, LLC, CLA West Chester, LLC, CLA One Loudoun, LLC, LLC, CLA Fishers, LLC, CLA Chanhassen, LLC, CLA Ellisville, LLC, CLA Farm, LLC, and CLA Westerville, LLC. Children's Learning Adventure USA, LLC ("CLA Parent") has not filed a petition for bankruptcy. The CLA Debtors include each of the Company's direct or indirect tenants on 24 out of the Company's 25 CLA properties, including 21 operating properties, two partially completed properties and one unimproved land parcel. The only CLA tenant unaffected by the bankruptcy is CLA King of Prussia, LLC, which is the CLA tenant entity for an unimproved land parcel located in Tredyffrin, Pennsylvania. This property was one of the two properties sold in February 2019 as further discussed below. It is the Company's understanding that the CLA Debtors filed bankruptcy petitions to stay the termination of the remaining CLA leases and delay the eviction process.

On January 8, 2018, the Company filed with the Court (i) motions seeking rent for the post-petition period beginning on December 18, 2017, and (ii) motions seeking relief from the automatic stay seeking the right to terminate the remaining leases and evict the CLA Debtors from the properties. On March 14, 2018, the CLA Parties and the Company entered into a Stipulation providing that (a) the CLA Parties would pay rent for the months of March through July 2018 for an aggregate total of $4.3 million, (b) resolution of restructuring of the leases between the Company and the CLA Parties would be concluded no later than July 31, 2018 (the "Forbearance Period"), (c) relief from stay would be granted with respect to the Company’s properties as needed to implement the Stipulation, (d) the parties would not commence or prosecute litigation against any other party during the Forbearance Period, and (e) the deadline for any motion by the CLA Debtors to assume or reject the leases under the U.S. Bankruptcy Code would be extended to July 31, 2018. On May 7, 2018, the Court entered an order approving the Stipulation. The CLA Parties made all of the rent payments required by the Stipulation.


33


The CLA Debtors did not assume the leases by July 31, 2018, and the Company entered into a new lease agreement with CLA related to the 21 operating properties which replaced the prior lease arrangements and continued on a month-to-month basis. The lease agreement provided for a monthly rent of $1.0 million plus approximately $170 thousand for pro rata property taxes. CLA relinquished control of four properties that were still under development as the Company no longer intends to develop these properties for CLA. Two of these properties were sold in February 2019.

In February 2019, CLA and the Company entered into agreements (collectively, the "PSA") providing for the purchase and sale of certain assets associated with the businesses located at the 21 operating CLA properties whereby the Company can nominate a third party operator to take an assignment and transfer of such assets from CLA and to receive certain beneficial rights under various related ancillary agreements. Consideration provided by the Company for the asset transfers includes the release of past due rent obligations, previously fully reserved by the Company, and additional consideration of approximately $15.0 million which includes approximately $3.5 million for equipment used in the operations of the Company's schools. The transfers of such assets are expected to close between May 1, 2019 and March 31, 2020 as closing conditions for each transfer are satisfied. CLA has agreed to surrender possession of any of those properties that have not been transferred to a replacement operator prior to March 31, 2020 and has agreed to lease and operate each of the 21 properties for an aggregate of approximately $1.0 million per month of minimum rent until the transfer of each property to the Company’s replacement tenant or surrender of the property.

The primary closing condition for each transfer will be the requirement that the replacement tenant has obtained all required licenses and permits. There can be no assurance that the replacement tenant of a property will timely satisfy this or other conditions which could delay or prevent the closing of one or more transfers. As a result, there can be no assurance that one or more properties will not be surrendered until after March 31, 2020, in which case the Company would receive such properties without the ability to provide active operations to a replacement tenant which could adversely affect the terms of the Company's leases of such properties to replacement tenants.

CLA is required to file a motion by March 1, 2019 with the Court seeking authorization of the sale of certain assets pursuant to the PSA. A condition to the parties’ obligations under the PSA is the Court’s approval of the motion. There can be no assurance that this motion will be approved by the Court or that the Court will not require modifications to the PSA as a condition to its approval.

Additionally, in February 2019, the Company entered into new leases of all 21 operating CLA properties with Crème de la Crème ("Crème"), a premium, national early childhood education operator. These leases are contingent upon the Company delivering possession of the properties and include different financial terms based on whether or not CLA delivers Crème the assets associated with the in-place operations of the school. The leases have 20-year terms that commence upon Crème beginning operations of the schools. Additionally, Crème and the Company each have early termination rights based on school level economic performance.

