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EX-4.1 - AMENDED AND RESTATED REDEMPTION PLAN - CNL LIFESTYLE PROPERTIES INCdex41.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CEO - CNL LIFESTYLE PROPERTIES INCdex321.htm
EX-32.2 - SECTION 906 CERTIFICATION OF CFO - CNL LIFESTYLE PROPERTIES INCdex322.htm
EX-21.1 - SUBSIDIARIES OF THE REGISTRANT - CNL LIFESTYLE PROPERTIES INCdex211.htm
EX-10.1 - ADVISORY AGREEMENT - CNL LIFESTYLE PROPERTIES INCdex101.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CFO` - CNL LIFESTYLE PROPERTIES INCdex312.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - CNL LIFESTYLE PROPERTIES INCdex311.htm
EX-10.19 - SCHEDULE OF OMITTED AGREEMENTS - CNL LIFESTYLE PROPERTIES INCdex1019.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2009

OR

 

¨ 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 000-51288

 

 

CNL LIFESTYLE PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

Maryland   20-0183627

(State of other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

450 South Orange Avenue

Orlando, Florida

  32801
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (407) 650-1000

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of exchange on which registered

None   Not applicable

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value per share

(Title of class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  x    No  ¨

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨

  Accelerated filer  ¨

Non-accelerated filer  x

  Smaller reporting company  ¨

(Do not check if a smaller reporting company)

 

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

Aggregate market value of the common stock held by non-affiliates of the registrant: No established market exists for the registrant’s shares of common stock, so there is no market value for such shares. Based on the $10 offering price of the shares, approximately $2.6 billion of our common stock was held by non-affiliates as of February 28, 2010.

The number of shares of common stock outstanding as of March 15, 2010 was 252,186,979.

DOCUMENTS INCORPORATED BY REFERENCE

Registrant incorporates by reference portions of the CNL Lifestyle Properties, Inc. Definitive Proxy Statement for the 2010 Annual Meeting of Stockholders (Items 10, 11, 12, 13 and 14 of Part III) to be filed no later than April 30, 2010.

 

 

 


Table of Contents

Contents

 

          Page

Part I.

     
  

Statement Regarding Forward Looking Information

   2

Item 1.

  

Business

   2-9

Item 1A.

  

Risk Factors

   10-20

Item 1B.

  

Unresolved Staff Comments

   20

Item 2.

  

Properties

   21-29

Item 3.

  

Legal Proceedings

   29

Item 4.

  

Submission of Matters to a Vote of Security Holders

   29

Part II.

     

Item 5.

  

Market for Registrant’s Common Equity and Related Stockholder Matters

   30-34

Item 6.

  

Selected Financial Data

   35-37

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   38-64

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   65-66

Item 8.

  

Financial Statements and Supplementary Data

   67-105

Item 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

   106

Item 9A.

  

Controls and Procedures

   106

Item 9B.

  

Other Information

   106

Part III.

     

Item 10.

  

Directors and Executive Officers of the Registrant

   107

Item 11.

  

Executive Compensation

   107

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management

   107

Item 13.

  

Certain Relationships and Related Transactions

   107

Item 14.

  

Principal Accountant Fees and Services

   107

Part IV.

     

Item 15.

  

Exhibits, Financial Statement Schedules

   108-125

Signatures

   126-127

Schedule II—Valuation and Qualifying Accounts

   128

Schedule III—Real Estate and Accumulated Depreciation

   129-136

Schedule IV—Mortgage Loans on Real Estate

   137


Table of Contents

PART I

STATEMENT REGARDING FORWARD LOOKING INFORMATION

The following information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements generally are characterized by the use of terms such as “may,” “will,” “should,” “plan,” “anticipate,” “estimate,” “intend,” “predict,” “believe” and “expect” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: continued or worsening economic conditions, the lack of available debt financing for us and our tenants, the fluctuating values of real estate, conditions affecting the CNL brand name, changes in government regulations or accounting rules, changes in local and national real estate trends, our ability to obtain additional lines of credit or long-term financing on satisfactory terms, changes in interest rates, availability of proceeds from our offering of shares, our tenants’ inability to manage rising costs or declining revenues, our ability to identify suitable investments, our ability to close on identified investments, tenant or borrower defaults under their respective leases or loans and bankruptcies, changes or inaccuracies in our accounting estimates and our ability to locate suitable tenants and operators for our properties. Given these uncertainties, we caution you not to place undue reliance on such statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events.

 

Item 1. Business

GENERAL

CNL Lifestyle Properties, Inc. is a Maryland corporation organized on August 11, 2003. We operate as a real estate investment trust, or REIT. The terms “us,” “we,” “our,” “our company” and “CNL Lifestyle Properties” include CNL Lifestyle Properties, Inc. and each of our subsidiaries. We have retained CNL Lifestyle Company, LLC, (the “Advisor”), as our Advisor to provide management, acquisition, disposition, advisory and administrative services. Our offices are located at 450 South Orange Avenue within the CNL Center at City Commons in Orlando, Florida 32801.

Our principal investment objectives include investing in a diversified portfolio of real estate with a goal to preserve, protect and enhance the long-term value of those assets. We primarily invest in lifestyle properties in the United States that we believe have the potential for long-term growth and income generation. Our investment thesis is supported by demographic trends which we believe affect consumer demand for the various lifestyle asset classes that are the focus of our investment strategy. We define lifestyle properties as those properties that reflect or are impacted by the social, consumption and entertainment values and choices of our society. We generally lease our properties on a long-term, triple-net or gross basis (generally five to 20 years, plus multiple renewal options) to tenants or operators that we consider to be significant industry leaders. To a lesser extent, we also make and acquire loans (including mortgage, mezzanine and other loans) and enter into joint ventures related to interests in real estate.

Following our investment policies of acquiring carefully selected and well-located lifestyle or other income producing properties, we believe we have built a unique portfolio of diversified assets, with established long-term operating histories that have survived many economic cycles. We will continue to focus on the careful selection and acquisition of income producing properties that we believe will provide long-term value to our stockholders, while also concentrating on the management and oversight of our existing assets. We have also maintained a strong balance sheet with a low leverage ratio.

 

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While we invest primarily in properties subject to long-term triple-net leases, we have also invested in joint ventures and made loans (mortgage, mezzanine and other loans) related to real estate. The following is our investment structure by number of properties and loans as of March 15, 2010:

LOGO

Asset classes and portfolio diversification. As of March 15, 2010, we had a portfolio of 119 lifestyle properties which when aggregated by initial purchase price was diversified as follows: approximately 28.0% in ski and mountain lifestyle, 24.6% in golf facilities, 17.5% in attractions, 7.5% in marinas and 22.4% in additional lifestyle properties. These assets consist of 22 ski and mountain lifestyle properties, 53 golf facilities, 21 attractions, 15 marinas and eight additional lifestyle properties. Eight of these 119 properties are owned through unconsolidated ventures. Many of our properties feature characteristics that are common to more than one asset class, such as a ski resort with a golf facility. Our asset classifications are based on the primary property usage. The pie chart below shows our asset class diversification as of March 15, 2010, by initial purchase price.

LOGO

 

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Our real estate investment portfolio is geographically diversified with properties in 32 states and two Canadian provinces. The map below shows our current property allocations across geographic regions as of March 15, 2010.

LOGO

We have invested primarily in ski and mountain lifestyle, golf, attractions and marinas. However, we have also invested or may invest in additional lifestyle properties including, but not limited to, hotels, multi-family residential housing, merchandise marts, medical facilities or any type of property that we believe has the potential to generate long-term revenue.

Our tenants and operators. We generally attempt to lease our properties to tenants and operators that we consider to be significant industry leaders. We consider a tenant or an operator to be a “significant industry leader” if it has one or more of the following traits:

 

   

many years of experience operating in a particular industry as compared with other operators in that industry, as a company or through the experience of its senior management;

 

   

many assets managed in a particular industry as compared with other operators in that industry; and/or

 

   

is deemed by us to be a dominant operator in a particular industry for reasons other than those listed above.

Although we attempt to lease our properties to tenants that we consider to be significant industry leaders, we do not believe the success of our properties is based solely on the performance or abilities of our tenant operators. In some cases, the assets we have acquired are considered unique, iconic or nonreplicable assets which by their very nature have intrinsic value. In addition, unlike our competitors in many other commercial real estate sectors, in the event a tenant is in default and vacates a property, we are able to engage a third-party manager to operate the property on our behalf for a period of time until we re-lease it to a new tenant. During this period, the

 

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property remains open and we receive any net earnings from the property’s operations, although these amounts may be less than the rents that were contractually due under the prior leases. Any taxable income from these properties will be subject to income tax until we re-lease these properties to new tenants.

Our leases and ventures. As part of our net lease investment strategy, we either acquire properties directly or purchase interests in entities that own the properties we seek to acquire. Once we acquire the properties, we either lease them back to the original seller or to a third-party operator. These leases are usually structured as triple-net leases which means our tenants are generally responsible for repairs, maintenance, property taxes, ground lease or permit expenses (where applicable), utilities and insurance for the properties that they lease. The weighted-average lease rate of our portfolio as of December 31, 2009 was approximately 8.9%.

Our leases are generally long-term in nature (generally five to 20 years with multiple renewal options). We have no near-term lease expirations (other than at our one multi-family residential property, which generally enters into one-year leases with its tenants) with the first long-term lease expiring in December 2021, excluding available renewal periods. As of March 15, 2010, the average lease expiration of our portfolio (excluding the multi-family residential and joint venture properties) was approximately 18 years. The following presents the future lease expirations of our portfolio:

LOGO

We typically structure our leases to provide for the payment of a minimum annual base rent with periodic increases in base rent over the lease term. In addition, our leases provide for the payment of percentage rent normally based on a percentage of gross revenues generated at the property over certain thresholds. Within the provisions of our leases, we also generally require the payment of capital improvement reserve rent. Capital improvement reserves are paid by the tenant and generally based on a percentage of gross revenue of the property and are set aside by us for capital improvements, replacements and other capital expenditures at the property. These amounts are and will remain our property during and after the term of the lease and help maintain the integrity of our assets.

To a lesser extent, when beneficial to our investment structure, certain properties may be leased to wholly-owned tenants that are taxable REIT subsidiaries or that are owned through taxable REIT subsidiaries (referred to as “TRS” entities). Under this structure, we engage third-party managers to conduct day-to-day operations. Under the TRS leasing structure, our results of operations will include the operating results of the underlying properties as opposed to rental income from operating leases that is recorded for properties leased to third-party tenants.

We have entered into joint ventures in which our partners subordinate their returns to our minimum return. This structure provides us with some protection against the risk of downturns in performance but may allow our partners to obtain a higher rate of return on their investment than we receive if the underlying performance of the properties exceeds certain thresholds.

 

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Our loans. As part of our overall investment and lending strategy, we have made and may continue to make or to acquire loans (including mortgage, mezzanine or other loans) with respect to any of the asset classes in which we are permitted to invest. We generally make loans to the owners of properties to enable them to acquire land, buildings, or both, or to develop property or as part of a larger acquisition. In exchange, the owner generally grants us a first lien or collateralized interest in a participating mortgage collateralized by the property or by interests in the entity that owns the property. Our loans generally require fixed interest payments. We expect that the interest rate and terms for long-term mortgage loans (generally, 10 to 20 years) will be similar to the rate of return on our long-term net leases. Mezzanine loans and other financings for which we have a secondary-lien or collateralized interest will generally have shorter terms (one to two years) and higher interest rates than our net leases and long-term mortgage loans. With respect to the loans that we make, we generally seek loans with collateral values resulting in a loan-to-value ratio of not more than 85%.

Our common stock offerings. As of December 31, 2009, we had raised approximately $2.6 billion (260.1 million shares) through our public offerings. During the period January 1, 2010 through February 28, 2010, we raised an additional $34.7 million (3.5 million shares). We have and will continue to use the net proceeds from our offerings to acquire properties, make loans and other investments.

We intend to extend our current stock offering for a period of one year through April 9, 2011 and may have the ability to extend for another six months beyond that date upon meeting certain criteria. On or prior to December 31, 2011, our board of directors will consider an evaluation of our strategic options, which may include, but are not limited to, listing on a national securities exchange, merging with another public company or selling.

Seasonality. Many of the asset classes in which we invest are seasonal in nature and experience seasonal fluctuations in their business due to geographic location, climate and weather patterns. As a result, the businesses experience seasonal variations in revenues that may require our operators to supplement operating cash from their properties in order to be able to make scheduled rent payments to us. In many situations, we have structured the leases for certain tenants such that rents are paid on a seasonal schedule with most, if not all, of the rent being paid during the tenant’s seasonally busy operating period.

As part of our diversification strategy, we have considered the varying and complimentary seasonality of our asset classes and portfolio mix. For example, the peak operating season of our ski and mountain lifestyle assets are staggered against the peak seasons in our attractions and golf portfolios to balance and mitigate the risks associated with seasonality.

Competition. As a REIT, we have historically experienced competition from other REITs (both traded and non-traded), real estate partnerships, mutual funds, institutional investors, specialty finance companies, opportunity funds and other investors, including, but not limited to, banks and insurance companies, many of which generally have had greater financial resources than we do for the purposes of leasing and financing properties within our targeted asset classes. These competitors often also have a lower cost of capital and are subject to less regulation. However, due to the current economic conditions in the U.S. financial markets, the capital resources available to these competitor sources have declined. When capital markets begin to normalize, our competition for investments will likely increase or resume to historical levels. The level of competition impacts both our ability to raise capital, find real estate investments and locate suitable tenants. We may also face competition from other funds in which affiliates of our Advisor participate or advise.

In general, we perceive there to be a lower level of competition for the types of assets that we have acquired and intend to acquire in comparison to assets in core real estate sectors based on the sheer supply of assets in those sectors, the number of willing buyers and the volume of transactions in their respective markets. Accordingly, we believe that being focused in specialty or lifestyle asset classes allows us to take advantage of unique opportunities. Some of our key competitive advantages are as follows:

 

   

We acquire assets in niche sectors which historically trade at higher cap rates than other core commercial real estate sectors such as Apartment, Industrial, Office and Retail. According to data

 

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compiled by Real Capital Analytics, the aggregate average cap rate for commercial real estate since 2004 has been approximately 7.0%. Our portfolio of properties was acquired between 2004 and 2009 with an average cap rate of approximately 11.2%. We also evaluate our acquisitions on an unlevered basis, which avoids artificial justification of inflated purchase prices through low cost debt. During 2007, which is generally considered the peak buying period for commercial real estate, we acquired properties at an 11.2% cap rate which is consistent with our six year average.

 

   

Some of our targeted assets classes, such as golf, have experienced a net reduction in new supply to normalize with demand. According to the National Golf Foundation 2010 State-of-the-Industry Presentation, the net growth in supply (openings less closings) of golf facilities has declined in each of the last four years as residential developers have scaled back development of new golf communities and weaker facilities have closed.

 

   

Our asset classes have inherently high barriers to entry. For example, the process of obtaining permits to create a new ski resort or marina is highly regulated and significantly more difficult than obtaining permits for the construction of new office or retail space. Additionally, general geographic constraints, such as the availability of suitable waterfront property or mountain terrain, are an inherent barrier to entry in several of our asset classes. There are also high costs associated with building a new ski resort or regional gated attraction that is prohibitive to potential market participants.

 

   

Our leasing arrangements generally require the payment of capital improvement reserve rent which is paid by the tenants and set aside by us to be reinvested into the properties. This arrangement allows us to maintain the integrity of our properties and mitigates deferred maintenance issues.

 

   

Unlike our competitors in many other commercial real estate sectors that generally receive no income in the event a tenant defaults or vacates a property, applicable tax laws allow us to engage a third-party manager to operate a property on our behalf for a period of time until we can re-lease it to a new tenant. During that period, we receive any net earnings from the underlying business operations, which may be less than rents collected under the previous leasing arrangement. However, our ability to continue to operate the property under such an arrangement helps to off-set taxes, insurance and other operating costs that would otherwise have to be absorbed by a landlord and allows the property some time to stabilize, if necessary, before entering into a new lease.

 

   

Our access to capital through our public offerings allows us unique opportunities to invest in and strengthen our existing portfolio as compared to other owners or operators. Owners and operators in those industry segments often have pressure to grow visitation and revenue through the addition of new amenities. When careful analysis justifies an additional investment in one of our existing properties, such as new feature rides at an amusement park or new high-speed lifts or terrain at a ski resort, our investments are added to the tenant’s lease basis, upon which we earn future additional rent. We believe these investments increase visitation to our properties and enhance the overall competitiveness and value of the portfolio.

 

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Significant tenants and borrowers. As of December 31, 2009 and 2008 and for the years ended through December 31, 2009, we had the following tenants that individually accounted for 10% or more of our aggregate total revenues or assets.

 

Tenant

  

Number & Type of Leased
Properties

   Percentage
of Total
Revenues
    Percentage
of Total

Assets
 
       
       
          2009     2008     2007     2009     2008  

PARC Management, LLC (“PARC”)

   18 Attractions    18.3   21.0   23.0   14.3   15.9

Boyne USA, Inc. (“Boyne”)

   7 Ski & Mountain    15.3   19.4   19.0   9.2   9.9
  

Lifestyle Properties

          

Evergreen Alliance Golf Limited, L.P.
(“EAGLE”)

   43 Golf Facilities    14.3   20.6   9.0   15.4   17.1

Booth Creek Ski Holding, Inc.
(“Booth”)

   3 Ski & Mountain    8.3   12.2   13.2   6.3   6.7
   Lifestyle Properties           
                                 
      56.2   73.2   64.2   45.2   49.6
                                 

The significance of any given tenant or operator, and the related concentration of risk generally decrease as additional properties and operators are added to the portfolio. As shown above, there were only three tenants that individually accounted for 10% or more of our total revenues or assets as of December 31, 2009.

Tax status. We currently operate and have elected to be taxed as a REIT for federal income tax purposes beginning with the taxable year ended December 31, 2004. As a REIT, we generally will not be subject to federal income tax at the corporate level to the extent we distribute annually at least 90% of our taxable income to our stockholders and meet other compliance requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is lost.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

Our current business consists of investing in, owning and leasing lifestyle properties primarily in the United States. We evaluate all of our lifestyle properties as a single industry segment and review performance on a property-by-property basis. Accordingly, we do not report segment information.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

We have one consolidated property located in British Columbia, Canada, Cypress Mountain that generated total rental income of approximately $6.3 million, $6.7 million and $5.5 million for the years ended December 31, 2009, 2008 and 2007, respectively. We also own interests in two properties located in Canada through unconsolidated ventures that generated a combined equity in losses of approximately $0.3 million during the year ended December 31, 2009 and approximately $0.2 million during both years ended December 31, 2008 and 2007. The remainder of our rental income was generated from properties or investments located in the United States.