There can be no assurance as to the outcome of the contemplated transaction or whether some or all of the properties will be transferred to Crème with in-place operations. If some or all of the schools are not transferred to Crème with in-place operations, there will be a delay in re-opening such schools and a corresponding reduction in near term rents from Crème.

Item 4. Mine Safety Disclosures

Not applicable.

34


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common shares are listed on the New York Stock Exchange (“NYSE”) under the trading symbol “EPR.”

During the year ended December 31, 2018, the Company did not sell any unregistered equity securities.

On February 27, 2019, there were approximately 7,471 holders of record of our outstanding common shares.

Issuer Purchases of Equity Securities 
Period
 
Total Number of Shares Purchased
 
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 through October 31, 2018 common stock
 

 
 
$

 

 
$

November 1 through November 30, 2018 common stock
 
8,862

(1) 
 
70.08

 

 

December 1 through December 31, 2018 common stock
 

 
 

 

 

 
 
 
 
 
 
 
 
 
 
Total
 
8,862

 
 
$
70.08

 

 
$

 
 
 
 
 
 
 
 
 
 

(1) The repurchases of equity securities during November of 2018 were completed in conjunction with employee stock option exercises. These repurchases were not made pursuant to a publicly announced plan or program.


35


Share Performance Graph

The following graph compares the cumulative return on our common shares during the five-year period ended December 31, 2018, to the cumulative return on the MSCI U.S. REIT Index and the Russell 1000 Index for the same period. The comparisons assume an initial investment of $100 and the reinvestment of all dividends during the comparison period. Performance during the comparison period is not necessarily indicative of future performance.
396922419_a18performancegraph.jpg
Total Return Analysis
 
 
 
 
 
 
 
 
 
 
 
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
 
12/31/2018
EPR Properties
$
100.00

 
$
124.85

 
$
134.88

 
$
174.87

 
$
168.90

 
$
176.91

MSCI U.S. REIT Index
$
100.00

 
$
130.38

 
$
133.67

 
$
145.16

 
$
152.52

 
$
145.55

Russell 1000 Index
$
100.00

 
$
113.24

 
$
114.28

 
$
128.05

 
$
155.82

 
$
148.37

Source: S&P Global Market Intelligence
The performance graph and related text are being furnished to and not filed with the SEC, and will not be deemed "soliciting material" or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically incorporate such information by reference into such a filing.


36


Item 6. Selected Financial Data

The following tables set forth selected consolidated financial and other information of the Company as of and for each of the years ended December 31, 2018, 2017, 2016, 2015, and 2014. The table should be read in conjunction with the Company's consolidated financial statements and notes thereto and Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report on Form 10-K.
    
Operating Statement Data
 
 
 
 
 
 
 
 
 
(Dollars in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Total revenue
$
700,731

 
$
575,991

 
$
493,242

 
$
421,017

 
$
385,051

Net income attributable to EPR Properties
266,983

 
262,968

 
224,982

 
194,532

 
179,633

Preferred dividend requirements
(24,142
)
 
(24,293
)
 
(23,806
)
 
(23,806
)
 
(23,807
)
Preferred share redemption costs

 
(4,457
)
 

 

 

Net income available to common shareholders of EPR Properties
242,841

 
234,218

 
201,176

 
170,726

 
155,826

 
 
 
 
 
 
 
 
 
 
Net income available to common shareholders per common share:
 
 
 
 
 
 
 
 
 
Basic
3.27

 
3.29

 
3.17

 
2.94

 
2.87

Diluted
3.27

 
3.29

 
3.17

 
2.93

 
2.86

 
 
 
 
 
 
 
 
 
 
Shares used for computation (in thousands):
 
 
 
 
 
 
 
 
 
Basic
74,292

 
71,191

 
63,381

 
58,138

 
54,244

Diluted
74,337

 
71,254

 
63,474

 
58,328

 
54,444

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
4.32

 
4.08

 
3.84

 
3.63

 
3.42

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (at period end)
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
5,872

 
41,917

 
19,335

 
4,283

 
3,336

Total assets
6,131,390

 
6,191,493

 
4,865,022

 
4,217,270

 
3,686,275

Debt
2,986,054

 
3,028,827

 
2,485,625

 
1,981,920

 
1,629,750

Total liabilities
3,266,367

 
3,264,168

 
2,679,121

 
2,143,402

 
1,759,786

Equity
2,865,023

 
2,927,325

 
2,185,901

 
2,073,868

 
1,926,489




37


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in this Annual Report on Form 10-K. The forward-looking statements included in this discussion and elsewhere in this Annual Report on Form 10-K involve risks and uncertainties, including anticipated financial performance, business prospects, industry trends, shareholder returns, performance of leases by tenants, performance on loans to customers and other matters, which reflect management’s best judgment based on factors currently known. See “Cautionary Statement Concerning Forward-Looking Statements.” Actual results and experience could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in this Item and in Item 1A - “Risk Factors.”

Overview

Business
Our principal business objective is to enhance shareholder value by achieving predictable and increasing FFO and dividends per share. Our prevailing strategy is to focus on long-term investments in a limited number of categories in which we maintain a depth of knowledge and relationships, and which we believe offer sustained performance throughout all economic cycles. Our investment portfolio includes ownership of and long-term mortgages on entertainment, recreation and education properties. Substantially all of our owned single-tenant properties are leased pursuant to long-term, triple-net leases, under which the tenants typically pay all operating expenses of the property. Tenants at our owned multi-tenant properties are typically required to pay common area maintenance charges to reimburse us for their pro-rata portion of these costs. We also own certain recreation anchored lodging assets structured using traditional REIT lodging structures as discussed in Item 1 - "Business."

It has been our strategy to structure leases and financings to ensure a positive spread between our cost of capital and the rentals or interest paid by our tenants. We have primarily acquired or developed new properties that are pre-leased to a single tenant or multi-tenant properties that have a high occupancy rate. We have also entered into certain joint ventures and we have provided mortgage note financing. We intend to continue entering into some or all of these types of arrangements in the foreseeable future.

Historically, our primary challenges have been locating suitable properties, negotiating favorable lease or financing terms (on new or existing properties), and managing our portfolio as we have continued to grow. We believe our management’s knowledge and industry relationships have facilitated opportunities for us to acquire, finance and lease properties. Our business is subject to a number of risks and uncertainties, including those described in Item 1A - “Risk Factors” of this report.

We group our investments into four reportable operating segments: Entertainment, Recreation, Education and Other. As of December 31, 2018, our total assets were approximately $6.1 billion (after accumulated depreciation of approximately $0.9 billion) which included investments in each of our four operating segments with properties located in 42 states and Ontario, Canada.

Our Entertainment segment included investments in 152 megaplex theatres, seven entertainment retail centers (which included seven additional megaplex theatres) and 11 family entertainment centers. Our portfolio of owned entertainment properties consisted of 13.4 million square feet and was 98% leased, including megaplex theatres that were 100% leased.
Our Recreation segment included investments in 12 ski properties, 21 attractions, 34 golf entertainment complexes and 13 other recreation facilities. Our portfolio of owned recreation properties was 100% leased.
Our Education segment included investments in 59 public charter schools, 69 early education centers and 15 private schools. Our portfolio of owned education properties consisted of 4.7 million square feet and was 98% leased.
Our Other segment consisted primarily of land under ground lease, property under development and land held for development related to the Resorts World Catskills casino and resort project in Sullivan County, New York.


38


The combined owned portfolio consisted of 22.2 million square feet and was 99% leased. As of December 31, 2018, we also had invested approximately $287.5 million in property under development.

Operating Results
Our total revenue, net income available to common shareholders and Funds From Operations As Adjusted ("FFOAA") per diluted share are detailed below for the years ended December 31, 2018 and 2017 (in millions, except per share information):
 
Year ended December 31,
 
 
 
2018
 
2017
 
Increase
Total revenue (1)
$
700.7

 
$
576.0

 
22
 %
Net income available to common shareholders per diluted share (2)
3.27

 
3.29

 
(1
)%
FFOAA per diluted share (3)
6.10

 
5.02

 
22
 %

(1) Total revenue for the year ended December 31, 2018, versus the year ended December 31, 2017 was favorably impacted by the effect of investment spending. Total revenue for the year ended December 31, 2018 was also favorably impacted by an increase of $73.9 million in prepayment fees from the early payoff of mortgage notes and higher percentage rent of $2.8 million compared to the year ended December 31, 2017. Total revenue for the year ended December 31, 2018 versus the year ended December 31, 2017 was unfavorably impacted by property dispositions and mortgage note payoffs that occurred in 2018 and 2017.