ADVISORY SERVICES

We have engaged CNL Lifestyle Company, LLC as our Advisor. Under the terms of the advisory agreement, our Advisor is responsible for our day-to-day operations, administers our bookkeeping and accounting functions, serves as our consultant in connection with policy decisions to be made by our board of directors, manages our properties, loans, and other permitted investments and renders other services as the board

 

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of directors deems appropriate. In exchange for these services, our Advisor is entitled to receive certain fees from us. First, for supervision and day-to-day management of the properties and the mortgage loans, our Advisor receives an asset management fee, which is payable monthly, in an amount equal to 0.08334% per month based on the total real estate asset value of a property as defined in the advisory agreement (exclusive of acquisition fees and acquisition expenses), the outstanding principal amounts of any loans made by us and the amount invested in any other permitted investments as of the end of the preceding month. Second, for the selection, purchase, financing, development, construction or renovation of real properties and services related to the incurrence of debt, our Advisor receives an acquisition fee equal to 3% of the gross proceeds from our common stock offerings and loan proceeds from debt, lines of credit and other permanent financing that we use to acquire properties or to make or acquire loans and other permitted investments.

In addition, we reimburse our Advisor for all of the costs it incurs in connection with the services it provides to us. However, in accordance with the advisory agreement, our Advisor is required to reimburse us for the amount by which the total operating expenses (as described in the advisory agreement) incurred by us in any four consecutive fiscal quarters (the “Expense Year”) exceed the greater of 2% of average invested assets or 25% of net income (the “Expense Cap”). For the expense years ended December 31, 2009, 2008 and 2007, operating expenses did not exceed the Expense Cap.

The current advisory agreement continues until April 2010, and thereafter may be extended annually upon the mutual consent of our Advisor and our entire board of directors, including directors who are not directly or indirectly associated with our Advisor (“Independent Directors”), unless terminated at an earlier date upon 60 days prior written notice by either party. As of the date of this filing, the board of directors has approved the extension of the advisory agreement for an additional year through April 2011.

EMPLOYEES

Reference is made to Item 10. “Directors, Executive Officers and Corporate Governance” in our Definitive Proxy Statement for a listing of our executive officers. We have no employees. Our executive officers are compensated by our Advisor.

AVAILABLE INFORMATION

We make available free of charge on our Internet website, www.cnllifestylereit.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the “Commission”). The public may read and copy any materials that we file with the Commission at the Commission’s Public Reference Room at Room 1580, 100 F Street, N.E., Washington, D.C. 20549 and may obtain information on the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an internet site that contains reports, proxy and information statements, and other information that we file electronically with the Commission (http://www.sec.gov).

 

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Item 1A. Risk Factors

Real Estate and Other Investment Risks

The current economic slowdown has affected certain of the lifestyle properties in which we invest, and the financial difficulties of our tenants and operators could adversely affect us. A prolonged or expanded period of economic difficulty could adversely affect other of our lifestyle properties. Although a general downturn in the real estate industry would be expected to adversely affect the value of our properties, a downturn in the ski, golf, attractions, marinas and additional lifestyle industries in which we invest could compound the adverse affect. Economic weakness combined with higher costs, especially for energy, food and commodities, has put considerable pressure on consumer spending, which, along with the lack of available debt, has resulted in certain of our tenants experiencing a decline in financial and operating performance. Reductions in consumer spending due to weakness in the economy and uncertainties regarding future economic prospects have adversely affected some of our tenants’ abilities to pay rent to us, resulting in the restructuring of many of their leases with us or in the termination of certain leases. The continuation or expansion of such events could have a negative impact on our results of operations and our ability to pay distributions to our stockholders. In addition, negative events impacting the capital markets may reduce the amount of working capital available to our tenants which may affect their ability to pay rent.

The current economic environment has affected certain of our tenants’ ability to make rental payments to us in accordance with their lease agreement. Some of our tenants have experienced difficulties or have been unable to obtain working capital lines of credit or renew their existing lines of credit due to current state of economy and the capital markets which impacted their ability to pay the full amount of rent due under their leases. As a result, we restructured the leases for certain tenants such that the rents are paid on a seasonal schedule with most, if not all, of the rent being paid during the tenants’ seasonally busy period. In other cases, we restructured the lease terms to allow for rent deferrals or reductions for a period of time to provide temporary relief that then become payable in later periods of the lease term. In addition, we have refunded security deposits which must be replaced up to specified amounts and have provided lease allowances. The rent deferrals granted, the security deposits refunded and lease allowances paid in 2009 directly reduced our cash flows from operating activities during 2009. Other restructures, such as the reductions in lease rates and the future amortization of lease allowances against rental income have reduced and will reduce our net operating results in current and future periods.

Because our revenues are highly dependent on lease payments from our properties and interest payments from loans that we make, defaults by our tenants or borrowers would reduce our cash available for the repayment of our outstanding debt and for distributions. Our ability to repay any outstanding debt and make distributions to stockholders will depend upon the ability of our tenants and borrowers to make payments to us, and their ability to make these payments will depend primarily on their ability to generate sufficient revenues in excess of operating expenses from businesses conducted on our properties. For example, the ability of our tenants to make their scheduled payments to us will depend upon their ability to generate sufficient operating income at the property they operate. A tenant’s failure or delay in making scheduled rent payments to us or a borrower’s failure to make debt service payments to us may result from the tenant or borrower realizing reduced revenues at the properties it operates.

We do not have control over market and business conditions that may affect our success. The following external factors, as well as other factors beyond our control, may reduce the value of properties that we acquire, the ability of tenants to pay rent on a timely basis, or at all, the amount of the rent to be paid and the ability of borrowers to make loan payments on time, or at all:

 

   

changes in general or local economic or market conditions;

 

   

the pricing and availability of debt or working capital;

 

   

increased costs of energy, insurance or products;

 

   

increased costs and shortages of labor;

 

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increased competition;

 

   

quality of management;

 

   

failure by a tenant to meet its obligations under a lease;

 

   

bankruptcy of a tenant or borrower;

 

   

the ability of an operator to fulfill its obligations;

 

   

limited alternative uses for properties;

 

   

changing consumer habits;

 

   

condemnation or uninsured losses;

 

   

changing demographics; and

 

   

changing government regulations.

Further, the results of operations for a property in any one period may not be indicative of results in future periods, and the long-term performance of such property generally may not be comparable to, and cash flows may not be as predictable as, other properties owned by third parties in the same or similar industry. If tenants are unable to make lease payments or borrowers are unable to make loan payments as a result of any of these factors, cash available for distributions to our stockholders may be reduced.

Our exposure to typical real estate investment risks could reduce our income. Our properties, loans and other permitted investments will be subject to the risks typically associated with investments in real estate. Such risks include the possibility that our properties will generate rent and capital appreciation, if any, at rates lower than we anticipated or will yield returns lower than those available through other investments. Further, there are other risks by virtue of the fact that our ability to vary our portfolio in response to changes in economic and other conditions will be limited because of the general illiquidity of real estate investments. Income from our properties may be adversely affected by many factors including, but not limited to, an increase in the local supply of properties similar to our properties, a decrease in the number of people interested in participating in activities related to the businesses conducted on the properties that we acquire, adverse weather conditions, changes in government regulation, international, national or local economic deterioration, increases in energy costs and other expenses affecting travel, factors which may affect travel patterns and reduce the number of travelers and tourists, increases in operating costs due to inflation and other factors that may not be offset by increased room rates, and changes in consumer tastes.

If one or more of our tenants file for bankruptcy protection, we may be precluded from collecting all sums due. If one or more of our tenants, or the guarantor of a tenant’s lease, commences, or has commenced against it, any proceeding under any provision of the U.S. federal bankruptcy code, as amended, or any other legal or equitable proceeding under any bankruptcy, insolvency, rehabilitation, receivership or debtor’s relief statute or law (“Bankruptcy Proceeding”), we may be unable to collect sums due under our lease(s) with that tenant. Any or all of the tenants, or a guarantor of a tenant’s lease obligations, could be subject to a Bankruptcy Proceeding. A Bankruptcy Proceeding may bar our efforts to collect pre-bankruptcy debts from those entities or their properties unless we are able to obtain an enabling order from the bankruptcy court. If a lease is rejected by a tenant in bankruptcy, we would only have a general unsecured claim against the tenant, and may not be entitled to any further payments under the lease. We believe that our security deposits in the form of letters of credit would be protected from bankruptcy in most jurisdictions. However, a tenant’s or lease guarantor’s Bankruptcy Proceeding could hinder or delay efforts to collect past due balances under relevant leases or guarantees and could ultimately preclude collection of these sums. Such an event could cause a decrease or cessation of rental payments which would reduce our cash flow and the amount available for distribution to our stockholders. In the event of a Bankruptcy Proceeding, we cannot assure you that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distribution to our stockholders may be adversely affected.

 

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Multiple property leases or loans with individual tenants or borrowers increase our risks in the event that such tenants or borrowers become financially impaired. The value of our properties will depend principally upon the value of the leases entered into for properties that we acquire. Defaults by a tenant or borrower may continue for some time before we determine that it is in our best interest to evict the tenant or foreclose on the property of the borrower. Tenants may lease more than one property, and borrowers may enter into more than one loan. As a result, a default by, or the financial failure of, a tenant or borrower could cause more than one property to become vacant or be in default or more than one lease or loan to become non-performing. Defaults or vacancies can reduce and have reduced our cash receipts and funds available for distribution and could decrease the resale value of affected properties until they can be re-leased.

We may rely on various cash flow or income security provisions in our leases for minimum rent payments. Our leases may, but are not required to, have security provisions such as deposits, stock pledges and guarantees or shortfall reserves provided by a third-party tenant or operator. These security provisions may terminate at either a specific time during the lease term or once net operating income of the property exceeds a specified amount. Certain security provisions may also have limits on the overall amount of the security under the lease. After the termination of a security feature, or in the event that the maximum limit of a security provision is reached, we may only look to the tenant to make lease payments. In the event that a security provision has expired or the maximum limit has been reached, or a provider of a security provision is unable to meet its obligations, our results of operations and ability to pay distributions to our stockholders could be adversely affected if our tenants are unable to generate sufficient funds from operations to meet minimum rent payments and the tenants do not otherwise have the resources to make rent payments.

It may be difficult for us to exit a joint venture after an impasse. In our joint ventures, there will be a potential risk of impasse in some business decisions because our approval and the approval of each co-venturer may be required for some decisions. In any joint venture, we may have the right to buy the other co-venturer’s interest or to sell our own interest on specified terms and conditions in the event of an impasse regarding a sale. In the event of an impasse, it is possible that neither party will have the funds necessary to complete a buy-out. In addition, we may experience difficulty in locating a third-party purchaser for our joint venture interest and in obtaining a favorable sale price for the interest. As a result, it is possible that we may not be able to exit the relationship if an impasse develops.

Discretionary consumer spending may affect the profitability of certain properties we acquire. The financial performance of certain properties in which we have invested and may invest in the future depends in part on a number of factors relating to or affecting discretionary consumer spending for the types of services provided by businesses operated on these properties. Unfavorable local, regional, or national economic developments or uncertainties regarding future economic prospects have reduced consumer spending in the markets where we own properties and, when combined with the lack of available debt, have adversely affected certain of our tenants’ businesses. As a result, certain of our tenants have experienced declines in operating results, and a number of our tenants have sought to modify certain of their leases. Any continuation of such events that leads to lower spending on lifestyle activities could impact our tenants’ ability to pay rent and thereby have a negative impact on our results of operations.

The inability to increase or maintain lease rates at our properties might affect the level of distributions to stockholders. Given the nature of certain properties we have acquired or may acquire, the relative stagnation of base lease rates in certain sectors might not allow for substantial increases in rental revenue to us that could allow for increased distributions to stockholders.

Seasonal revenue variations in certain asset classes will require the operators of those asset classes to manage cash flow properly over time so as to meet their non-seasonal scheduled rent payments to us. Certain of the properties in which we may invest are generally seasonal in nature due to geographic location, climate and weather patterns. For example, revenue and profits at ski resorts and their related properties are substantially lower and historically result in losses during the summer months due to the closure of ski operations, while many

 

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attractions properties are closed during the winter months and produce the majority of their revenues and profits during summer months. As a result of the seasonal nature of certain business operations that may be conducted on properties we acquire, these businesses will experience seasonal variations in revenues that may require our operators to supplement revenue at their properties in order to be able to make scheduled rent payments to us or require us to, in certain cases we have or may, adjust their lease payments so that we collect more rent during their seasonally busy time.

Our real estate assets may be subject to impairment charges. We periodically evaluate the recoverability of the carrying value of our real estate assets for impairment indicators. Factors considered in evaluating impairment of our existing real estate assets held for investment include significant declines in property operating profits, recurring property operating losses and other significant adverse changes in general market conditions. Generally, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of the asset over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. Investments in unconsolidated entities are not considered impaired if the estimated fair value of the investment exceeds the carrying value of the investment and the decline is considered to be other than temporary. Management makes assumptions and estimates when considering impairments and actual results could vary materially from these assumptions and estimates.

The real estate industry is capital intensive and we are subject to risks associated with ongoing needs for renovation and capital improvements to our properties as well as financing for such expenditures. In order for us to remain competitive, our properties will have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. These capital improvements may give rise to the following risks:

 

   

construction cost overruns and delays;

 

   

a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on satisfactory terms; and

 

   

disruptions in the operation of the properties while capital improvements are underway.

We will not control the management of our properties. In order to maintain our status as a REIT for federal income tax purposes, we may not operate certain types of properties we acquire or participate in the decisions affecting their daily operations. Our success, therefore, will depend on our ability to select qualified and creditworthy tenants and managers who can effectively manage and operate the properties. Our tenants will be responsible for maintenance and other day-to-day management of the properties or will enter into agreements with third-party operators directly or by entering into operating agreements with third-party managers. Because our revenues will largely be derived from rents, our financial condition will be dependent on the ability of third-party tenants and/or operators to operate the properties successfully. We will attempt to enter into leasing agreements with tenants having substantial prior experience in the operation of the type of property being rented, however, there can be no assurance that we will be able to make such arrangements. Additionally, if we elect to treat property we acquire as a result of a borrower’s default on a loan or a tenant’s default on a lease as “foreclosure property” for federal income tax purposes, we will be required to operate that property through an independent contractor over whom we will not have control. If our tenants or third-party operators are unable to operate the properties successfully or if we select unqualified managers, then such tenants and operators might not have sufficient earnings to be able to pay our rent, which could adversely affect our financial condition.

Joint venture partners may have different interests than we have, which may negatively impact our control over our ventures. Investments in joint ventures involve the risk that our co-venturer may have economic or business interests or goals which, at a particular time, are inconsistent with our interests or goals, that the co-venturer may be in a position to take action contrary to our instructions, requests, policies or objectives, or that the co-venturer may experience financial difficulties. Among other things, actions by a co-venturer might subject assets owned by the joint venture to liabilities in excess of those contemplated by the terms of the joint

 

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venture agreement or to other adverse consequences. This risk is also present when we make investments in securities of other entities. If we do not have full control over a joint venture, the value of our investment will be affected to some extent by a third party that may have different goals and capabilities than ours. As a result, joint ownership of investments and investments in other entities may adversely affect our returns on investments and, therefore, cash available for distributions to our stockholders may be reduced.

Adverse weather conditions may damage certain properties we acquire and/or reduce our operators’ ability to make scheduled rent payments to us. Weather conditions may influence revenues at certain types of properties we acquire. These adverse weather conditions include heavy snowfall (or lack thereof), hurricanes, tropical storms, high winds, heat waves, frosts, drought (or reduced rainfall levels), excessive rain, avalanches, mudslides and floods. Adverse weather could reduce the number of people participating in activities at properties we acquire and have acquired. Certain properties may be susceptible to damage from weather conditions such as hurricanes, which may cause damage (including, but not limited to property damage and loss of revenue) that is not generally insurable at commercially reasonable rates. Further, the physical condition of properties we acquire must be satisfactory to attract visitation. In addition to severe or generally inclement weather, other factors, including, but not limited to plant disease and insect infestation, as well as the quality and quantity of water, could adversely affect the conditions at properties we own and acquire or develop. Most properties have some insurance coverage that will offset such losses and fund needed repairs.

Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks. We may invest in properties upon which we will develop and construct improvements. We will be subject to risks relating to uncertainties associated with re-zoning for development and environmental concerns of governmental entities and/or community groups, and our ability to control construction costs or to build in conformity with plans, specifications and timetables. Our performance also may be affected or delayed by conditions beyond our control. Moreover, delays in completion of construction also could give tenants the right to terminate preconstruction leases for space at a newly developed project. Furthermore, we must rely upon projections of rental income, expenses and estimates of the fair market value of property upon completion of construction before agreeing to a property’s purchase price. If our projections are inaccurate, we may pay too much for a property and our return on our investment could suffer.

If we set aside insufficient reserves for capital expenditures, we may be required to defer necessary property improvements. If we do not have enough reserves for capital expenditures to supply needed funds for capital improvements throughout the life of the investment in a property, and there is insufficient cash available from our operations, we may be required to defer necessary improvements to the property that may cause the property to suffer from a greater risk of obsolescence, a decline in value and/or a greater risk of decreased cash flow as a result of attracting fewer potential tenants to the property and adversely affecting our tenants’ businesses. If we lack sufficient capital to make necessary capital improvements, then we may not be able to maintain projected rental rates for certain properties, and our results of operations and ability to pay distributions to our stockholders may be negatively impacted.

Lending Related Risks

Our loans may be affected by unfavorable real estate market conditions. When we make loans, we are at risk of default on those loans caused by many conditions beyond our control, including local and other economic conditions affecting real estate values and interest rate levels. We do not know whether the values of the properties collateralizing mortgage loans will remain at the levels existing on the dates of origination of the loans. If the values of the underlying properties drop or in some instances fail to rise, our risk will increase and the value of our interests may decrease.

Foreclosures create additional ownership risks that could adversely impact our returns on mortgage investments. When we acquire property by foreclosure following defaults under our mortgage, bridge or mezzanine loans, we have the economic and liability risks as the owner of such property. This additional liability could adversely impact our returns on mortgage investments.

 

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Our loans will be subject to interest rate fluctuations. If we invest in fixed-rate, long-term loans and interest rates rise, the loans will yield a return lower than then-current market rates. If interest rates decrease, we will be adversely affected to the extent that loans are prepaid, because we will not be able to make new loans at the previously higher interest rate.

Lack of principal amortization of loans increases the risk of borrower default at maturity and delays in liquidating defaulted loans could reduce our investment returns and our cash available for distributions. Certain of the loans that we have made do not require the amortization of principal during their term. As a result, a substantial amount of, or the entire principal balance of such loans, will be due in one balloon payment at their maturity. Failure to amortize the principal balance of loans may increase the risk of a default during the term, and at maturity of loans. In addition, certain of our loans have or may have a portion of the interest accrued and payable upon maturity. We may not receive any of that accrued interest if our borrower defaults. A default under loans could have a material adverse effect on our ability to pay distributions to stockholders. Further, if there are defaults under our loans, we may not be able to repossess and sell the underlying properties or other security quickly. The resulting time delay could reduce the value of our investment in the defaulted loans. An action to foreclose on a mortgaged property securing a loan is regulated by state statutes and rules and is subject to many of the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due on our loan. Any failure or delay by a borrower in making scheduled payments to us may adversely affect our ability to make distributions to stockholders.

We may make loans on a subordinated and unsecured basis and may not be able to collect outstanding principal and interest. Although our loans to third parties are usually collateralized by properties pledged by such borrowers, we have made loans that are unsecured and/or subordinated in right of payment to such third parties’ existing and future indebtedness. In the event of a foreclosure, bankruptcy, liquidation, winding up, reorganization or other similar proceeding relating to such third party, and in certain other events, such third party’s assets may only be available to pay obligations on our unsecured loans after the third party’s other indebtedness has been paid. As a result, there may not be sufficient assets remaining to pay the principal or interest on the unsecured loans we may make.

Financing Related Risks

Continued uncertainty and volatility in the credit markets could affect our ability to obtain debt financing on reasonable terms, which could reduce the number of properties we may be able to acquire. The global and U.S. economy continued to struggle during 2009 and there continues to be uncertainty regarding the duration of the economic downturn as well as the full impact of these events on the global and U.S. economy, including our properties. If mortgage debt is unavailable on attractive terms as a result of increased interest rates, increased credit spreads, decreased liquidity or other factors, our ability to acquire properties may be limited and we risk being unable to refinance our existing debt upon maturity.

There is no guarantee that borrowing arrangements or other arrangements for obtaining leverage will be available, or if available, will be available on terms and conditions acceptable to us. Unfavorable economic conditions have increased financing costs and limited access to the capital markets. In addition, a decline in market value of our assets may have adverse consequences in instances where we borrow money based on the fair value of those assets. A decrease in market value of those assets may result in the lender requiring us to post additional collateral.

Currently, the market for credit facilities is very challenging and many lenders are actively seeking to reduce their balances outstanding by lowering advance rates on financed assets and increasing borrowing costs, to the extent such facilities continue to be available. In the event we are unable to maintain or extend existing and/or secure new lines of credit or collateralized financing on favorable terms, our ability to make investments and our ability to make distributions may be significantly impacted.

 

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Anticipated borrowing creates risks. We have borrowed and will likely continue to borrow money to acquire assets, to preserve our status as a REIT or for other corporate purposes. We generally mortgage or put a lien on one or more of our assets in connection with any borrowing. We intend to maintain one or more revolving lines of credit of up to $150 million to provide financing for the acquisition of assets, although our board of directors could determine to borrow a greater amount. We may repay the line of credit using equity offering proceeds, including proceeds from our stock offering, proceeds from the sale of assets, working capital or long-term financing. We also have and intend to continue to obtain long-term financing. We may not borrow more than 300% of the value of our net assets without the approval of a majority of our Independent Directors and the borrowing must be disclosed and explained to our stockholders in our first quarterly report after such approval. Borrowing may be risky if the cash flow from our properties and other permitted investments is insufficient to meet our debt obligations. In addition, our lenders may seek to impose restrictions on future borrowings, distributions and operating policies, including with respect to capital expenditures and asset dispositions. If we mortgage assets or pledge equity as collateral and we cannot meet our debt obligations, then the lender could take the collateral, and we would lose the asset or equity and the income we were deriving from the asset.

Defaults on our borrowings may adversely affect our financial condition and results of operations. Defaults on loans collateralized by a property we own may result in foreclosure actions and our loss of the property or properties securing the loan that is in default. Such legal actions are expensive. For tax purposes, a foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt collateralized by the property. If the outstanding balance of the debt exceeds our tax basis in the property, we would recognize taxable income on the foreclosure and all or a portion of such taxable income may be subject to tax and/or required to be distributed to our stockholders in order for us to qualify as a REIT. In such case, we would not receive any cash proceeds to enable us to pay such tax or make such distributions. If any mortgages contain cross collateralization or cross default provisions, more than one property may be affected by a default. If any of our properties are foreclosed upon due to a default, our financial condition, results of operations and ability to pay distributions to stockholders will be adversely affected.

Financing arrangements involving balloon payment obligations may adversely affect our ability to make distributions. Some of our fixed-term financing arrangements may require us to make “balloon” payments at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or sell a particular property. At the time the balloon payment is due, we may not be able to raise equity or refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. These refinancing or property sales could negatively impact the rate of return to stockholders and the timing of disposition of our assets. In addition, payments of principal and interest may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT.

Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders. We may borrow money that bears interest at a variable rate and, from time to time, we may pay mortgage loans or refinance our properties in a rising interest rate environment. Accordingly, increases in interest rates could increase our interest costs, which could have a material adverse effect on our operating cash flow and our ability to make distributions to our stockholders.

We may borrow money to make distributions and distributions may not come from funds from operations. In the past, we have borrowed from affiliates and other persons to make distributions, and in the future we may continue to borrow money as we consider necessary or advisable to meet our distribution requirements. Our distributions have exceeded our funds from operations in the past and may do so in the future. In the event that we make distributions in excess of our earnings and profits, such distributions could constitute a return of capital for federal income tax and accounting purposes. Furthermore, in the event that we are unable to fund future distributions from our funds from operations, the value of your shares upon the possible listing of our stock, the sale of our assets or any other liquidity event may be negatively affected.

 

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Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders. When providing financing, a lender may impose restrictions on us that affect our distributions, operating policies and ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage a property or affect other operational policies. Such limitations hamper our flexibility and may impair our ability to achieve our operating plans.

We may acquire various financial instruments for purposes of “hedging” or reducing our risks which may be costly and/or ineffective and will reduce our cash available for distribution to our stockholders. Use of derivative instruments for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging transaction can result in the hedging transaction becoming worthless or a speculative hedge. Hedging activities also involve the risk of an imperfect correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the asset being hedged. Use of hedging activities generally may not prevent significant losses and could increase our losses. Further, hedging transactions may reduce cash available for distribution to our stockholders.

Tax Related Risks

We will be subject to increased taxation if we fail to qualify as a REIT for federal income tax purposes. We believe that we have been organized and have operated, and intend to continue to be organized and to operate, in a manner that will enable us to meet the requirements for qualification and taxation as a REIT for federal income tax purposes, commencing with our taxable year ended December 31, 2004. A REIT is generally not subject to federal tax at the corporate level to the extent that it distributes annually at least 90% of its taxable income to its stockholders and meets other compliance requirements. We have not requested, and do not plan to request, a ruling from the IRS that we qualify as a REIT. Based upon representations made by our officers with respect to certain factual matters, and upon counsel’s assumption that we have operated and will continue to operate in the manner described in the representations and in our prospectus relating to our common stock offerings, our tax counsel, Arnold & Porter LLP, has rendered an opinion that we were organized and have operated in conformity with the requirements for qualification as a REIT and that our proposed method of operation will enable us to continue to meet the requirements for qualification as a REIT. Our continued qualification as a REIT will depend on our continuing ability to meet highly technical and complex requirements concerning, among other things, the ownership of our outstanding shares of common stock, the nature of our assets, the sources of our income, the amount of our distributions to our stockholders and the filing of TRS elections. No assurance can be given that we qualify or will continue to qualify as a REIT or that new legislation, Treasury Regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to our qualification as a REIT.

You should be aware that opinions of counsel are not binding on the IRS or on any court. The conclusions stated in the opinion of our tax counsel are conditioned on, and our continued qualification as a REIT will depend on, our company meeting various requirements.

If we fail to qualify as a REIT, we would be subject to additional federal income tax at regular corporate rates. If we fail to qualify as a REIT, we may be subject to additional federal income and alternative minimum taxes. Unless we are entitled to relief under specific statutory provisions, we also could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified. Therefore, if we fail to qualify as a REIT, the funds available for distribution to stockholders would be reduced substantially for each of the years involved.

Our leases may be recharacterized as financings which would eliminate depreciation deductions on our properties. We believe that we would be treated as the owner of properties where we would own the underlying land, except with respect to leases structured as “financing leases,” which would constitute financings for federal income tax purposes. If the lease of a property does not constitute a lease for federal income tax purposes and is

 

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recharacterized as a secured financing by the IRS, then we believe the lease should be treated as a financing arrangement and the income derived from such a financing arrangement should satisfy the 75% and the 95% gross income tests for REIT qualification as it would be considered to be interest on a loan collateralized by real property. Nevertheless, the recharacterization of a lease in this fashion may have adverse tax consequences for us. In particular, we would not be entitled to claim depreciation deductions with respect to the property (although we should be entitled to treat part of the payments we would receive under the arrangement as the repayment of principal). In such event, in some taxable years our taxable income, and the corresponding obligation to distribute 90% of such income, would be increased. With respect to leases structured as “financing leases,” we will report income received as interest income and will not take depreciation deductions related to the real property. Any increase in our distribution requirements may limit our ability to invest in additional properties and to make additional mortgage loans. No assurance can be provided that the IRS would recharacterize such transactions as financings that would qualify under the 95% and 75% gross income tests.

Excessive non-real estate asset values may jeopardize our REIT status. In order to qualify as a REIT, among other requirements, at least 75% of the value of our assets must consist of investments in real estate, investments in other REITs, cash and cash equivalents and government securities. Accordingly, the value of any other property that is not considered a real estate asset for federal income tax purposes must represent in the aggregate not more than 25% of our total assets. In addition, under federal income tax law, we may not own securities in, or make loans to, any one company (other than a REIT, a qualified REIT subsidiary or a taxable REIT subsidiary) which represent in excess of 10% of the voting securities or 10% of the value of all securities of that company or which have, in the aggregate, a value in excess of 5% of our total assets, and we may not own securities of one or more taxable REIT subsidiaries which have, in the aggregate, a value in excess of 25% of our total assets.

The 25%, 10% and 5% REIT qualification tests are determined at the end of each calendar quarter. If we fail to meet any such test at the end of any calendar quarter, and such failure is not remedied within 30 days after the close of such quarter, we will cease to qualify as a REIT, unless certain requirements are satisfied.

Despite our REIT status, we remain subject to various taxes which would reduce operating cash flow if and to the extent certain liabilities are incurred. Even if we qualify as a REIT, we are subject to some federal, state and local taxes on our income and property that could reduce operating cash flow, including but not limited to: (i) tax on any undistributed real estate investment trust taxable income; (ii) “alternative minimum tax” on our items of tax preference; (iii) certain state income taxes (because not all states treat REITs the same as they are treated for federal income tax purposes); (iv) a tax equal to 100% of net gain from “prohibited transactions;” (v) tax on gains from the sale of certain “foreclosure property;” (vi) tax on gains of sale of certain “built-in gain” properties; and (vii) certain taxes and penalties if we fail to comply with one or more REIT qualification requirements, but nevertheless qualify to maintain our status as a REIT. Foreclosure property includes property with respect to which we acquire ownership by reason of a borrower’s default on a loan or possession by reason of a tenant’s default on a lease. We may elect to treat certain qualifying property as “foreclosure property,” in which case, the income from such property will be treated as qualifying income under the 75% and 95% gross income tests for three years following such acquisition. To qualify for such treatment, we must satisfy additional requirements, including that we operate the property through an independent contractor after a short grace period. We will be subject to tax on our net income from foreclosure property. Such net income generally means the excess of any gain from the sale or other disposition of foreclosure property and income derived from foreclosure property that otherwise does not qualify for the 75% gross income test, over the allowable deductions that relate to the production of such income. Any such tax incurred will reduce the amount of cash available for distribution.

We may be required to pay a penalty tax upon the sale of a property. The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100% penalty tax. Under current law, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of a property constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular

 

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transaction. The 2008 Housing and Economic Recovery Act changed the safe harbor rules such that a REIT, among other things, is required to hold the property for only two years rather than four years. We intend that we and our subsidiaries will hold the interests in our properties for investment with a view to long-term appreciation, to engage in the business of acquiring and owning properties, and to make occasional sales as are consistent with our investment objectives. We do not intend to engage in prohibited transactions. We cannot assure you, however, that we will only make sales that satisfy the requirements of the safe harbors or that the IRS will not successfully assert that one or more of such sales are prohibited transactions.

Company Related Risks

We may have difficulty funding distributions solely from cash flow from operations, which could reduce the funds we have available for investments and your overall return. There are many factors that can affect the availability and timing of distributions to stockholders. We expect to fund distributions principally from cash flows from operations; however, if our properties are not generating sufficient cash flow or our other operating expenses require it, we may fund our distributions from borrowings. If we fund distributions from borrowings, then we will have fewer funds available for the acquisition of properties and your overall return may be reduced. Further, to the extent distributions exceed earnings and profits calculation on a tax basis, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize a capital gain in the future.

Yields on and safety of deposits may be lower due to the extensive decline in the financial markets. Until we invest the proceeds of the offering in properties, we generally hold those funds in permitted investments that are consistent with preservation of liquidity and safety. The investments include money market funds, bank money market accounts and CDs or other accounts at third-party depository institutions. While we strive to hold these funds in high quality investments with quality institutions, there can be no assurance that continued or unusual declines in the financial markets will not result in a loss of some or all of these funds or reductions in cash flows from these investments.

We may not be able to pay distributions at an increasing rate. In the future, our ability to declare and pay distributions at our current or an increasing rate will be subject to evaluation by our board of directors of our current and expected future operating results, capital levels, financial condition, future growth plans, general business and economic conditions and other relevant considerations, and we cannot assure you that we will continue to pay distributions on any schedule or that we will not reduce the amount of or cease paying distributions in the future.

We may be unable to invest the proceeds we receive from our common stock offerings in a timely manner. We have and expect to continue to raise capital through our current and future common stock offerings. If we experience delays in using this capital to acquire properties or make loans, it may reduce the rate at which we pay distributions to our stockholders as a result of the dilution that occurs from uninvested offering proceeds. Additionally, if we are unable to locate suitable third-party tenants for our properties, it may further delay our ability to acquire properties.

Offering Related Risks

The price of our shares is subjective and may not bear any relationship to what a stockholder could receive if their shares were resold.

We determined the offering price of our shares in our sole discretion based on:

 

   

the price that we believed investors would pay for our shares;

 

   

estimated fees to be paid to third parties and to our Advisor and its affiliates; and

 

   

the expenses of this offering and funds we believed should be available for us to invest in properties, loans and other permitted investments.

 

19


Table of Contents

There is no public market for our shares on which to base market value and there can be no assurance that one will develop. However, eighteen months following the completion of our last offering, we will be required to provide an estimated value of our shares to our stockholders.

Although we have adopted a redemption plan, we have discretion not to redeem your shares, to suspend the plan and to cease redemptions. Our redemption plan includes restrictions that limit a stockholders’ ability to have their shares redeemed. Our stockholders must hold their shares for at least one year before presenting for our consideration all or any portion equal to at least 25% of such shares to us for redemption, except for redemption sought upon death, qualifying disability, bankruptcy or unforeseeable emergency of a stockholder. We limit the number of shares redeemed pursuant to the redemption plan as follows: (i) at no time during any 12-month period, we may redeem no more than 5% of the weighted-average shares of our common stock at the beginning of such 12-month period and (ii) during each quarter, redemptions will be limited to an amount determined by our board and from the sale of shares under our dividend reinvestment plan during the prior quarter. The redemption plan has many limitations and you should not rely upon it as a method of selling shares promptly at a desired price.

 

Item 1B. Unresolved Staff Comments

None.