(2) Net income available to common shareholders per diluted share for the year ended December 31, 2018, versus the year ended December 31, 2017 was also impacted by the items affecting total revenue as described above and was favorably impacted by a gain on sale of investment in direct financing leases and no preferred share redemption costs. Net income available to common shareholders per diluted share for the year ended December 31, 2018 versus the year ended December 31, 2017 was unfavorably impacted by an increase in general and administrative expense, severance expense, litigation settlement expense, costs associated with loan refinancing or payoff (primarily related to our redemption of our 7.75% Senior Notes due 2020), interest expense, transaction costs, impairment charges, depreciation and amortization and lower gains on sale of real estate. Additionally, net income available to common shareholders per diluted share for the year ended December 31, 2018, versus the year ended December 31, 2017 was unfavorably impacted by an increase in common shares outstanding.

(3) FFOAA per diluted share for the year ended December 31, 2018, versus the year ended December 31, 2017 was also impacted by the items affecting total revenue as described above. FFOAA per diluted share for the year ended December 31, 2018, versus the year ended December 31, 2017 was unfavorably impacted by lower termination fees recognized with the exercise of tenant purchase options, as well as increases in general and administrative expense, interest expense and common shares outstanding.

FFOAA is a non-GAAP financial measure. For the definitions and further details on the calculations of FFOAA and certain other non-GAAP financial measures, see the section below titled "Funds From Operations (FFO), Funds From Operations As Adjusted (FFOAA) and Adjusted Funds from Operations (AFFO)."

Investment Spending Overview
For much of 2018, market conditions were such that our cost of capital was higher, thus reducing the spread between what we could charge in rent and interest to our tenants and borrowers for new investments and the cost at which we could raise new capital. As a result, we became more selective in our investment spending decision making in 2018 and implemented a plan to sell existing assets rather than raise new capital to fund such investments. Accordingly, our total investment spending was $572.0 million in 2018 compared to $1.6 billion in the prior year and dispositions and mortgage note pay-offs totaled $471.1 million compared to $197.6 million in the prior year. Investment spending in 2017 also included a transaction in the Recreation segment with CNL Lifestyle Properties, Inc. ("CNL Lifestyle") and Och-Ziff Real Estate ("OZRE") totaling $730.8 million. There was no such large singular transaction in 2018.


39


While there can be no assurance, as market conditions have improved, we expect that our investment spending will increase in 2019 as we continue to see significant opportunities in each of our segments.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, management has made its best estimates and assumptions that affect the reported assets and liabilities. The most significant assumptions and estimates relate to the valuation of real estate, accounting for real estate acquisitions, estimating reserves for uncollectible receivables and the impairment of mortgage and other notes receivable. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

Impairment of Real Estate Values
We are required to make subjective assessments as to whether there are impairments in the value of our rental properties. These estimates of impairment may have a direct impact on our consolidated financial statements. We assess the carrying value of our rental properties whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable. Certain factors may indicate that impairments exist which include, but are not limited to, underperformance relative to projected future operating results, tenant difficulties and significant adverse industry or market economic trends. If an indicator of possible impairment exists, the property is evaluated for impairment by comparing the carrying amount of the property to the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate. If an impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its estimated fair value. Estimating future cash flows is highly subjective and such estimates could differ materially from actual results.

Real Estate Acquisitions
Upon acquisition of real estate properties, we evaluate the acquisition to determine if it is a business combination or an asset acquisition. In January 2017, we adopted Accounting Standards Update ("ASU") No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, and as a result, expect that few, if any, of our real estate acquisitions will be accounted for as business combinations.

If the acquisition is determined to be an asset acquisition, we record the purchase price and other related costs incurred to the acquired tangible assets (consisting of land, building, tenant improvements, leasehold interests and furniture, fixtures and equipment) and identified intangible assets and liabilities (consisting of above and below market leases, in-place leases, tradenames, tenant relationships and assumed financing that is determined to be above or below market terms) on a relative fair value basis. Typically, relative fair values are based on recent independent appraisals or methods similar to those used by independent appraisers, as well as management judgment. In addition, acquisition-related costs incurred for asset acquisitions are capitalized.

If the acquisition is determined to be a business combination, we record the fair value of acquired tangible assets and identified intangible assets and liabilities as well as any noncontrolling interest. Typically, fair values are based on recent independent appraisals or methods similar to those used by independent appraisers, as well as management judgment. In addition, acquisition-related costs incurred for business combinations are expensed as incurred. Costs related to such transactions, as well as costs associated with terminated transactions, are included in the accompanying consolidated statements of income as transaction costs.
 