 

20


Table of Contents
Item 2. Properties

As of December 31, 2009, through various limited partnerships and limited liability companies, we had invested in 115 real estate investment properties. The following tables set forth details about our property holdings by asset class beginning with wholly-owned properties followed by properties owned through joint venture arrangements. These properties are owned in fee simple interest and operated subject to long-term triple-net leases unless otherwise noted (in thousands):

 

Name and Location

 

Description

  Operator   Mortgages and
Other Notes
Payable as of
December 31,
2009
  Initial
Purchase
Price
  Date
Acquired

Ski and Mountain Lifestyle

         

Brighton Ski Resort—

Brighton, Utah

  1,050 skiable acres, seven chairlifts; permit and fee interests   Boyne   $ 15,834   $ 35,000   1/8/07

Crested Butte Mountain Resort—

Mt. Crested Butte, Colorado

  1,167 skiable acres, 16 chairlifts; permit and leasehold interest   Triple Peaks   $ 13,109   $ 41,000   12/5/08

Cypress Mountain—

Vancouver, BC, Canada

  358 skiable acres, five chairlifts; permit and fee interests   Boyne   $ 19,064   $ 27,500   5/30/06

Gatlinburg Sky Lift—

Gatlinburg, Tennessee

  Scenic chairlift; leasehold interest   Boyne   $ —     $ 19,940   12/22/05

Jiminy Peak Mountain Resort—

Hancock, Massachusetts

  800 skiable acres, eight chairlifts; fee interest   FO Ski Resorts,
LLC
  $ 9,957   $ 27,000   1/27/09

Loon Mountain Resort—

Lincoln, New Hampshire

  275 skiable acres, ten chairlifts; leasehold, permit and fee interests   Boyne   $ 12,963   $ 15,539   1/19/07

Mount Sunapee Mountain Resort—

Newbury, New Hampshire

  230 skiable acres, ten chairlifts leasehold interest   Triple Peaks   $ 6,075   $ 19,000   12/5/08

Mountain High Resort—

Wrightwood, California

  290 skiable acres, 59 trails, 16 chairlifts; permit interest   Mountain High
Resorts Associates,
LLC
  $ —     $ 45,000   6/29/07

Northstar-at-Tahoe Resort—

Lake Tahoe, California

  2,480 skiable acres, 16 chairlifts; permit and fee interests   Booth   $ 42,131   $ 80,097   1/19/07

Okemo Mountain Resort—

Ludlow, Vermont

  624 skiable acres, 19 chairlifts; leasehold interest   Triple Peaks   $ 32,816   $ 72,000   12/5/08

Sierra-at-Tahoe Resort—

South Lake Tahoe, California

  1,680 skiable acres, 12 chairlifts; permit and fee interests   Booth   $ 19,353   $ 39,898   1/19/07

Sugarloaf Mountain Resort—

Carrabassett Valley, Maine

  525 skiable acres, 15 chairlifts; fee and leasehold interests   Boyne   $ —     $ 26,000   8/7/07

Summit-at-Snoqualmie Resort—

Snoqualmie Pass, Washington

  1,697 skiable acres, 26 chairlifts; permit and fee interests   Boyne   $ 12,963   $ 34,466   1/19/07

Sunday River Resort—

Newry, Maine

  668 skiable acres, 18 chairlifts; leasehold, permit and fee interests   Boyne   $ —     $ 50,500   8/7/07

The Village at Northstar—

Lake Tahoe, California

  79,898 leasable square feet   Booth   $ —     $ 36,100   11/15/07
                 
  Total     $ 184,265   $ 569,040  
                 

 

21


Table of Contents

Name and Location

  

Description

   Operator    Mortgages and
Other Notes
Payable as of
December 31,
2009
   Initial
Purchase
Price
   Date
Acquired

Golf

              

Ancala Country Club—

   18-hole private course    EAGLE    $ 7,349    $ 14,107    11/30/07

Scottsdale, Arizona

              

Arrowhead Country Club—

   18-hole private course    EAGLE    $ 9,089    $ 17,357    11/30/07

Glendale, Arizona

              

Arrowhead Golf Club—

   18-hole public course    EAGLE    $ 10,056    $ 15,783    11/30/07

Littleton, Colorado

              

Bear Creek Golf Club—

Dallas, Texas

   36-hole public course;
leasehold interest
   Billy Casper    $ 5,481    $ 11,100    9/8/06

Canyon Springs Golf Club—

   18-hole public course    EAGLE    $ 7,554    $ 13,010    11/16/06

San Antonio, Texas

              

Clear Creek Golf Club—

Houston, Texas

   18-hole public course;
concession-hold interest
   EAGLE    $ —      $ 1,888    1/11/07

Continental Golf Course—

   18-hole public course    EAGLE    $ 3,868    $ 6,419    11/30/07

Scottsdale, Arizona

              

Cowboys Golf Club—

Grapevine, Texas

   18-hole public course;
leasehold interest
   EAGLE    $ 12,033    $ 25,000    12/26/06

David L. Baker Golf Course—

Fountain Valley, California

   18-hole public course;
concession interest
   EAGLE    $ —      $ 9,492    4/17/08

Deer Creek Golf Club—

   18-hole public course    EAGLE    $ 4,738    $ 8,934    11/30/07

Overland Park, Kansas

              

Desert Lakes Golf Club—

   18-hole public course    EAGLE    $ 1,257    $ 2,637    11/30/07

Bullhead City, Arizona

              

Eagle Brook Country Club—

   18-hole private course    EAGLE    $ 8,896    $ 16,253    11/30/07

Geneva, Illinois

              

Foothills Golf Club—

   18-hole public course    EAGLE    $ 5,512    $ 9,881    11/30/07

Phoenix, Arizona

              

Forest Park Golf Course—

   27-hole public course;    EAGLE    $ —      $ 13,372    12/19/07

St. Louis, Missouri

   leasehold interest            

Fox Meadow Country Club—

   18-hole private course    EAGLE    $ 4,517    $ 9,400    12/22/06

Medina, Ohio

              

Golf Club at Fossil Creek—

   18-hole public course    EAGLE    $ 4,508    $ 7,686    11/16/06

Fort Worth, Texas

              

Hunt Valley Golf Club—

   27-hole public course    EAGLE    $ 13,538    $ 23,430    11/30/07

Phoenix, Maryland

              

Kokopelli Golf Club—

   18-hole public course    EAGLE    $ 5,608    $ 9,416    11/30/07

Phoenix, Arizona

              

Lake Park Golf Club—

Dallas-Fort Worth, Texas

   27-hole public course;
concession-hold interest
   EAGLE    $ —      $ 5,632    11/16/06

 

22


Table of Contents

Name and Location

 

Description

 

Operator

  Mortgages and
Other Notes
Payable as of
December 31,
2009
  Initial
Purchase
Price
  Date
Acquired

Golf (continued)

         

Lakeridge Country Club—

  18-hole private course   EAGLE   $ 3,804   $ 7,900   12/22/06

Lubbock, Texas

         

Las Vegas Golf Club—

  18-hole public course   EAGLE   $ —     $ 10,951   4/17/08

Las Vegas, Nevada

         

Legend at Arrowhead Golf Resort—

  18-hole public course   EAGLE   $ 6,092   $ 10,438   11/30/07

Glendale, Arizona

         

London Bridge Golf Club—

  36-hole public course   EAGLE   $ 6,769   $ 11,805   11/30/07

Lake Havasu, Arizona

         

Majestic Oaks Golf Club—

  45-hole public course   EAGLE   $ 6,962   $ 13,217   11/30/07

Ham Lake, Minnesota

         

Mansfield National Golf Club—

Dallas-Fort Worth, Texas

  18-hole public course; leasehold interest   EAGLE   $ 4,173   $ 7,147   11/16/06

Meadowbrook Golf & Country Club—

  18-hole private course   EAGLE   $ 6,575   $ 11,530   11/30/07

Tulsa, Oklahoma

         

Meadowlark Golf Course—

Huntington Beach, California

  18-hole public course; leasehold interest   EAGLE   $ —     $ 16,945   4/17/08

Mesa del Sol Golf Club—

Yuma, Arizona

  18-hole public course   EAGLE   $ 3,290   $ 6,850   12/22/06

Micke Grove Golf Course—

Lodi, California

  18-hole public course; leasehold interest   EAGLE   $ —     $ 6,550   12/19/07

Mission Hills Country Club—

  18-hole private course   EAGLE   $ 1,741   $ 4,779   11/30/07

Northbrook, Illinios

         

Montgomery Country Club—

  18-hole private course   Traditional Golf   $ —     $ 6,300   9/11/08

Laytonsville, Maryland

         

Painted Desert Golf Club—

  18-hole public course   EAGLE   $ 5,222   $ 9,468   11/30/07

Las Vegas, Nevada

         

Painted Hills Golf Club—

  18-hole public course   EAGLE   $ 1,854   $ 3,850   12/22/06

Kansas City, Kansas

         

Palmetto Hall Plantation Club—

  36-hole public course   Heritage Golf   $ 3,743   $ 7,600   4/27/06

Hilton Head, South Carolina

         

Plantation Golf Club—

  18-hole public course   EAGLE   $ 2,622   $ 4,424   11/16/06

Dallas-Fort Worth, Texas

         

Raven Golf Club at South Mountain—

  18-hole public course   I.R.I. Golf   $ 6,278   $ 12,750   6/9/06

Phoenix, Arizona

         

Royal Meadows Golf Course—

  18-hole public course   EAGLE   $ 1,165   $ 2,400   12/22/06

Kansas City, Missouri

         

Ruffled Feathers Golf Club—

Lemont, Illinois

  18-hole public course   EAGLE   $ 8,026   $ 13,883   11/30/07

Shandin Hills Golf Club—

San Bernardino, California

 

18-hole public course;

leasehold interest

  EAGLE   $ —     $ 5,249   3/7/08

 

23


Table of Contents

Name and Location

 

Description

 

Operator

  Mortgages and
Other Notes
Payable as of
December 31,
2009
    Initial
Purchase
Price
  Date
Acquired

Golf (continued)

         

Signature Golf Course—

  18-hole private course   EAGLE   $ 8,201      $ 17,100   12/22/06

Solon, Ohio

         

Stonecreek Golf Club—

  18-hole public course   EAGLE   $ 8,509      $ 14,095   11/30/07

Phoenix, Arizona

         

Superstition Springs Golf Club—

  18-hole public course   EAGLE   $ 6,189      $ 11,042   11/30/07

Mesa, Arizona

         

Tallgrass Country Club—

  18-hole private course   EAGLE   $ 2,708      $ 5,405   11/30/07

Witchita, Kansas

         

Tamarack Golf Club—

  18-hole public course   EAGLE   $ 4,351      $ 7,747   11/30/07

Naperville, Illinois

         

Tatum Ranch Golf Club—

  18-hole private course   EAGLE   $ 2,321      $ 6,379   11/30/07

Cave Creek, Arizona

         

The Golf Club at Cinco Ranch—

  18-hole public course   EAGLE   $ 4,419      $ 7,337   11/16/06

Houston, Texas

         

The Links at Challedon Golf Club—

  18-hole public course   Traditional Golf   $ —        $ 3,650   9/11/08

Mount Airy, Maryland

         

The Tradition Golf Club at Broad Bay—

  18-hole private course   Traditional Golf   $ 5,770      $ 9,229   3/26/08

Virginia Beach, Virginia

         

The Tradition Golf Club at Kiskiack—

  18-hole public course   Traditional Golf   $ —        $ 6,987   3/26/08

Williamsburg, Virginia

         

The Tradition Golf Club at The Crossings—

  18-hole public course   Traditional Golf   $ —        $ 10,084   3/26/08

Glen Allen, Virginia

         

Valencia Country Club—

  18-hole private course   Kemper Sports(1)   $ 18,621      $ 39,533   10/16/06

Santa Clarita, California

         

Weston Hills Country Club—

  36-hole private course   Century Golf(1)   $ 16,651      $ 35,000   10/16/06

Weston, Florida

         

Weymouth Country Club—

Medina, Ohio

  18-hole private course   EAGLE   $ 5,040      $ 10,500   12/22/06
                   
 

Total

    $ 255,100      $ 578,921  
                   

Attractions

         

Camelot Park—

Bakersfield, California

 

Miniature golf course, go-karts, batting cages and arcade;

fee and leasehold interest

  PARC   $ —   (2)    $ 948   10/6/06

Darien Lake—

Buffalo, New York

 

978-acre theme park

and waterpark

  PARC   $ 5,854      $ 109,000   4/6/07

 

24


Table of Contents

Name and Location

 

Description

  Operator   Mortgages and
Other Notes
Payable as of
December 31,
2009
    Initial
Purchase
Price
  Date
Acquired

Attractions (continued)

         

Elitch Gardens—

Denver, Colorado

  62-acre theme park and waterpark   PARC   $ 7,788      $ 109,000   4/6/07

Fiddlesticks Fun Center—

Tempe, Arizona

  Miniature golf course, bumper boats, batting cages and go-karts   PARC   $ —   (2)    $ 5,016   10/6/06

Frontier City—

Oklahoma City, Oklahoma

  113-acre theme park   PARC   $ 1,011      $ 17,750   4/6/07

Funtasticks Fun Center—

Tucson, Arizona

  Miniature golf course, go-karts, batting cages, bumper boats and kiddie land with rides   PARC   $ —   (2)    $ 6,424   10/6/06

Grand Prix Tampa—

Tampa, Florida

  Miniature golf course, go-kart and batting cages   PARC   $ —   (2)    $ 3,254   10/6/06

Hawaiian Falls-Garland—

Garland, Texas

  11-acre waterpark; leasehold interest   HFE Horizon   $ —   (2)    $ 6,318   4/21/06

Hawaiian Falls-The Colony—

The Colony, Texas

  12-acre waterpark; leasehold interest   HFE Horizon   $ —        $ 5,807   4/21/06

Magic Springs and Crystal Falls—

Hot Springs, Arkansas

  70-acre theme park and waterpark   PARC   $ —   (2)    $ 20,000   4/16/07

Mountasia Family Fun Center—

North Richland Hills, Texas

  Two miniature golf courses, go-karts, bumper boats, batting cages, paintball fields and arcade   PARC   $ —   (2)    $ 1,776   10/6/06

Myrtle Waves Water Park—

  20-acre waterpark;   PARC   $ —   (2)    $ 9,100   7/11/08

Myrtle Beach, South Carolina

  leasehold interest        

Splashtown—

Houston, Texas

  53-acre waterpark   PARC   $ 828      $ 13,700   4/6/07

Waterworld—

Concord, California

  23-acre waterpark; leasehold interest   PARC   $ 637      $ 10,800   4/6/07

Wet’nWild Hawaii—

Honolulu, Hawaii

  29-acre waterpark; leasehold interest   Village
Roadshow
  $ —        $ 25,800   5/6/09

White Water Bay—

Oklahoma City, Oklahoma

  21-acre waterpark   PARC   $ 1,123      $ 20,000   4/6/07

Wild Waves —

Seattle, Washington

  67-acre theme park and waterpark; leasehold interest   PARC   $ 1,359      $ 31,750   4/6/07

Zuma Fun Center—

Charlotte, North Carolina

  Miniature golf course, batting cages, bumper boats and go-karts   PARC   $ —   (2)    $ 7,378   10/6/06

Zuma Fun Center—

Knoxville, Tennessee

  Miniature golf course, batting cages, bumper boats, rock climbing and go-karts   PARC   $ —   (2)    $ 2,037   10/6/06

Zuma Fun Center—

North Houston, Texas

  Miniature golf course, batting cages, bumper boats and go-karts   PARC   $ —   (2)    $ 916   10/6/06

Zuma Fun Center—

South Houston, Texas

  Miniature golf course, batting cages, bumper boats and go-karts   PARC   $ —   (2)    $ 4,883   10/6/06
                   
 

Total

    $ 18,600      $ 411,657  
                   

 

25


Table of Contents

Name and Location

 

Description

  Operator   Mortgages and
Other Notes
Payable as of
December 31,
2009
    Initial
Purchase
Price
  Date
Acquired
Marinas          

Beaver Creek Marina—

Monticello, Kentucky

  275 wet slips; leasehold interest   Marinas
International
  $  —   (2)    $ 10,525   12/22/06

Brady Mountain Resort & Marina—

Royal (Hot Springs), Arkansas

  585 wet slips, 55 dry storage units; leasehold interest   Marinas
International
  $ —        $ 14,140   4/10/08

Burnside Marina—

Somerset, Kentucky

  400 wet slips; leasehold interest   Marinas
International
  $  —   (2)    $ 7,130   12/22/06

Crystal Point Marina—

  200 wet slips;   Marinas   $  —   (2)    $ 5,600   6/8/07

Point Pleasant, New Jersey

    International      

Eagle Cove Marina—

  106 wet slips; leasehold and fee   Marinas   $  —   (2)    $ 5,300   8/1/07

Byrdstown, Tennessee

  interests   International      

Great Lakes Marina—

  350 wet slips, 150 dry storage   Marinas   $  —   (2)    $ 10,088   8/20/07

Muskegon, Michigan

  units   International      

Holly Creek Marina—

  250 wet slips; leasehold and   Marinas   $  —   (2)    $ 6,790   8/1/07

Celina, Tennessee

  fee interests   International      

Lakefront Marina—

  470 wet slips; leasehold and fee   Marinas   $  —   (2)    $ 5,600   12/22/06

Port Clinton, Ohio

  interests   International      

Manasquan River Club—

  199 wet slips   Marinas   $  —   (2)    $ 8,900   6/8/07

Brick Township, New Jersey

    International      

Pier 121 Marina and Easthill Park—

  1,007 wet slips, 250 dry storage   Marinas   $  —   (2)    $ 37,190   12/22/06

Lewisville, Texas

  units; leasehold interest   International      

Sandusky Harbor Marina—

  660 wet slips; leasehold and fee   Marinas   $  —   (2)    $ 8,953   12/22/06

Sandusky, Ohio

  interests   International      
                   
 

Total

    $ —        $ 120,216  
                   

Additional Lifestyle Properties

         

Dealership

         

Route 66 Harley-Davidson—

Tulsa, Oklahoma

  46,000 square-foot retail and service facility with restaurant   Route 66
Harley
Davidson,
Inc
  $  —   (2)    $ 6,500   4/27/06
                   
 

Total

    $ —        $ 6,500  
                   

Multi-family Residential

         

Mizner Court at Broken Sound—

Boca Raton, Florida

  450-unit apartment complex   Greystar(1)   $ 85,413      $ 104,413   12/31/07
                   
 

Total

    $ 85,413      $ 104,413  
                   

 

26


Table of Contents

Name and Location

 

Description

  Operator   Mortgages and
Other Notes
Payable as of
December 31,
2009
  Initial
Purchase
Price
    Date
Acquired
 

Hotels

         

Coco Key Water Resort—

Orlando, Florida

  399-room waterpark hotel (closed during renovation)   N/A(1)   $ 6,427   $ 18,527      5/28/08   

Great Wolf Lodge—Sandusky—

Sandusky, Ohio

  271-room waterpark resort   Great Wolf
Resorts
(1)
  $ 31,862   $ 43,400 (3)    8/6/09 (3) 

Great Wolf Lodge—Wisconsin Dells—

Wisconsin Dells, Wisconsin

  309-room waterpark resort   Great Wolf
Resorts
(1)
  $ 26,321   $ 46,900 (3)    8/6/09 (3) 

The Omni Mount Washington Resort and Bretton Woods Ski Area—

Bretton Woods, New Hampshire

  284-room hotel, 434 skiable acres and nine chairlifts   Omni
Hotels

Management

Corporation(1)

  $ 31,500   $ 45,000      6/23/06   
                   
 

Total

    $ 96,110   $ 153,827     
                   

Other

         

Granby Development Lands

Granby, Colorado

  1,553 acres with infrastructure and improvements such as roads, water, sewer, golf course invarious stages of completion   N/A   $ —     $ 51,255      10/29/09   
                   
 

Total

    $ —     $ 51,255     
                   
 

Total Properties

    $ 639,488   $ 1,995,829     
                   

 

FOOTNOTES:

 

(1) These properties are operated by the indicated management companies under third-party management contracts.

 

(2) These properties are pledged as collateral for a $100.0 million revolving line of credit as of December 31, 2009.

 

(3) We acquired an initial partnership interest in these properties on October 4, 2005. We acquired all remaining partnership interests on August 6, 2009, and the amounts stated as initial purchase price represent the estimated fair value of these properties at that time.

 

27


Table of Contents

As of December 31, 2009, we own interests in two unconsolidated ventures that are in the business of owning and leasing real estate. We own an 80% interest in the Intrawest Retail Village Properties and 81.9% interest in the Dallas Market Center. As of December 31, 2009, we have invested, through unconsolidated entities, in the following properties which are divided by asset class (in thousands):

 

Name and Location

  

Description

   Mortgages and
Other Notes
Payable as of
December 31,
2009
    Initial
Purchase
Price
   Date
Acquired

Destination Retail—Intrawest Venture

          

Village of Baytowne Wharf—

Destin, Florida

   56,104 leasable square feet    $ 10,168      $ 17,100    12/16/04

Village at Blue Mountain—

Collingwood, ON, Canada

   39,723 leasable square feet    $ 24,305 (1)    $ 10,781    12/3/04

Village at Copper Mountain—

Copper Mountain, Colorado

   97,928 leasable square feet    $ 11,166      $ 23,300    12/16/04

Village at Mammoth Mountain—

Mammoth Lakes, California

   57,924 leasable square feet    $ 12,574      $ 22,300    12/16/04

Village of Snowshoe Mountain—

Snowshoe, West Virginia

   39,846 leasable square feet    $ 4,948      $ 8,400    12/16/04

Village at Stratton—

Stratton, Vermont

   47,837 leasable square feet    $ 2,905      $ 9,500    12/16/04

Whistler Creekside—

Vancouver, BC, Canada

   70,802 leasable square feet    $ —   (1)    $ 19,500    12/3/04
                    
  

Total

   $ 66,066      $ 110,881   
                    

Merchandise Marts— DMC Venture

          

Dallas Market Center—

International Floral and Gift Center—

Dallas, Texas

   4.8 million leasable square feet; leasehold and fee interests    $ 145,293      $ 260,659    2/14/05
                    
  

Total

   $ 145,293      $ 260,659   
                    
  

Total Properties

   $ 211,359      $ 371,540   
                    

 

FOOTNOTE:

 

(1) This amount encumbers both the Village at Blue Mountain and Whistler Creekside properties and was converted from Canadian dollars to U.S. dollars at an exchange rate of 1.049 Canadian dollars for $1.00 U.S. dollar on December 31, 2009.

 

28


Table of Contents

In addition to the properties listed above, we made the following acquisition subsequent to December 31, 2009 (in thousands):

 

Name and Location

 

Description

 

Operator

  Mortgages Payable   Initial
Purchase
Price
  Date
Acquired

Ancapa Isle Marina—

Oxnard, California

 

438 wet slips;

leasehold interest

  Almar Management, Inc.   $ 2,841   $ 9,829   3/12/10

Ballena Isle Marina—

Alameda, California

 

504 wet slips;

leasehold interest

  Almar Management, Inc.   $ —     $ 8,179   3/12/10

Cabrillo Isle Marina—

San Diego, California

 

463 slips;

leasehold interest

  Almar Management, Inc.   $ 6,820   $ 20,576   3/12/10

Ventura Isle Marina—

Ventura, California

 

579 slips;

leasehold interest

  Almar Management, Inc.   $ 4,321   $ 16,418   3/12/10
                 
  Total     $ 13,982   $ 55,002  
                 

 

Item 3. Legal Proceedings

We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While resolution of these matters cannot be predicted with certainty, we believe, based upon currently available information that the final outcome of such matters will not have a material adverse effect on our results of operations or financial condition.

 

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of our security holders during the fourth quarter of 2009.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Market Information. There is no established public trading market for our shares, and even though we intend to list our shares on a national securities exchange or over-the-counter market if market conditions are satisfactory, a public market for our shares may not develop even if the shares are listed. Prior to such time, if any, as the listing of our shares occurs, any stockholder who has held shares for not less than one year (other than our Advisor or its affiliates) may present all or any portion equal to at least 25% of such stockholder’s shares to us for redemption at any time pursuant to our existing redemption plan. See the section entitled “Redemption of Shares” below for additional information regarding our redemption plan.

As of December 31, 2009, the price per share of our common stock was $10.00. We determined the price per share based upon the price we believed investors would pay for the shares and upon the price at which our shares are currently selling. We did not take into account the value of the underlying assets in determining the price per share.

We are aware of sales of our common stock made between investors totaling 8,640 shares sold at an average price of $8.97 per share during 2009, 21,793 shares sold at an average price of $9.21 per share during 2008 and 16,293 shares sold at an average price of $8.96 per share during 2007.

As of December 31, 2009, we had cumulatively raised approximately $2.6 billion (260.1 million shares) in subscription proceeds including approximately $197.0 million (20.7 million shares) received through our dividend reinvestment plan pursuant to a registration statement on Form S-11 under the Securities Act of 1933. In addition, during the period January 1, 2010 through February 28, 2010, we raised an additional $34.7 million (3.5 million shares). As of March 15, 2010 we had approximately 80,083 common stockholders of record. The below is information about the Company’s completed and current offerings as of February 28, 2010:

 

Offering

   Commenced    Closed    Maximum
Offering
   Total
Offering
Proceeds
(in thousands)

1st (File No. 333-108355)

   4/16/2004    3/31/2006    $ 2.0 billion    $ 520,728

2nd (File No. 333-128662)

   4/4/2006    4/4/2008    $ 2.0 billion      1,520,035

3rd (File No. 333-146457)

   4/9/2008    Ongoing    $ 2.0 billion      583,002
               

Total

            $ 2,623,765
               

We intend to extend our current stock offering for a period of one year through April 9, 2011 and may have the ability to extend for another six months beyond that date upon meeting certain criteria. On or prior to December 31, 2011, our board of directors will consider an evaluation of our strategic options, which may include, but are not limited to, listing on a national securities exchange, merging with another public company or selling.

We have used the proceeds from these offerings primarily in our investing activities, including the acquisition of properties, the making of loans, investments in unconsolidated entities and for other capital expenditures. In addition, we used these offering proceeds to reimburse and compensate our Advisor and its affiliates for acquisition fees and costs incurred on our behalf, to pay offering costs, selling commissions and marketing support fees to our Managing Dealer and to make redemptions in connection with our redemption plan. As of December 31, 2009, approximately $2.4 billion in total proceeds raised were used in the above mentioned activities and are allocated as follows (in thousands):

 

Investing activities

   $ 1,868,390

Acquisition fees and costs to advisor

     146,488

Fees to Managing Dealer

     232,696

Redemptions

     119,819
      

Total

   $ 2,367,393
      

 

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Distributions. We intend to pay distributions to our stockholders on a quarterly basis. The amount of distributions declared to our stockholders will be determined by our board of directors and is dependent upon a number of factors, including:

 

   

Sources of cash available for distribution such as current year and inception to date cumulative cash flows, FFO and MFFO, as well as, expected future long-term stabilized cash flows, FFO and MFFO;

 

   

The proportion of distributions paid in cash compared to that which is being reinvested through our reinvestment program; and

 

   

Other factors such as the avoidance of distribution volatility, our objective of continuing to qualify as a REIT, capital requirements, the general economic environment and other factors.

We may use borrowings to fund a portion of our distributions during the growth stage of our company and the current economic downturn in order to avoid distribution volatility. See “Sources of Liquidity and Capital Resources” within Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information related to our sources of cash for distributions.

On January 27, 2009, our board of directors declared a special distribution of $0.035 per share to stockholders of record as of March 31, 2009. Additionally, we increased our monthly distribution rate from $0.05125 to $0.0521 per share effective April 1, 2009. The special distribution, totaling approximately $8.0 million, was paid on June 30, 2009 along with our quarterly distribution. On an annualized basis the increased rate, excluding the special distribution, would represent a 6.25% return if paid for twelve months based on the current $10.00 per share offering price of our common stock.

For the years ended December 31, 2009 and 2008, approximately 4.4% and 41.0%, respectively, of the distributions paid to stockholders were considered taxable income and approximately 95.6% and 59.0%, respectively, were considered a return of capital to stockholders for federal income tax purposes. No amounts distributed to stockholders for the years ended December 31, 2009 and 2008, were required to be or have been treated by us as a return of capital for purposes of calculating the stockholders’ return on their invested capital as described in our advisory agreement. In determining the apportionment between taxable income and a return of capital, the amounts distributed to stockholders (other than any amounts designated as capital gains dividends) in excess of current or accumulated Earnings and Profits (“E&P”) are treated as a return of capital to the stockholders. E&P is a statutory calculation, which is derived from net income and determined in accordance with the IRS. It is not intended to be a measure of the REIT’s performance, nor do we consider it to be an absolute measure or indicator of our source or ability to pay distributions to stockholders.

 

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The following table represents total distributions declared including cash distributions, distributions reinvested and distributions per share for the years ended December 31, 2009 and 2008 (in thousands except per share data):

 

Periods

   Cash
Distributions
   Distributions
Reinvested
   Total
Distributions
Declared
   Distributions
Per Share

2009 Quarter

                   

First

   $ 18,613    $ 16,304    $ 34,917    $ 0.1538

Second

     24,048      20,237      44,285      0.1913

Third

     20,250      16,910      37,160      0.1563

Fourth

     20,924      17,167      38,091      0.1563
                           

Year

   $ 83,835    $ 70,618    $ 154,453    $ 0.6577
                           

2008 Quarter

                   

First

   $ 15,851    $ 14,060    $ 29,911    $ 0.1538

Second

     16,522      14,839      31,361      0.1538

Third

     17,139      15,632      32,771      0.1537

Fourth

     18,049      16,266      34,315      0.1537
                           

Year

   $ 67,561    $ 60,797    $ 128,358    $ 0.6150
                           

We paid distributions for the year ended December 31, 2008 with cash flows generated from operating activities. A portion of the distributions paid for the year ended December 31, 2009 was funded from excess cash flows from operating activities in prior years and borrowings.

Redemption of Shares. We redeem shares pursuant to our redemption plan, which is designed to provide eligible stockholders with limited interim liquidity by enabling them to sell shares back to us prior to any listing of our shares. The following table presents information about redemptions for the year ended December 31, 2009:

 

2009 Quarter

   First    Second    Third    Fourth    Year

Redemptions Requested

     2,268      3,409      1,762      1,872      9,311

Shares Redeemed

     2,268      2,112      1,758      1,849      7,987

Redemption Request Unfulfilled(1)

     —        1,297      1,301      1,324      1,324

Average Price Paid Per Share

   $ 9.55    $ 9.58    $ 9.70    $ 9.35    $ 9.55

 

FOOTNOTE:

 

(1) Unfulfilled requests will be redeemed on a pro rata basis as described below. In the fourth quarter of 2009, we redeemed all unfulfilled requests from the third quarter of 2009 and 29.3% of new redemption requests.

For the year ended December 31, 2009, we received total redemption requests of approximately 9.3 million shares, of which 8.0 million shares were redeemed on a pro rata basis with the remaining 1.3 million shares redeemed at the end of the first quarter of 2010. For the year ended December 31, 2008, we received redemption requests for approximately 3.6 million shares, all of which were redeemed in the period they were requested.

In March 2010, we amended our redemption plan to provide clarity about the board of directors’ discretion in establishing the amount of redemptions that may be processed each quarter and to allow certain priority groups of stockholders with requests made pursuant to circumstances such as death, qualifying disability, bankruptcy or unforeseeable emergency to have their redemption requests processed ahead of the general stockholder population. In addition, our board of directors determined that we will redeem shares pursuant to the redemption plan in an amount totaling $7.5 million per calendar quarter beginning in the second quarter of 2010. Our board

 

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of directors will continue to evaluate and determine the amount of shares to be redeemed based on what it believes to be in the best interests of the Company and our stockholders, as the redemption of shares dilutes the amount of cash available to make acquisitions.

We are not obligated to redeem shares under our redemption plan. However, if we elect to redeem shares, the aggregate amount of funds that will be used to redeem shares pursuant to the redemption plan will be determined on a quarterly basis in the sole discretion of our board of directors and may be less than, but is not expected to exceed, the aggregate proceeds received through our dividend reinvestment plan. At no time during a 12-month period, however, may the number of shares we redeem pursuant to the redemption plan (if we determine to redeem shares) exceed 5% of the weighted-average shares of our common stock at the beginning of such 12-month period. To date we have not exceeded this limit, and we do not anticipate that we will reach the maximum number of shares redeemable under our Redemption Plan during the next twelve months.

Subject to certain restrictions discussed below, we may redeem shares, from time to time, at the following prices:

 

   

92.5 % of the original purchase price per share for stockholders who have owned their shares for at least one year;

 

   

95.0% of the original purchase price per share for stockholders who have owned their shares for at least two years;

 

   

97.5% of the original purchase price per share for stockholders who have owned their shares for at least three years; and

 

   

for stockholders who have owned their shares for at least four years, a price determined by our board of directors but in no event less than 100.0 % of the original purchase price per share.

During the period of any public offering, the repurchase price will not exceed the current public offering price of the shares. If there is no current offering, the redemption price will not exceed the estimated fair market value of the shares as determined by the discretion of management. In addition, we have the right to waive the above holding periods and redemption prices in the event of the death, qualifying disability, bankruptcy or unforeseeable emergency of a stockholder as defined under the plan. Redemption of shares issued pursuant to our dividend reinvestment plan will be priced based upon the purchase price from which shares are being reinvested.

Any stockholder who has held shares for not less than one year (other than our Advisor) may present for our consideration, all or any portion equal to at least 25% of such shares to us for redemption at any time. At such time, we may, at our sole option, choose to redeem such shares presented for redemption for cash to the extent we have sufficient funds available. There is no assurance that there will be sufficient funds available for redemption or that we will exercise our discretion to redeem such shares and, accordingly, a stockholder’s shares may not be redeemed. Factors that we will consider in making our determinations to redeem shares include:

 

   

whether such redemption impairs our capital or operations;

 

   

whether an emergency makes such redemption not reasonably practical;

 

   

whether any governmental or regulatory agency with jurisdiction over us demands such action for the protection of our stockholders;

 

   

whether such redemption would be unlawful; and

 

   

whether such redemption, when considered with all other redemptions, sales, assignments, transfers and exchanges of our shares, could prevent us from qualifying as a REIT for tax purposes.

 

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In the event there are insufficient funds to redeem all of the shares for which redemption requests have been submitted, and we have determined to redeem shares, we will redeem pending requests at the end of each quarter in the following order:

 

  (i) pro rata as to redemptions sought upon a stockholder’s death;

 

  (ii) pro rata as to redemptions sought by stockholders with a qualifying disability;

 

  (iii) pro rata as to redemptions sought by stockholders subject to bankruptcy;

 

  (iv) pro rata as to redemptions sought by stockholders in the event of an unforeseeable emergency;

 

  (v) pro rata as to stockholders subject to mandatory distribution requirements under an individual retirement arrangement (an “IRA”);

 

  (vi) pro rata as to redemptions that would result in a stockholder owning less than 100 shares; and

 

  (vii) pro rata as to all other redemption requests.

With respect to a stockholder whose shares are not redeemed due to insufficient funds in that quarter, the redemption request will be retained by us unless it is withdrawn by the stockholder, and such shares will be redeemed in subsequent quarters as funds become available and before any subsequently received redemption requests are honored, subject to the priority for redemption requests listed in (i) through (vi) above. Until such time as the company redeems the shares, a stockholder may withdraw its redemption request as to any remaining shares not redeemed.

Our board of directors, in its sole discretion, may amend or suspend the redemption plan at any time it determines that such amendment or suspension is in our best interest. If our board of directors amends or suspends the redemption plan, we will provide stockholders with at least 30 days advance notice prior to effecting such amendment or suspension: (i) in our annual or quarterly reports or (ii) by means of a separate mailing accompanied by disclosure in a current or periodic report under the Securities Exchange Act of 1934. While we are engaged in an offering, we will also include this information in a prospectus supplement or post-effective amendment to the registration statement as required under federal securities laws. The redemption plan will terminate, and we no longer shall accept shares for redemption, if and when listing occurs.

Issuer Purchases of Equity Securities. The following table presents details regarding our repurchase of securities between October 1, 2009 and December 31, 2009 (in thousands).

 

Period

   Total
Number

of Shares
Purchased
   Average
Price Paid
per Share
   Total Number
of Shares
Purchased

as Part of
Publicly
Announced
Plan
   Maximum
Number of
Shares that
may yet be
Purchased
under the
Plan
 

October 1, 2009 through October 31, 2009

   —         —      3,021,243   

November 1, 2009 through November 30, 2009

   —         —      3,021,243   

December 1, 2009 through December 31, 2009

   1,848,727    $ 9.35    1,848,727    2,522,708 (1) 
               

Total

   1,848,727       1,848,727   
               

 

FOOTNOTE:

 

(1) This number represents the maximum number of shares which can be redeemed under the redemption plan without exceeding the five percent limitation in a rolling 12-month period described above and does not take into account the amount the board has determined to redeem or whether there are sufficient proceeds under the redemption plan. Under the redemption plan, we can, at our discretion, use up to $100,000 per calendar quarter of the proceeds from any public offering of our common stock for redemptions.