Allowance for Doubtful Accounts
Accounts receivable is reduced by an allowance for amounts where collection is not probable. Our accounts receivable balance is comprised primarily of rents and operating cost recoveries due from tenants as well as accrued rental rate increases to be received over the life of the existing leases. We regularly evaluate the adequacy of our allowance for doubtful accounts. The evaluation primarily consists of reviewing past due account balances and considering such factors as the credit quality of our tenants, historical trends of the tenant and/or other debtor, current economic conditions and changes in customer payment terms. Additionally, with respect to tenants in bankruptcy, we estimate the expected

40


recovery through bankruptcy claims and increase the allowance for amounts deemed uncollectible. These estimates have a direct impact on our net income.

Impairment of Mortgage Notes and Other Notes Receivable
We evaluate the collectability of both interest and principal for each loan to determine whether it is impaired. A loan is considered to be impaired when, based on current information and events, we determine it is probable that we will be unable to collect all amounts due according to the existing contractual terms. Certain factors that may occur and indicate that impairments may exist include, but are not limited to: underperformance relative to projected future operating results, borrower difficulties and significant adverse industry or market economic trends. When a loan is considered to be impaired, the amount of loss is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the loan’s effective interest rate or to the fair value of 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 we determine 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.

Recent Developments

Investment Spending
Our investment spending during the year ended December 31, 2018 totaled $572.0 million and included investments in each of our four operating segments.

Entertainment investment spending during the year ended December 31, 2018 totaled $87.2 million, including spending on build-to-suit development and redevelopment of megaplex theatres, entertainment retail centers and family entertainment centers, as well as $22.4 million in two megaplex theatre acquisitions.

Recreation investment spending during the year ended December 31, 2018 totaled $384.0 million, including spending on build-to-suit development of golf entertainment complexes and attractions, redevelopment of ski properties, as well as investments in two other recreation facilities which included one mortgage note investment and one property acquisition. In addition, we acquired three other recreation properties and one attraction property described below.

On June 22, 2018, we acquired a recreation anchored lodging property located in Pagosa Springs, Colorado for approximately $36.4 million. The property is a natural hot springs resort and spa on approximately eight acres and is subject to a long-term, triple-net lease.

On December 21, 2018, we entered into two joint ventures to acquire two recreation anchored lodging properties located in St. Petersburg, Florida, for a total of approximately $68.5 million ($29.5 million after the Company's pro-rata share of debt at closing), representing a 65% interest in the joint ventures. We account for these investments under the equity method of accounting.

On December 28, 2018, we acquired an attraction property located in St. Louis, Missouri for approximately $50.3 million. The property is an interactive museum and is subject to a long-term, triple-net lease.

Education investment spending during the year ended December 31, 2018 totaled $86.9 million, including spending on build-to-suit development and redevelopment of public charter schools, early education centers and private schools, as well as $17.7 million on four early education center acquisitions.

Other investment spending during the year ended December 31, 2018 totaled $13.9 million and was related to the common infrastructure for the Resorts World Catskills casino and resort project in Sullivan County, New York.

41



The following details our investment spending during the years ended December 31, 2018 and 2017 (in thousands):
For the Year Ended December 31, 2018
Operating Segment
 
Total Investment Spending
 
New Development
 
Re-development
 
Asset Acquisition
 
Mortgage Notes or Notes Receivable
 
Investment in Joint Ventures
Entertainment
 
$
87,194

 
$
31,276

 
$
33,500

 
$
22,418

 
$

 
$

Recreation
 
383,990

 
208,831

 
650

 
94,671

 
11,365

 
68,473

Education
 
86,907

 
49,749

 

 
17,691

 
19,467

 

Other
 
13,891

 
13,891

 

 

 

 

Total Investment Spending
 
$
571,982

 
$
303,747

 
$
34,150

 
$
134,780

 
$
30,832

 
$
68,473

 
 
 
 
 
 
 
 
 
 
 
 
 
For the Year Ended December 31, 2017
Operating Segment
 
Total Investment Spending
 
New Development
 
Re-development
 
Asset Acquisition
 
Mortgage Notes or Notes Receivable
 
Investment in Joint Ventures
Entertainment
 
$
319,665

 
$
62,521

 
$
95,520

 
$
154,144

 
$
7,480

 
$

Recreation
 
1,006,741

 
189,907

 
1,223

 
542,453

 
273,158

 

Education
 
255,127

 
119,047

 

 
38,497

 
97,583

 

Other
 
1,079

 
1,079

 

 

 

 

Total Investment Spending
 
$
1,582,612

 
$
372,554

 
$
96,743

 
$
735,094

 
$
378,221

 
$

 
The above amounts include $135 thousand and $118 thousand in capitalized payroll, $9.9 million in capitalized interest for both periods and $0.9 million and $3.3 million in capitalized other general and administrative direct project costs for the years ended December 31, 2018 and 2017, respectively. Excluded from the table above is $3.6 million and $4.7 million of maintenance capital expenditures and other spending for the years ended December 31, 2018 and 2017, respectively.