 

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Item 6. Selected Financial Data

SELECTED FINANCIAL DATA

The following selected financial data for CNL Lifestyle Properties, Inc. should be read in conjunction with “Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. —Financial Statements and Supplementary Data” (in thousands except per share data):

 

    Year Ended December 31,  
    2009     2008   2007   2006   2005  

Operating Data:

         

Revenues

  $ 253,271      $ 210,415   $ 139,422   $ 21,887   $ 227   

Operating income (loss)

    13,012        57,578     34,661     1,295     (4,984

Income (loss) from continuing operations(1)

    (19,320     34,240     35,356     19,250     6,583   

Discontinued operations(2)

    —          2,396     169     135     —     

Net income (loss)(1)

    (19,320     36,636     35,525     19,385     6,583   

Net income (loss) per share (basic and diluted):

         

From continuing operations

    (0.08     0.16     0.22     0.31     0.33   

From discontinued operations

    —          0.01     —       —       —     

Weighted average number of shares outstanding (basic and diluted)

    235,873        210,192     159,807     62,461     19,796   

Distributions declared(3)

    154,453        128,358     94,067     33,726     10,096   

Distributions declared per share

    0.66        0.62     0.60     0.56     0.54   

Cash provided by operating activities

    62,400        118,782     117,212     45,293     4,616   

Cash used in investing activities

    141,884        369,193     1,221,387     562,480     199,063   

Cash provided by financing activities

    53,459        424,641     842,894     721,293     251,542   
    Year Ended December 31,  
    2009     2008   2007   2006   2005  

Balance Sheet Data:

         

Real estate investment properties, net

  $ 2,021,188      $ 1,862,502   $ 1,603,061   $ 464,892   $ 20,953   

Investments in unconsolidated entities

    142,487        158,946     169,350     178,672     212,025   

Mortgages and other notes receivable, net

    145,640        182,073     116,086     106,356     3,171   

Cash

    183,575        209,501     35,078     296,163     93,804   

Total assets

    2,672,128        2,529,735     2,042,210     1,103,699     336,795   

Long-term debt obligations

    639,488        539,187     355,620     69,996     —     

Line of credit

    99,483        100,000     —       3,000     4,504   

Total liabilities

    822,912        707,363     424,896     104,505     12,163   

Rescindable common stock

    —          —       —       21,688     —     

Stockholders’ equity

    1,849,216        1,822,372     1,617,314     977,506     324,632   

Other Data:

         

Funds from operations (“FFO”)(1) (4)

    120,576        148,853     118,378     40,037     14,170   

FFO per share

    0.51        0.71     0.74     0.64     0.72   

Modified funds from operations (“MFFO”)(4)

    141,422        148,853     118,378     40,037     14,170   

MFFO per share

    0.60        0.71     0.74     0.64     0.72   

Properties owned directly at the end of period

    107        104     90     42     1   

Properties owned through unconsolidated entities at end of the period

    8        10     10     10     10   

Investments in mortgages and other notes receivable at the end of period

    10        11     9     7     1   

 

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FOOTNOTES:

 

(1) For the year ended December 31, 2009, acquisition fees and miscellaneous acquisition costs of approximately $14.6 million, which were historically capitalized, were expensed as a result of new accounting standards effective January 1, 2009 which has significantly impacted our net income (loss).

 

(2) On December 12, 2008, we sold our Talega Golf Course property. In accordance with GAAP, we have reclassified and included the results from the property sold in 2008 as discontinued operations in the consolidated statements of operations for all periods presented.

 

(3) Cash distributions are declared by the board of directors and generally are based on various factors, including expected and actual net cash from operations and our general financial condition, among others. Approximately 4.4%, 41.0%, 58.0%, 71.9% and 51.9%, of the distributions received by stockholders were considered to be taxable income and approximately 95.6%, 59.0%, 42.0%, 28.1%, and 48.1% were considered a return of capital for federal income tax purposes for the years ended December 31, 2009, 2008, 2007, 2006, and 2005, respectively. We have not treated such amounts as a return of capital for purposes of calculating the stockholders’ return on their invested capital, as described in our advisory agreement.

 

(4) FFO is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We use FFO, which is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures, as one measure to evaluate our operating performance. In addition to FFO, we use MFFO, which excludes acquisition-related costs and non-recurring charges such as the write-off of in-place lease intangibles, other similar costs associated with lease terminations and fair value adjustments of contingent purchase price obligations in order to further evaluate our ongoing operating performance.

FFO was developed by NAREIT as a relative measure of performance of an equity REIT in order to recognize that income-producing real estate has historically not depreciated on the basis determined under GAAP. We believe that FFO is helpful to investors and our management as a measure of operating performance, because it excludes depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which is not immediately apparent from net income (loss) alone.

We believe MFFO is helpful to our investors and our management as a measure of operating performance because it excludes costs that management considers more reflective of investing activities, such as the payment of acquisition expenses that are directly associated with property acquisition, and other non-operating items historically included in the computation of FFO such as non-recurring charges associated with lease terminations and the write-off of in-place lease intangibles and other deferred charges. Acquisition expenses are paid for with proceeds from our common stock offerings or debt proceeds rather than paid for with cash generated from operations. Costs incurred in connection with acquiring a property are generally added to the contractual lease basis of the property thereby generating future incremental revenue rather than creating a current periodic operating expense and are funded through offering proceeds rather than operations. Similarly, new accounting standards require us to estimate any future contingent purchase consideration at the time of acquisition and subsequently record changes to those estimates or eventual payments in the statement of operations even though the payment is funded by offering proceeds. Previously under GAAP, these amounts would be capitalized, which is consistent with how these incremental payments are added to the contractual lease basis used to calculate rent for the related property and generate future rental income. Therefore, we exclude these amounts in the computation of MFFO. By providing MFFO, we present information that is more consistent with management’s long term view of our core operating activities and is more reflective of a stabilized asset base.

Accordingly, we believe that in order to facilitate a clear understanding of our operating performance between periods and as compared to other equity REITs, FFO and MFFO should be considered in

 

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conjunction with our net income (loss) and cash flows as reported in the accompanying consolidated financial statements and notes thereto. Because acquisition fees and costs and adjustments to contingent purchase price obligations were not required to be expensed under GAAP prior to January 1, 2009, MFFO for the prior periods is the same as FFO. FFO and MFFO (i) do not represent cash generated from operating activities determined in accordance with GAAP (which, unlike FFO or MFFO, generally reflects all cash effects of transactions and other events that enter into the determination of net income (loss)), (ii) are not necessarily indicative of cash flow available to fund cash needs and (iii) should not be considered as alternatives to net income (loss) determined in accordance with GAAP as an indication of our operating performance, or to cash flow from operating activities determined in accordance with GAAP as a measure of either liquidity or our ability to make distributions. FFO or MFFO as presented may not be comparable to amounts calculated by other companies.

The following table presents a reconciliation of net income (loss) to FFO and MFFO for the years ended December 31, 2009, 2008, 2007, 2006 and 2005 (in thousands except per share data):

 

     Year Ended December 31,
     2009     2008     2007    2006    2005

Net income (loss)

   $ (19,320   $ 36,636      $ 35,525    $ 19,385    $ 6,583

Adjustments:

            

Depreciation and amortization

     124,040        98,901        64,883      8,489      17

Gain on sale of real estate investment properties

     —          (4,470     —        —        —  

Net effect of FFO adjustment from unconsolidated entities(a)

     15,856        17,786        17,970      12,163      7,570
                                    

Total funds from operations

   $ 120,576      $ 148,853      $ 118,378    $ 40,037    $ 14,170
                                    

Acquisition fees and costs(b)

     14,616        —          —        —        —  

Contingent purchase price consideration(c)

     3,472        —          —        —        —  

Write-off of non-cash deferred charges(d)

     2,758        —          —        —        —  
                                    

Modified funds from operations

   $ 141,422      $ 148,853      $ 118,378    $ 40,037    $ 14,170
                                    

Weighted average number of shares of common stock outstanding (basic and diluted)

     235,873        210,192        159,807      62,461      19,796
                                    

FFO per share (basic and diluted)

   $ 0.51      $ 0.71      $ 0.74    $ 0.64    $ 0.72
                                    

Modified FFO per share (basic and diluted)

   $ 0.60      $ 0.71      $ 0.74    $ 0.64    $ 0.72
                                    

 

FOOTNOTES:

 

(a) This amount represents our share of the FFO adjustments allowable under the NAREIT definition (primarily depreciation) multiplied by the percentage of income or loss recognized under the hypothetical liquidation at book value (“HLBV”) method.

 

(b) Acquisition fees and costs that were directly identifiable with properties acquired were not required to be expensed under GAAP prior to January 1, 2009. Accordingly, no adjustments to funds from operations are necessary for periods prior to 2009.

 

(c) In connection with the acquisition of Wet’n’Wild Hawaii, we recorded the fair value of the additional incremental contingent purchase price consideration as a result of the property exceeding certain performance thresholds which entitled the seller to additional contingent purchase consideration above what we initially estimated at the acquisition date. In accordance with GAAP, this amount is required to be expensed even though it is funded by offering proceeds and added to the contractual lease basis used to calculate rent.

 

(d) This amount includes non-recurring charges associated with lease terminations such as the write-off of in-place lease intangibles and other deferred charges. Prior to January 1, 2009, there were no lease terminations.

 

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

INTRODUCTION

CNL Lifestyle Properties, Inc. was organized pursuant to the laws of the State of Maryland on August 11, 2003. We were formed primarily to acquire lifestyle properties in the United States that we lease on a long-term (generally five to 20 years, plus multiple renewal options), triple-net or gross basis to tenants or operators that we consider to be significant industry leaders. We define lifestyle properties as those properties that reflect or are impacted by the social, consumption and entertainment values and choices of our society. We also make and acquire loans (including mortgage, mezzanine and other loans) generally collateralized by interests in real estate. We currently operate and have elected to be taxed as a REIT for federal income tax purposes beginning with the taxable year ended December 31, 2004. We have retained CNL Lifestyle Company, LLC, as our Advisor to provide management, acquisition, advisory and administrative services.

All capitalized terms used herein but not defined shall have the meanings described to them in the “Definitions” section of our Prospectus.

GENERAL

Our principal business objectives include investing in and owning a diversified portfolio of real estate with a goal to preserve, protect and enhance the long-term value of those assets. We have built a portfolio of properties that we consider to be well-diversified by region, asset type and operator. As of March 15, 2010, we had a portfolio of 119 lifestyle properties which when aggregated by initial purchase price was diversified as follows: approximately 28.0% in ski and mountain lifestyle, 24.6% in golf facilities, 17.5% in attractions, 7.5% in marinas and 22.4% in additional lifestyle properties. These assets consist of 22 ski and mountain lifestyle properties, 53 golf facilities, 21 attractions, 15 marinas and eight additional lifestyle properties. Eight of these 119 properties are owned through unconsolidated ventures.

We have elected to be taxed as a REIT for federal income tax purposes. As a REIT, we generally will not be subject to federal income tax at the corporate level to the extent that we distribute at least 90% of our taxable income to our stockholders and meet other compliance requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is lost. Such an event could materially and adversely affect our net income and cash flows. However, we believe that we are organized and have operated in a manner to qualify for treatment as a REIT beginning with the year ended December 31, 2004. In addition, we intend to continue to be organized and to operate so as to remain qualified as a REIT for federal income tax purposes.

The economic recession and tightened credit markets have created challenges for us and our tenants in 2009. We cannot predict the extent to which these negative trends will continue, worsen or improve or the timing and nature of any changes to the macroeconomic environment, including the impact it may have on our future results of operations and cash flows. However, in response to the economic and market pressures, we have focused on liquidity, maintained a strong balance sheet with significant cash balances and low leverage, proactively monitored tenant performance, restructured tenant leases when necessary and strengthened relationships with key constituents including tenants and lenders. With this disciplined management approach, we believe we are well positioned to take advantage of future buying opportunities.

Our research indicates that consumers are still spending time and money on the type of lifestyle and leisure activities supported by our properties. The rising trend in “staycations”, which is generally defined as a period of time in which an individual or family engages in nearby leisure activities or takes regional day trips from their home to area attractions as opposed to taking destination or fly-to vacations, that emerged in 2008 continued into 2009. Even in a down market, spending on leisure pursuits continues. While certain consumers reduce their spending, they continue to seek leisure and recreational outlets to create memories with family and friends. We

 

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believe that many of our properties are managing through the recession because of their accessible drive-to locations and the types of activities and experiences offered at a range of affordable price points. This is evidenced by the generally sustained or only modest decreases in visitation levels, on average across our portfolio. See “Asset Classes and Industry Trends” below for additional information about recent trends impacting the industries in which we operate.

Across our portfolio, we have begun to see early indications of recovery including increased ski visitation and spending in the 2009/2010 season as well as slight rise in early booking trends for events at certain golf properties. We have also noticed a trend in the popular press known as “recession fatigue” or “frugal fatigue”, defined as mental exhaustion caused by constant frugality during hard economic times, reportedly responsible for the rise in consumer spending in recent months.

We will continue to focus on property acquisitions and other investments with increased focus on the management and oversight of our existing assets. We have, and intend to maintain, low leverage and have more favorable FFO and MFFO payout ratios than most of our competitors. Our conservative lease structures generally require security deposits and include cross-default provisions when multiple properties are leased to a single tenant.

We experience competition from other REITs, real estate partnerships, mutual funds, institutional investors, specialty finance companies, opportunity funds and other investors, including, but not limited to, banks and insurance companies, many of which have historically had greater financial resources than us in the acquisition, leasing and financing of properties within our targeted asset classes. However, due to the current economic conditions in the U.S. financial markets, the capital resources available to these competitor sources has continued to decrease and debt financing continues to be scarce. As capital availability improves, our competition for investments will likely increase or return back to historical levels. These competitors may also have a lower cost of capital and may be subject to less regulation. The level of competition impacts our ability to find both real estate investments and tenants. We may also face competition from other funds in which affiliates of our Advisor may participate or advise.

In general, we believe there is a lower level of competition for the types of assets that we have acquired and intend to acquire in comparison to traditional or core real estate asset classes. Some of our targeted asset classes, such as golf, have experienced a reduction in new supply to normalize with demand, and many of our asset classes have inherently high barriers to entry. The process of obtaining permits to create a new ski resort or marina is highly regulated and significantly more difficult than obtaining permits for the construction of new office or retail space and there are significant location constraints. Further, we believe that our focus in specialty and lifestyle asset classes allows us to take advantage of unique opportunities.

 

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We continue to believe that our properties have long-term value, and we will continue to manage our portfolio through these temporary and cyclical market conditions with a long-term view. Our portfolio contains unique, iconic or nonreplicable properties with long-established operating histories. The following information shows the average operating history of each of our operating asset classes based on the date the properties in our portfolio were first opened. Further, it demonstrates the longevity of these assets through a number of economic down-cycles during their operating history.

LOGO

SOURCE: Economic Cycles as defined by the National Bureau of Economic Research. Average years of operation by property and asset class compiled from Schedule III as included in this filing on form 10-K.

ASSET CLASS AND INDUSTRY TRENDS

Although we generally lease our properties to tenant operators that bear the primary variability in property performance and net operating results, certain economic and industry trends that impact our tenants’ operations can ultimately impact our operating performance. For example, positive growth in visitation and per capita spending may result in our receipt of additional contingent rent and declines may impact our tenants’ ability to pay rent to us.

Ski and mountain lifestyle. According to the National Ski Area Association (NSAA) and the Kottke National End of Season Survey 2008/2009, the U.S. ski industry recorded a robust 57.4 million ski and snowboard visits for the 2008/2009 ski season, representing the fourth highest total on record. This mark is 5.12%

 

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below the all-time record set the previous year when skier visits tallied 60.5 million, breaking the 60 million mark for the first time. On average, our ski resorts outperformed the industry for 2008/2009, finishing the ski season with skier visits totaling 5.93 million, or 5.10% below the record previous year. As the 2008/2009 season began, the nation had entered a severe recession. However, despite this overall economic downturn, our Ski and Mountain Lifestyle portfolio, as well as the U.S. ski industry generally fared well showing underlying resilience in the face of recessionary pressures. A study published by NSAA in the fall of 2008, authored by Noland Rosall of RRC Associates, noted that in the previous three U.S. recessions snow conditions trumped economy as the principal influencer of skier visit volume. Entering the 2009/2010 ski season, our resorts saw strong sales of season passes, with at least one large resort on track to set an all-time record for revenues and units sold. As of the date of this filing, although the 2009/2010 season is not completed, we have seen revenues per visit trends improved over the 2008/2009 season, with visitors showing they were more willing to spend on retail items and food and beverage, in addition to “core” revenue areas including lift tickets, ski and snowboard rentals, and ski school. The trend experienced in the 2008/2009 ski season that saw regional destination and day ski resorts prosper to a greater extent than fly-to destination resorts, continues to affect the U.S. ski industry in general, as well as our ski portfolio. Since our portfolio is dominated by regional and day ski resorts located near large drive-to markets, it is well positioned to continue benefitting from this trend.

Golf. According to a 2010 State-of-the-Industry Presentation by the National Golf Foundation (NGF), the leading golf participation indicators have remained generally flat over the past five years. The number of rounds played in the U.S. is relatively stable averaging just under 500 million rounds annually and the number of golfers has remained steady over the past seven years totaling approximately 28.6 million in 2009. Even during the current economic slowdown, NGF and Golf Datatech reported that the total rounds played in the U.S. for the twelve month period ended December 2009 was down only 0.6% from the same period in 2008. Additionally, the net supply of facilities (openings less closures) has declined in each of the last four years, and going forward, the NGF expects that the trend will continue until supply and demand reach equilibrium. The most financially impacted facilities have been the private clubs with large initiation or dues structures, resort facilities, and facilities with a large group outing and event business. The majority of our facilities are daily fee facilities. Our largest tenant, EAGLE Golf reported a 0.9% increase in the number of rounds played in 2009 versus 2008 for the facilities they operate.

Attractions. Our properties include regional gated amusement parks and water parks that generally draw most of their visitation from local markets. Regional and local attractions have historically been somewhat resistant to recession, with inclement weather being a more significant factor impacting attendance. Our portfolio on average experienced a modest decline in attendance and per capita spending primarily as a result of unusually rainy weather and the recessionary conditions. Our largest attractions operator, PARC Management, reported an average decline in attendance of 3.2% in 2009 as compared to 2008 across our seven largest gated amusement parks. According to the most recent IBIS World Industry Report for “Amusement & Themeparks in the US” released on December 1, 2009, revenues at domestic parks are expected to grow by an average annual rate of 2.1% over the next five years. Although the economic recession may have impacted the rate of expected industry growth, we continue to believe based on these trends and industry research that the attraction properties in our portfolio have the potential for long term growth and revenue generation.

Marinas. The marinas sector is highly fragmented with over 70% of marinas being privately owned and the remainder largely held by municipalities. Common industry drivers are boat ownerships, slip rental, and occupancy. Marina operators are affected by government regulations, rising fuel prices, and general economic conditions. During 2009, our properties included 11 marinas primarily in the Southeast, Mid Atlantic and Great Lakes regions. According to the IBIS World Industry Report on “Marinas in the US”, the industry is relatively mature and revenue is forecasted to grow by approximately 1.0% per annum over the next five years. The report also indicates that the economic recession has had a relatively limited impact on the industry, as revenues fell approximately 1.7% in 2008 as compared to 2007, and was anticipated to decrease approximately 5.7% in 2009 across the country. High barriers to entry limit the supply of competing properties and demand is projected to remain steady with a gradual rise over the next five years.

 

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We continue to closely monitor the performance of all tenants, their financial strength and their ability to pay rent under the leases for our properties. Our asset managers review operating results and rent coverage compared to budget for each of our properties on a monthly basis, monitor the local and regional economy, competitor activity, and other environmental, regulatory or operating conditions for each property, make periodic site visits and engage in regular discussions with our tenants.

LIQUIDITY AND CAPITAL RESOURCES

General

During the year ended December 31, 2009, we focused on maintaining our liquidity and the preservation of capital with significant cash on hand. Our principal demand for funds during the short and long-term will be for property acquisitions, loans and other permitted investments and for the payment of operating expenses, debt service and distributions to stockholders. Generally, our cash needs for items other than property acquisitions and making loans are generated from operations and our existing investments. The sources of our operating cash flows are primarily driven by the rental income and net security deposits received from leased properties, from interest payments on the loans we make, interest earned on our cash balances and by distributions from our unconsolidated entities. A reduction in cash flows from any of these sources could significantly decrease our ability to pay distributions to our stockholders. In addition, we have a revolving line of credit of $100.0 million to ensure we have cash available for future acquisitions and working capital needs.

We intend to continue to acquire properties, make loans and other permitted investments within the parameters of our conservative investment policies, with proceeds from our public offerings, our line of credit and long-term debt financing. If sufficient capital is not raised, or if affordable debt is unavailable, it could limit our ability to acquire additional properties or make loans and permitted investments.

We intend to continue to pay distributions to our stockholders on a quarterly basis. Operating cash flows are expected to continue to be generated from properties, loans and other permitted investments to cover a significant portion of such distributions and any temporary shortfalls are expected to be funded with cash borrowed under our line of credit. In the event that our properties do not perform as expected or that we are unable to acquire properties at the pace expected, we may not be able to continue to pay distributions to stockholders or may need to reduce the distribution rate or borrow to continue paying distributions, all of which may negatively impact a stockholder’s investment in the long-term. Our ability to acquire properties is in part dependent upon our ability to locate and contract with suitable third-party tenants. The inability to locate suitable tenants may delay our ability to acquire certain properties. Delays in acquiring properties or making loans with the capital raised from our common stock offerings may adversely affect our ability to pay distributions to our existing stockholders.

We believe that our current liquidity needs to pay operating expenses, debt service and distributions to stockholders will be adequately covered by cash generated from operating activities and cash on hand. We have no significant debt maturities coming due in the near term other than our $100.0 million revolving line of credit maturing in October 2010. We are currently in negotiations with a syndicate of lenders and have entered into a non-binding letter of intent to replace the existing credit facility with a new line with up to $100.0 million in total borrowing capacity expiring in 2013. We anticipate closing on the new credit facility late in the first quarter of 2010, however, there can be no assurances that the credit facility will be obtained. The acquisition of additional real estate investments will be dependent upon the amount and pace of capital raised through our public offerings and our ability to obtain additional long-term debt financing, both of which have been affected by the economic environment.

Recent Market Conditions

The global and U.S. economy continued to struggle during 2009 and there continues to be uncertainty regarding the duration of the economic downturn as well as the full impact of these events on our properties. We continue to monitor economic events, capital markets and the financial stability of our tenants in an effort to minimize the impact of the economic downturn. While we remain cautious about the state of the economy, we

 

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also believe that these events may provide us with acquisition opportunities over the next year or two as property owners need to refinance or recapitalize their businesses and alternative financing sources are unavailable. As of December 31, 2009, we had approximately $183.6 million in cash available to support our business and to acquire new properties. The following is a summary of how the current economic crisis has impacted us to date and how we believe it may impact us going forward with respect to capital markets and our existing operations.

Impact on Capital Markets—We have continued to see a limited availability of debt. Where debt is available, we have seen an increase in our cost of borrowing over historical rates, which we expect to continue. We continue to maintain a low leverage ratio, which was approximately 27.7% at December 31, 2009. Consistent with the entire unlisted REIT industry, sales of our common stock were lower for the year ended December 31, 2009 as compared to the year ended December 31, 2008. For the year ended December 31, 2009, our average monthly sales of common stock were approximately $24.4 million as compared to approximately $32.2 million for the year ended December 31, 2008. Reduced sales of our stock and difficulties accessing debt markets may reduce the amount of capital that we have available to take advantage of future acquisition opportunities or manage our assets. We have also seen an increase in redemption requests which we believe is in part due to the fact that several non-listed REITs have suspended their redemption programs. This has reduced proceeds from our dividend reinvestment plan available to acquire properties and make other investments. We recently amended the terms of our redemption plan to clarify the board of directors’ discretion in establishing the amount of redemptions that will be processed each quarter and to allow for certain priority groups that will have redemption requests processed ahead of the general shareholder population.

Impact on Tenants’ Operations—As noted above, although visitation at our properties has generally been sustained or only slightly changed, spending per visit declined, which resulted in reduced revenues and profitability of most of our tenants. Many of our tenants have also been unable to obtain working capital lines of credit or renew existing lines of credit due to the current state of the economy and the capital markets and have had difficulty obtaining additional equity from their capital partners. This created working capital shortages for some tenants in 2009, particularly during off season months and in a number of cases has impacted their ability to pay the full amount of rent due under their leases.

To partially alleviate this situation, in 2009 we restructured the leases for certain tenants such that rents are paid on a seasonal schedule with most, if not all, of the rent being paid during the tenant’s seasonally busy period. In other cases, we have restructured lease terms to allow for rent deferrals or reductions for a period of time to provide temporary relief that then become payable in later periods of the lease term. In total, we granted the following aggregate lease restructures as of December 31, 2009: (i) refunded $29.9 million in tenant security deposits, of which $7.5 million was replenished, (ii) deferred $31.4 million in 2009 scheduled rental payments, (iii) amended lease terms which resulted in a $12.4 million reduction in annualized straight-line rents and (iv) agreed to provide a lease allowance of up to $14.6 million of which approximately $11.5 million was funded as of December 31, 2009, with the remaining $3.1 million funded in January 2010. In exchange for these restructures, we have generally required tenants to (i) eventually replace security deposits up to specified amounts, (ii) pay deferred rent over future years during the lease term and (iii) pay higher future base rents to offset near-term reductions. In certain leases, we obtained a pledge of stock of the tenant entities and adjusted percentage rents.

We also terminated our leases on two golf properties and one additional lifestyle property and engaged nationally recognized management companies to operate the properties on our behalf. In the event that a tenant defaults, and is evicted from our property’s operations, applicable tax laws permit us to engage a third-party manager to operate the property on our behalf for a period of time until we can re-lease it to a new tenant. During this period, the property continues to operate and we receive any net earnings from the property, which may be less than the rents that were contractually due under the prior leases. Any taxable income from these properties will be subject to income tax until we re-lease these properties to new tenants.

The rent deferrals granted and the lease allowances paid in 2009 directly reduce our cash flows from operating activities for the year. However, these deferrals did not significantly affect our net operating results or

 

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funds from operations for the year ending December 31, 2009 due to the straight-lining of rents in accordance with GAAP, which means the total of all contractual rents due over the term of the lease are averaged and recognized evenly as rental income over the term of the lease. Other restructures, such as the reductions in lease rates and the future amortization of lease allowances against rental income have and will reduce our net operating results in current and future periods. Although we can provide no assurances, we believe that the operations of our properties will ultimately return to pre-recession levels and that the amount of rent we have deferred is collectible in later periods. Further, we have evaluated and determined in accordance with GAAP that these properties are not impaired based on the expected operating results of the properties over the estimated holding period and rents we expect to receive over the term of the leases. We believe we have sufficient cash on hand to offset any adverse effects on our operations that could result from a downturn in our tenants’ businesses in the coming year.

As noted above, recent trends in our ski and golf portfolios have been positive and according to the National Bureau of Economic Research, many of the most recent reports of key economic indicators such as unemployment, real gross domestic product, home prices and the consumer confidence index are all showing signs of improvement. As a result, while there are no assurances, we are hopeful that the economic recovery is underway.

Sources of Liquidity and Capital Resources

Common Stock Offering

Our main source of capital is from our common stock offerings. As of December 31, 2009, we had received approximately $2.6 billion (260.1 million shares) in total offering proceeds from all three offerings. During the period from January 1, 2010 through February 28, 2010, we received additional subscription proceeds of approximately $34.7 million (3.5 million shares).

The amount of capital raised through our public offerings for the years ended December 31, 2009, 2008 and 2007 was approximately $293.3 million, $387.0 million and $776.9 million, respectively, which represents a decrease of 24.2% from 2009 compared to 2008 and a decrease of 50.2% from 2008 compared to 2007. The decrease was, in part, due to higher than normal sales in 2007 which resulted from the recycling of capital from the sale of other unlisted REITs during 2007. However, part of the decrease in the average daily sales of our common stock is a result of the current economic environment and increased competition in the unlisted REIT industry. Due to the weakened U.S. economy and the continued uncertainty in the capital markets, we cannot predict the number of shares we will sell or proceeds we will raise through our public offering in the coming year.

We intend to extend our current stock offering for a period of one year through April 9, 2011 and may have the ability to extend for another six months beyond that date upon meeting certain criteria. On or prior to December 31, 2011, our board of directors will consider an evaluation of our strategic options, which may include, but are not limited to, listing on a national securities exchange, merging with another public company or selling.

Borrowings

We have borrowed and intend to continue to borrow money to acquire properties and to pay certain related fees. In general, we pledge our assets in connection with such borrowings. We have also borrowed, and may continue to borrow, money to pay distributions to stockholders in order to avoid distribution volatility. There continues to be limited availability of debt in the financial markets. Where debt is available, we have seen an increase in our cost of borrowing over historical rates, which we expect to continue. The aggregate amount of long-term financing is not expected to exceed 50% of our total assets on an annual basis. As of December 31, 2009, our leverage ratio was 27.7%.

 

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As of the date of this filing, we have no significant near term debt maturities other than our $100.0 million revolving line of credit maturing in October 2010. We are currently in negotiations with a syndicate of lenders and have entered into a non-binding letter of intent to replace the existing credit facility with a new line with up to $100.0 million in total borrowing capacity extending through 2013. We anticipate closing on the new credit facility late in the first quarter of 2010, however, there can be no assurances that the credit facility will be obtained. Approximately 66.7% of our total borrowings are fixed rate debt with a weighted-average interest rate of 6.6%. We have entered into interest rate swaps to hedge a large portion of our variable rate debt, thereby fixing the interest rates on over 42.0% of our variable rate debt portfolio and effectively making 80.7% of our total borrowing fixed. Given the current state of the capital markets, we have taken a proactive approach to managing our debt maturities and are in active negotiations to renew or extend certain financing arrangements. Despite the lack of available debt in 2009, we were able to obtain financing on two separate ski portfolios and a hotel redevelopment.

As of December 31, 2009 and 2008, we had the following indebtedness (in thousands):

 

     December 31,
     2009    2008

Mortgages payable

   $ 562,388    $ 474,449

Sellers financing

     77,100      64,738
             

Total mortgages and other notes payable

     639,488      539,187
             

Line of credit

     99,483      100,000
             

Total indebtedness

   $ 738,971    $ 639,187
             

See Note 12 “Mortgages and other Notes Payable” to the accompanying consolidated financial statements in Item 8. for additional information including interest rates, maturity dates and other loan terms.

As of December 31, 2009, two of our loans require us to meet certain customary financial covenants and ratios, with which we were in compliance. Our other long-term borrowings are not subject to any significant financial covenants.

See also “Off Balance Sheet and Other Arrangements—Borrowings of Our Unconsolidated Entities” for a description of the borrowings of our unconsolidated entities.

Operating Cash Flows

Our net cash flow provided by operating activities was approximately $62.4 million for the year ended December 31, 2009 which consisted primarily of rental income, property operating revenues, interest income on mortgages and other notes receivable, distributions from our unconsolidated entities and interest earned on cash balances offset by payments made for operating expenses including property operating expenses and asset management fees to our Advisor. The net cash flows from operating activities was approximately $118.8 million for the year ended December 31, 2008. The decrease in operating cash flows of $56.4 million or 47.5% as compared to the prior year is principally attributable to:

 

   

Rent deferrals and reductions as discussed above, as well as the payment of approximately $11.5 million in lease incentives.

 

   

Expensing of approximately $14.6 million in acquisition fees and costs in 2009 in accordance with new accounting standards. Historically, acquisition fees and costs were capitalized and reflected in cash flows from investing activities. The characterization of these acquisition fees and costs to operating activities in accordance with GAAP does not change the nature and source of how the amounts are funded and paid with proceeds from our public offerings.

 

   

A net security deposit refund of approximately $22.4 million in 2009 as a result of lease restructures, offset in part by deposits from tenants on newly acquired properties.

 

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Additional interest expense paid as a result of an increase in our mortgages and other notes payable for 2009 as compared to the same period in 2008.

 

   

Lower average interest paid by financial institutions on cash balances during the year ended December 31, 2009 as compared to 2008.

 

   

Increase in our operating expenses as a result of the increase in our total assets under management.

We do not believe that the decline on our 2009 cash flows from operating activities will be an ongoing trend, but was rather a direct result of the lease restructures we made in 2009 coupled with dilution from temporarily uninvested cash and new accounting standards as mentioned above.

Dispositions and Discontinued Operations

On December 12, 2008, we sold the Talega Golf Course property for $22.0 million, resulting in a gain of approximately $4.5 million. In connection with the disposition, we paid approximately $2.4 million in loan prepayment fees and paid off the portion of our mortgage loan collateralized by the property of approximately $8.8 million. In addition, we terminated our lease on the property with Heritage Golf. In connection with the sale, we received cash in the amount of $12.0 million and a promissory note in the amount of $10.0 million, which was repaid in 2009.

Results of discontinued operations were as follows (in thousands):

 

     Years Ended December 31,  
     2009    2008     2007  

Revenues

   $ —      $ 1,626      $ 1,764   

Expenses

     —        (595     (650

Depreciation and amortization

     —        (752     (945
                       

Income from discontinued operations

     —        279        169   

Gain on sale of assets

     —        4,470        —     

Loss on extinguishment of debt

     —        (2,353     —     
                       
   $ —      $ 2,396      $ 169   
                       

Distributions from Unconsolidated Entities

As of December 31, 2009, we had investments in eight properties through unconsolidated entities. We are entitled to receive quarterly cash distributions from our unconsolidated entities to the extent there is cash available to distribute. For the years ended December 31, 2009 and 2008, we were declared operating distributions of approximately $11.2 million and $13.1 million, respectively, from the operation of these entities. These distributions are generally received within 45 days after each quarter end. Distributions receivable from our unconsolidated entities as of December 31, 2009 and 2008 were approximately $2.8 million and $2.4 million, respectively.

The following table summarizes the change in distributions declared to us from our unconsolidated entities (in thousands):

 

Period

   Wolf
Partnership(1)
   DMC
Partnership
   Intrawest
Venture
    Total  

Year ended December 31, 2009

   $ —      $ 10,427    $ 809      $ 11,236   

Year ended December 31, 2008

     —        10,251      2,876        13,127   
                              

Decrease

   $ —      $ 176    $ (2,067   $ (1,891
                              

 

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FOOTNOTE:

 

(1) On August 6, 2009, we purchased Great Wolf’s 30.3% interest in the Wolf Partnership. As a result, the properties are wholly-owned and consolidated in our financial statements on a go-forward basis.

The retail villages owned by the Intrawest Venture have been impacted by the current recession resulting in a reduction in cash distributions as compared with the prior year. We expect cash flows from these properties to return to historical levels when consumer spending and the broader economy improve. Distributions from the DMC Partnership remained relatively consistent with the prior year.

Uses of Liquidity and Capital Resources

Acquisitions and Investments in Unconsolidated Entities

Since our inception we have used proceeds from our common stock offerings to acquire new properties, make additional capital improvements at existing properties, make and acquire loans and make investments in unconsolidated entities. During the year ended December 31, 2009, we acquired the following properties (in thousands).

 

Property/Description

   Location    Date of
Acquisition
   Purchase
Price
 

Jiminy Peak Mountain Resort—

   Massachusetts    1/27/2009    $ 27,000   

One ski resort

        

Wet’n’Wild Hawaii—

   Hawaii    5/6/2009      25,800 (1) 

One waterpark

        

Okemo Mountain Resort—

   Vermont    6/30/2009      14,400   

Additional leasehold interest

        
              
      Total    $ 67,200   
              

 

FOOTNOTE:

 

(1) This amount includes $15.0 million cash paid at closing and an additional $10.8 million, which represents the estimated fair value of contingent purchase consideration expected to be paid in connection with the acquisition on May 6, 2009. The purchase agreement provides for additional purchase consideration of up to $14.7 million payable to the seller contingent upon the property achieving certain financial performance goals over the next three years. During 2009, the operating income of the property exceeded certain performance goals which entitled the seller to additional contingent purchase consideration above what we initially estimated at the acquisition date. As such, we recorded the fair value of the additional purchase price consideration expense of approximately $3.5 million, and increased our estimated liability to $14.4 million as of December 31, 2009. On February 19, 2010, approximately $11.4 million was paid. This additional purchase consideration will be added to the contractual lease basis used to calculate rent and will result in additional rental income being generated from this property.

On August 6, 2009 we acquired the remaining 30.3% interest in the Wolf Partnership from Great Wolf Resorts, Inc. for $6.0 million. The Wolf Partnership was previously an unconsolidated entity and owns two of our waterpark resorts, the Wolf Dells and the Wolf Sandusky (the “Wolf Properties”). The consideration paid to acquire the remaining equity interest, along with carrying value of our investment in the unconsolidated entity at the acquisition date approximated the fair value of the net assets acquired, and accordingly no gain or loss was recorded in connection with the transaction. At acquisition, the fair value of the properties was determined to be approximately $90.3 million. The properties are encumbered with one mortgage loan with an aggregate outstanding principal, at the acquisition date, of approximately $62.7 million and fair value of approximately $58.7 million.