Property Dispositions

During the year ended December 31, 2018, we completed the sale of four entertainment parcels located in West Virginia, Illinois and Kansas for net proceeds totaling $7.3 million. In connection with these sales, we recognized a gain on sale of $1.2 million.

Pursuant to a tenant purchase option, we completed the sale of one public charter school located in California for net proceeds totaling $12.0 million and recognized a gain on sale of $1.9 million during the year ended December 31, 2018. Additionally, we also completed the sale of two early education centers for net proceeds of $2.5 million during the year ended December 31, 2018. No gain or loss was recognized on these sales.

During the year ended December 31, 2018, we completed the sale of four public charter schools, classified as investment in direct financing leases, and leased to Imagine Schools, Inc. for net proceeds of $43.4 million. Accordingly, we reduced our investment in direct financing leases, net, by $37.9 million, which included $31.6 million in original acquisition costs. A gain of $5.5 million was recognized during the year ended December 31, 2018.

Recreation Tenant Update

During the year ended December 31, 2018, Six Flags Entertainment Corporation ("Six Flags") completed their acquisition of the leasehold interest in five of our attraction properties which were previously operated by Premier

42


Parks, LLC. As a result, Six Flags now operates six of our attraction properties representing approximately $173.7 million of net book value of assets at December 31, 2018.

Mortgage Notes Receivable

On February 16, 2018, a borrower exercised its put option to convert its mortgage note agreement, totaling $142.9 million and secured by 28 education facilities including both early education and private school properties, to a lease agreement. As a result, we recorded the rental property at the carrying value, which approximated fair value of the mortgage note on the conversion date, and allocated this cost on a relative fair value basis. The properties are leased pursuant to a triple-net master lease with a 23-year remaining term.

During the year ended December 31, 2018, we received payment in full on the mortgage note receivable of $250.3 million from OZRE that was secured by 14 ski properties. In connection with the prepayment of this note, we recognized prepayment fees totaling $65.9 million.

During the year ended December 31, 2018, we received payment in full on one mortgage note receivable of $32.0 million that was secured by the observation deck of the John Hancock Tower in Chicago, Illinois. In connection with the prepayment of this note, we recognized prepayment fees of $5.4 million.

During the year ended December 31, 2018, we received payment in full on five mortgage notes receivable totaling $38.1 from LBE Investments, Ltd. that were secured by four charter school properties and land located in Arizona. In connection with the prepayment of these notes, we recognized prepayment fees totaling $3.4 million. Additionally, during the year ended December 31, 2018, we received payment in full on two mortgage notes receivable totaling $10.5 million that were secured by land located in California and real estate in Washington. There were no prepayment fees received in connection with these note payoffs.

Impairment Charges

During the year ended December 31, 2018, we recognized a $10.7 million impairment charge related to our guarantees of the payment of certain economic development revenue bonds secured by leasehold interest and improvements at two theatres in Louisiana. We determined a portion of our guarantee fees receivable was no longer recoverable and in addition, determined that our future payment on a portion of the bond obligations was probable. See Note 4 to the consolidated financial statements included in this Annual Report on Form 10-K for further detail.

As further discussed below, during the year ended December 31, 2018, we also recognized an impairment charge of $16.5 million related to an early childhood education tenant.

Severance Expense
On April 5, 2018, we entered into an Amended and Restated Employment Agreement with Mr. Earnest, our then Senior Vice President and Chief Investment Officer, effective March 31, 2018, to reflect the changes in connection with Mr. Earnest's transition to Executive Advisor of the Company. As we determined that such services were no longer needed, on December 27, 2018, we gave notice that the agreement was going to be terminated pursuant to the provisions of the Amended and Restated Employment Agreement. As a result, during the year ended December 31, 2018, we recorded severance expense related to Mr. Earnest, as well as another employee terminated under a similar such agreement, totaling $5.9 million. Severance expense includes cash payments totaling $2.6 million, accelerated vesting of nonvested shares totaling $3.2 million and $0.1 million of related taxes and other expenses.

Cappelli Legal Settlement
On June 29, 2018, we entered into a settlement agreement with affiliates of Louis Cappelli (the "Cappelli Group") whereby each of the parties fully settled all disputes between and among them relating to previously disclosed litigation in which we were the defendant. The terms of the settlement agreement include, among other terms, a payment of $2.0 million to the plaintiffs, the mutual release of all parties, and the dismissal of the final pending New York state court

43


case with prejudice. Additionally, during the year ended December 31, 2018, we paid approximately $90 thousand in professional fees associated with the settlement. See Note 19 to the consolidated financial statements included in this Annual Report on Form 10-K for further discussion related to the Cappelli Group legal settlement.

Early Childhood Education Tenant Update
As previously disclosed, certain subsidiaries of Children's Learning Adventure USA ("CLA") that are tenants of our leases (the "CLA Debtors") filed petitions in bankruptcy under Chapter 11 seeking the protections of the U.S. Bankruptcy Code. On March 14, 2018, we, CLA, CLA Debtors and certain other CLA subsidiaries' operating properties owned by us (collectively, the "CLA Parties") entered into and filed a Stipulation to Resolve Pending Motions (the "Stipulation") providing that (a) the CLA Parties would pay rent for the months of March through July for an aggregate total of $4.3 million, (b) resolution of restructuring of the leases between us and the CLA Parties would be concluded no later than July 31, 2018 (the "Forbearance Period"), (c) relief from stay would be granted with respect to our properties as needed to implement the Stipulation, (d) the parties would not commence or prosecute litigation against any other party during the Forbearance Period, and (e) the deadline for any motion by the CLA Debtors to assume or reject the leases under the U.S. Bankruptcy Code would be extended to July 31, 2018. On May 7, 2018, the Court entered an order approving the Stipulation.

In July 2018, we entered into a new lease agreement with CLA related to 21 open schools which replaced the prior lease arrangements and continued on a month-to-month basis. The lease agreement provided for a monthly rent of $1.0 million plus approximately $170 thousand for pro rata property taxes. We had $246.2 million classified in rental properties, net, in the accompanying consolidated balance sheets at December 31, 2018 for these 21 schools and determined that the estimated undiscounted future cash flow exceed the carrying values of these properties.

As part of the July agreement, CLA also relinquished control of four of our properties that were still under development as we no longer intend to develop these properties for CLA. As a result, we revised our estimated undiscounted cash flows for these four properties, considering shorter expected holding periods, and determined that those estimated cash flows were not sufficient to recover the carrying values of these properties. During the year ended December 31, 2018, we obtained independent appraisals of these four properties and reduced the carrying value of these assets to $9.8 million, recording an impairment charge of $16.5 million. The charge is primarily related to the cost of improvements specific to the development of CLA’s prototype. Two of these properties were sold in February 2019.

In February 2019, we entered into agreements with CLA (collectively, the "PSA") providing for the purchase and sale of certain assets associated with the businesses located at the 21 operating CLA properties whereby we can nominate a third party operator to take an assignment and transfer of such assets from CLA and to receive certain beneficial rights under various related ancillary agreements. Consideration provided by us for the asset transfers includes the release of past due rent obligations, previously fully reserved by us, and additional consideration of approximately $15.0 million which includes approximately $3.5 million for equipment used in the operations of our schools. The transfers of such assets are expected to close between May 1, 2019 and March 31, 2020 as closing conditions for each transfer are satisfied. CLA has agreed to surrender possession of any of those properties that have not been transferred to a replacement operator prior to March 31, 2020 and has agreed to lease and operate each of the 21 properties for an aggregate of approximately $1.0 million per month of minimum rent until the transfer of each property to our replacement tenant or surrender of the property.

CLA is required to file a motion by March 1, 2019 with the bankruptcy court ("Court") seeking authorization of the sale of certain assets pursuant to the PSA. A condition to the parties’ obligations under the PSA is the Court’s approval of the motion. There can be no assurance that this motion will be approved by the Court or that the Court will not require modifications to the PSA as a condition to its approval.

Also, in February 2019, we entered into new leases of all 21 operating CLA properties with Crème de la Crème ("Crème"), a premium, national early childhood education operator. These leases are contingent upon us delivering possession of the properties and include different financial terms based on whether or not CLA delivers Crème the assets associated with the in-place operations of the school. The leases have 20-year terms that commence upon Crème beginning operations of the schools. Additionally, both us and Crème have early termination rights based on school level economic performance.

44



There can be no assurance as to the outcome of the contemplated transaction or whether some or all of the properties will be transferred to Crème with in-place operations. If some or all of the schools are not transferred to Crème with in-place operations, there will be a delay in re-opening such schools and a corresponding reduction in near term rents from Crème.

Results of Operations

Year ended December 31, 2018 compared to year ended December 31, 2017

Rental revenue was $556.4 million for the year ended December 31, 2018 compared to $484.2 million for the year ended December 31, 2017. This increase resulted primarily from $63.1 million of rental revenue related to property acquisitions and developments completed in 2018 and 2017 and conversion of certain mortgage notes to rental properties, an increase of $4.7 million in rental revenue on existing properties and an increase in rental revenue of $10.9 million related to CLA. These increases were partially offset by a decrease of $6.5 million in rental revenue from property dispositions. Percentage rents of $10.7 million and $7.8 million were recognized during the years ended December 31, 2018 and 2017, respectively. Straight-line rents, net of $10.2 million and $4.3 million were recognized during the years ended December 31, 2018 and 2017, respectively. Tenant reimbursements of $15.4 million and $15.6 million were recognized during the years ended December 31, 2018 and 2017, respectively.

During the year ended December 31, 2018, we renewed four lease agreements on approximately 240,809 square feet and funded or agreed to fund an average of $29.07 per square foot in tenant improvements. We experienced a decrease of approximately 1.7% in rental rates and paid no leasing commissions with respect to these lease renewals.
Mortgage and other financing income for the year ended December 31, 2018 was $142.3 million compared to $88.7 million for the year ended December 31, 2017. The $53.6 million increase was primarily due to an increase in prepayment fees received of $73.9 million in connection with prepayments on mortgage notes for the year ended December 31, 2018 versus the year ended December 31, 2017. See Note 6 to the consolidated financial statements included in this Annual Report on Form 10-K for further detail. These increases were partially offset by the conversion of a mortgage note secured by 28 early education properties to leased properties during the year ended December 31, 2018, six public charter school properties reclassified from direct financing leases to operating leases in 2017, other note payoffs during 2018 and 2017, as well as the sale of four public charter school properties classified as direct financing leases.

Our property operating expense totaled $30.8 million for the year ended December 31, 2018 compared to $31.7 million for the year ended December 31, 2017. These property operating expenses arise from the operations of our retail centers and other specialty properties. The $0.9 million decrease resulted primarily from a decrease in bad debt expense offset by higher property operating expenses at our multi-tenant properties.

Our general and administrative expense totaled $48.9 million for the year ended December 31, 2018 compared to $43.4 million for the year ended December 31, 2017. The increase of $5.5 million was primarily due to an increase in payroll and benefits costs, including share-based compensation, as well as increases in professional fees, shareholder and marketing expenses, franchise taxes and insurance costs.

Severance expense was $5.9 million for the year ended December 31, 2018 and related to the termination of the Amended and Restated Employment Agreement for our former Senior Vice President and Chief Investment Officer as well as another employee. See Note 15 to the consolidated financial statements included in this Annual Report on Form 10-K for further detail. There was no severance expense for the year ended December 31, 2017.
Litigation settlement expense was $2.1 million for the year ended December 31, 2018 and related to the settlement of our litigation with the Cappelli Group. See Note 19 to the consolidated financial statements included in this Annual Report on Form 10-K for further detail. There was no litigation settlement expense for the year ended December 31, 2017.

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Costs associated with loan refinancing or payoff for the year ended December 31, 2018 was $32.0 million and primarily related to the redemption of the 7.75% Senior Notes due 2020. Costs associated with loan refinancing or payoff totaled $1.5 million for the year ended December 31, 2017 and primarily related to the amendment to our unsecured revolving credit facility and term loan, and the prepayment of secured fixed rate mortgage notes payable.

Gain on early extinguishment of debt for the year ended December 31, 2017 was $1.0 million and related to a note payoff in advance of maturity that was initially recorded at fair value upon acquisition. There was no gain on early extinguishment of debt for the year ended December 31, 2018.

Our net interest expense increased by $2.4 million to $135.5 million for the year ended December 31, 2018 from $133.1 million for the year ended December 31, 2017. This increase resulted primarily from an increase in average borrowings partially offset by a decrease in the weighted average interest rate used to finance our real estate acquisitions and fund our mortgage notes receivable.

Transaction costs totaled $3.7 million for the year ended December 31, 2018 compared to $0.5 million for the year ended December 31, 2017. The increase of $3.2 million was due to an increase in potential and terminated transactions, as well as $1.3 million in pre-opening costs related to the indoor waterpark