 

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On August 3, 2009, the DMC Partnership exercised its option to purchase the land under the DMC Property, which was previously leased to the partnership, for approximately $11.6 million. We contributed cash to the DMC Partnership to fund the entire land purchase thereby increasing our ownership in the partnership to 81.9%.

The following table quantifies our total acquisitions in each year since our inception excluding properties owned through unconsolidated entities:

 

     2009     2008    2007    2006    2005

Number of properties

     5(1)        15      48      41      1

Total purchase price

   $ 157,500 (1)    $ 251,606    $ 1,152,817    $ 472,511    $ 20,953

(in thousands)

             

 

FOOTNOTE:

 

(1) On August 6, 2009, we acquired the remaining 30.3% interest in the Wolf Partnership. The amount stated as initial purchase price represents the estimated fair value of these properties at that time.

The decrease in the number and magnitude of property acquisitions in 2009 as compared to 2008 and 2007 is a result of our decision to conserve cash due to uncertainties in the financial markets and U.S. economy. While 2009 and 2008 had a lower level of acquisitions, we believe that these events may provide us with additional acquisition opportunities, over the next two years as property owners need to refinance or recapitalize their businesses. However, we cannot be certain when market conditions will improve or whether such acquisition opportunities will be available to us.

Mortgages and Other Notes Receivable, net

We use cash raised through our public offerings to make or acquire real estate related loans. As of December 31, 2009 and 2008, we had loans outstanding with carrying values of approximately $145.6 million and $182.1 million, respectively. During 2009, we collected $10.0 million on a maturing loan, made additional loans totaling approximately $20.5 million, net of certain payments, and obtained a deed in lieu of foreclosure on one loan with an original principal amount of $40.0 million. The following is a schedule of future maturities for all mortgages and other notes receivable (in thousands):

 

2010

   $ 592

2011

     1,287

2012

     101,217

2013

     824

2014

     903

Thereafter

     35,405
      

Total

   $ 140,228
      

Distributions

On January 27, 2009, our board of directors declared a special distribution of $0.035 per share to stockholders of record as of March 31, 2009 in connection with the gain on sale of one property in late 2008 and additional percentage rents earned in 2008 and received in 2009. Additionally, we increased our monthly distribution rate from $0.05125 to $0.0521 per share effective April 1, 2009. The special distribution, totaling approximately $8.0 million, was paid on June 30, 2009 along with our quarterly distribution. On an annualized basis, the increased rate, excluding the special distribution, represents a 6.25% return if paid for twelve months based on the current $10.00 per share offering price of our common stock.

 

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The following table represents total distributions declared including cash distributions, distributions reinvested and distributions per share for the years ended December 31, 2009 and 2008 (in thousands except per share data):

 

Periods

   Cash
Distributions
   Distributions
Reinvested
   Total
Distributions
Declared
   Distributions
Per Share

2009 Quarter

                   

First

   $ 18,613    $ 16,304    $ 34,917    $ 0.1538

Second

     24,048      20,237      44,285      0.1913

Third

     20,250      16,910      37,160      0.1563

Fourth

     20,924      17,167      38,091      0.1563
                           

Year

   $ 83,835    $ 70,618    $ 154,453    $ 0.6577
                           

2008 Quarter

                   

First

   $ 15,851    $ 14,060    $ 29,911    $ 0.1538

Second

     16,522      14,839      31,361      0.1538

Third

     17,139      15,632      32,771      0.1537

Fourth

     18,049      16,266      34,315      0.1537
                           

Year

   $ 67,561    $ 60,797    $ 128,358    $ 0.6150
                           

We paid distributions for the year ended December 31, 2008 with cash flows generated from operating activities. A portion of the distributions paid for the year ended December 31, 2009 was funded from excess cash flows from operating activities in prior years as well as borrowings.

Common Stock Redemptions

For the year ended December 31, 2009, we received total redemption requests of approximately 9.3 million shares, of which 8.0 million shares were redeemed on a pro rata basis, for an average price per share of $9.55 for a total of approximately $76.2 million, with the remaining 1.3 million shares redeemed at the end of the first quarter of 2010. For the years ended December 31, 2008 and 2007, we received redemption requests for approximately 3.6 million shares and 0.7 million shares, for an average price per share of $9.52 and $9.42 for a total of approximately $34.0 million and $6.2 million, respectively, all of which were redeemed in the period they were requested. The redemption price per share is based on the amount of time that the redeeming stockholder has held the applicable shares, but in no event is the redemption price greater than the price of shares sold to the public in our offerings. We believe the increase in the redemption requests from 2008 to 2009 is, in part, due to several non-listed REITs suspending their redemption programs.

In March 2010, we amended our redemption plan to provide clarity about the board of directors’ discretion in establishing the amount of redemptions that may be processed each quarter and to allow certain priority groups of stockholders with requests made pursuant to circumstances such as death, qualifying disability, bankruptcy or unforeseeable emergency to have their redemption requests processed ahead of the general stockholder population. In addition, our board of directors determined that we will redeem shares pursuant to the redemption plan in an amount totaling $7.5 million per calendar quarter beginning in the second quarter of 2010. Our board of directors will continue to evaluate and determine the amount of shares to be redeemed based on what it believes to be in the best interests of the Company and our stockholders, as the redemption of shares dilutes the amount of cash available to make acquisitions. See Part II, Item 5. “Market for Registrant’s Common Equity and Related Stockholder Matters” for additional information about our redemption plan.

Stock Issuance Costs and Other Related Party Arrangements

Certain of our directors and officers hold similar positions with CNL Lifestyle Company, LLC, which is both a stockholder and our Advisor, and CNL Securities Corp., which is the managing dealer for our public

 

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offerings. Our chairman of the board indirectly owns a controlling interest in CNL Financial Group, Inc. the parent company of our Advisor. These entities receive fees and compensation in connection with our stock offerings and the acquisition, management and sale of our assets. Amounts incurred relating to these transactions were approximately $56.3 million, $69.0 million and $117.4 million, for the years ended December 31, 2009, 2008 and 2007, respectively. Of these amounts, approximately $4.2 million and $3.9 million are included in the due to related parties in the accompanying consolidated balance sheets as of December 31, 2009 and 2008, respectively. CNL Lifestyle Company, LLC and its affiliates are entitled to reimbursement of certain expenses and amounts incurred on our behalf in connection with our organization, offering, acquisitions, and operating activities. Reimbursable expenses for the years ended December 31, 2009, 2008 and 2007 were approximately $13.3 million, $11.6 million and $10.1 million, respectively.

Additionally, pursuant to the advisory agreement, we will not reimburse our Advisor any amount by which total operating expenses paid or incurred by us exceed the greater of 2% of average invested assets or 25% of net income (the “Expense Cap”). For the expense years ended December 31, 2009, 2008 and 2007, operating expenses did not exceed the Expense Cap.

We maintain accounts at a bank for which our chairman and vice-chairman serve as directors. We had deposits at that bank of approximately $26.1 million and $13.7 million as of December 31, 2009 and 2008, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Consolidation. Our consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All inter-company transactions, balances and profits have been eliminated in consolidation. In addition, we evaluate our investments in partnerships and joint ventures for consolidation based on whether we have a controlling interest, including those in which we have been determined to be a primary beneficiary of a variable interest entity (“VIE”) or meets certain criteria of a sole general partner or managing member in accordance with the Consolidation guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

The application of these accounting principles requires management to make significant estimates and judgments about our rights and our venture partners’ rights, obligations and economic interests in the related venture entities. For example, under this pronouncement, there are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and if so, if we are the primary beneficiary. This includes determining the expected future losses of the entity, which involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses. A change in the judgments, assumptions and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment on the equity method that should in fact be consolidated, the effects of which could be material to our the financial statements.

Investments in unconsolidated entities. The equity method of accounting is applied with respect to investments in entities for which we have determined that consolidation is not appropriate and we have significant influence. We record equity in earnings of the entities under the HLBV method of accounting. Under this method, we recognize income in each period equal to the change in our share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value. Under this method, in any given period, we could be recording more or less income than actual cash distributions received and more or less than what we may receive in the event of an actual liquidation.

Leases. Our leases are accounted for as operating leases. Lease accounting principles require management to estimate the economic life of the leased property, the residual value of the leased property and the present

 

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value of minimum lease payments to be received from the tenant in order to determine the proper lease classification. Changes in our estimates or assumptions regarding collectability of lease payments, the residual value or economic lives of the leased property could result in a change in lease classification and our accounting for leases.

Revenue recognition. Revenue is recorded on the straight-line basis over the terms of the leases. Percentage rent that is due contingent upon tenant performance, such as achieving a certain amount of gross revenues, is deferred until the underlying performance thresholds have been reached. The deferred portion of interest on mortgages and other notes receivable is recognized on a straight-line basis over the term of the corresponding note. Changes in our estimates or assumptions regarding collectability of lease and loan interest payments could result in a change in income recognition and impact our results of operations.

Impairments. We test the recoverability of our directly-owned real estate whenever events or changes in circumstances indicate that the carrying value of those assets may be impaired. Factors that could trigger an impairment analysis include, among others: (i) significant underperformance relative to historical or projected future operating results; (ii) significant changes in the manner of use of our real estate assets or the strategy of our overall business; (iii) a significant increase in competition; (iv) a significant adverse change in legal factors or an adverse action or assessment by a regulator, which could affect the value of our real estate assets; or (v) significant negative industry or economic trends. When such factors are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition, to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we would recognize an impairment loss to adjust the carrying amount of the asset to the estimated fair value. Fair values are generally determined based on incorporating market participant assumptions, discounted cash flow models and our estimates reflecting the facts and circumstances of each acquisition.

For investments in unconsolidated entities, management monitors on a continuous basis whether there are any indicators, including the underlying investment property operating performance and general market conditions, that the value of the investments in unconsolidated entities may be impaired. An investment’s value is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment and such difference is deemed to be other-than-temporary. To the extent an impairment has occurred, the loss would be measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.

The estimated fair values of our unconsolidated entities are based upon a discounted cash flow model that includes all estimated cash inflows and outflows over the expected holding period. The discounted cash flow model contains significant judgments and assumptions including discount and capitalization rates and forecasted operating performance of the underlying properties. The capitalization rates and discount rates utilized in these models are based upon rates that we believe to be within a reasonable range of current market rates for the underlying properties.

Mortgages and other notes receivable. Mortgages and other notes receivable are recorded at the stated principal amounts net of deferred loan origination costs or fees. A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the note. An allowance for loan loss is calculated by comparing the carrying value of the note to the estimated fair value of the underlying collateral. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in the provision for loan loss not to exceed the original carrying amount of the loan. Interest income on performing loans is accrued as earned. Interest income on impaired loans is recognized as collected. The estimated fair market value of the underlying loan collateral is determined by management using appraisals and internally developed valuation methods. These models are based on a variety of assumptions. Changes in these assumptions could positively or negatively impact the valuation of our impaired loans.

 

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Derivative instruments and hedging activities. We utilize derivative instruments to partially offset the effect of fluctuating interest rates on the cash flows associated with our variable-rate debt. We follow established risk management policies and procedures in our use of derivatives and do not enter into or hold derivatives for trading or speculative purposes. We record all derivative instruments on the balance sheet at fair value. On the date we enter into a derivative contract, the derivative is designated as a hedge of the exposure to variable cash flows of a forecasted transaction. The effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (loss) and subsequently recognized in the statement of operations in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. Any ineffective portion of the gain or loss is reflected in interest expense in the statement of operations. Determining fair value and testing effectiveness of these financial instruments requires management to make certain estimates and judgments. Changes in assumptions could have a positive or negative impact on the estimated fair values and measured effectiveness of such instruments could in turn impact our results of operations.

Accounting for Property Acquisitions. For each acquisition, we record the fair value of the land, buildings, equipment, intangible assets, including in-place lease origination costs and above or below market lease values, and any assumed liabilities on contingent purchase consideration. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair values are determined based on incorporating market participant assumptions, discounted cash flow models and our estimates reflecting the facts and circumstances of each acquisition.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

Acquisition Fees and Costs. Effective January 1, 2009, we began expensing acquisition fees and costs in accordance with a new accounting pronouncement. Prior to this date, acquisition fees and costs were capitalized and allocated to the cost basis of the assets acquired in connection with a business combination. The adoption of this pronouncement had, and will continue to have, a significant impact on our operating results due to the highly acquisitive nature of our business. This pronouncement also causes a decrease in cash flows from operating activities, as acquisition fees and costs historically have been included in cash flows from investing activities, but are treated as cash flows from operating activities under this new pronouncement. The characterization of these acquisition fees and costs to operating activities in accordance with GAAP does not change the nature and source of how the amounts are funded and paid with proceeds from our public offerings. Upon adoption of this pronouncement, we expensed approximately $5.9 million in acquisition fees and costs for acquisitions that were being pursued in 2008 but which did not close as of December 31, 2008. Additionally, we expensed approximately $8.7 million in new acquisition fees and costs incurred during the year ended December 31, 2009. We will continue to capitalize acquisition fees and costs incurred in connection with the making of loans, simple asset purchases and other permitted investments not subject to this pronouncement.

Fair Value of Non-Financial Assets and Liabilities. Effective January 1, 2009, we adopted a new fair value pronouncement for non-financial assets and liabilities such as real estate, intangibles, investments in unconsolidated entities and other long-lived assets, including the incorporation of market participant assumptions. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement dated. We generally determine fair value based on incorporating market participant assumptions, discounted cash flow models and our management’s estimates reflecting the facts and circumstances of each non-financial asset or liability. Consequently, the adoption of this guidance did not have a material impact.

See Item 8. “Financial Statements and Supplementary Data” for additional information about the impact of recent accounting pronouncements.

 

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RESULTS OF OPERATIONS

The following table summarizes our operations for the years ended December 31, (in thousands except per share data):

 

     Year Ended December 31,     % Change
2009 vs
2008
    % Change
2008 vs
2007
 
     2009     2008     2007      

Revenues:

          

Rental income from operating leases

   $ 205,247      $ 203,031      $ 121,118      1.1   67.6

Property operating revenues

     35,246        —          7,286      100.0   -100.0

Interest income on mortgages and other notes receivable

     12,778        7,384        11,018      73.0   -33.0
                            

Total revenues

     253,271        210,415        139,422      20.4   50.9
                            

Expenses:

          

Asset management fees to advisor

     25,075        21,937        14,804      14.3   48.2

Acquisition fees and costs

     14,616        —          —        100.0   0.0

General and administrative

     13,935        14,003        9,801      -0.5   42.9

Property operating expenses

     34,665        —          5,272      100.0   -100.0

Ground lease and permit fees

     11,561        9,477        5,761      22.0   64.5

Other operating expenses

     9,548        8,943        5,047      6.8   77.2

Bad debt expense

     2,313        328        138      605.2   137.7

Loss on lease terminations

     4,506        —          —        100.0   0.0

Depreciation and amortization

     124,040        98,149        63,938      26.4   53.5
                            

Total expenses

     240,259        152,837        104,761      57.2   45.9
                            

Operating income

     13,012        57,578        34,661      -77.4   66.1
                            

Other income (expense):

          

Interest and other income

     2,676        5,718        11,132      -53.2   -48.6

Interest expense and loan cost amortization

     (40,638     (32,076     (14,175   -26.7   -126.3

Equity in earnings of unconsolidated entities

     5,630        3,020        3,738      86.4   -19.2
                            

Total other income (expense)

     (32,332     (23,338     695      -38.5   -3458.0
                            

Income (loss) from continuing operations

     (19,320     34,240        35,356      -156.4   -3.2

Discontinued operations

     —          2,396        169      -100.0   1317.8
                            

Net income (loss)

   $ (19,320   $ 36,636      $ 35,525      -152.7   3.1
                            

Earnings (loss) per share of common stock (basic and diluted)

          

Continuing operations

   $ (0.08   $ 0.16      $ 0.22      -150.0   -27.3

Discontinued operations

   $ —        $ 0.01      $ 0.00      -100.0   100.0
                            
   $ (0.08   $ 0.17      $ 0.22      -147.1   -22.7
                            

Weighted average number of shares of common stock outstanding (basic and diluted)

     235,873        210,192        159,807       
                            

Year ended December 31, 2009 vs. Year ended December 31, 2008

Rental income from operating leases. Overall, we experienced a 1.1% increase in rental income for 2009. Notwithstanding an increase of 11.8% in rental income attributable to properties newly acquired during 2008 and 2009, our total rate of growth declined as compared to prior years as a result of a 10.7% decline in rental income attributable to lease restructures and the termination of leases for three properties.

 

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The following information summarizes trends in rental income from operating leases in relation to the timing and number of our property acquisitions:

 

Properties Subject to Operating Leases

   Number
of
Properties
    Total Rental Income
(in thousands) for the
Year Ended
December 31,(1)
    Percentage
of Total
2009
Rental
Income
    Percentage
of Total
2008
Rental
Income
    Percentage
Increase
(Decrease)

in Rental
Income
 
           2009     2008                    

Acquired prior to 2008

   85      $ 165,097      $ 177,398      80.4   87.4   (6.9 )% 

Acquired in 2008

   15        31,348        12,677      15.3   6.2   147.3

Acquired in 2009

   2        5,231        —        2.5   —        100.0

Other properties(2)

   3        3,571        12,956      1.8   6.4   (72.4 )% 
                                    

Total

   105 (1)    $ 205,247 (1)    $ 203,031 (1)    100.0   100.0  
                                    

 

FOOTNOTES:

 

(1) The numbers only include our consolidated properties operated under long-term triple-net leases and our multi-family residential property.

 

(2) This represents rental income on two golf properties and one ski mountain lifestyle property prior to the lease termination at which point we began recording the golf and hotel operating revenues and expenses in place of rental income.

Rent from properties acquired prior to 2008 decreased 6.9% primarily as a result of rent reductions and lease terminations, offset, in part, by rent increases from capital expansion projects that increased the contractual lease basis of certain of our properties during 2008. We acquired 15 properties in 2008 which generated approximately $31.3 million and $12.7 million or 15.3% and 6.2% of total rental income for the years ended December 31, 2009 and 2008, respectively. Approximately $5.2 million or 2.5% of total rental income for the year ended December 31, 2009 was derived from properties that were newly acquired during 2009.

As of December 31, 2009 and 2008, the weighted-average lease rate for our portfolio of leased properties was 8.9% and 9.0%, respectively. These rates are based on annualized straight-lined base rent due under our leases and the weighted-average contractual lease basis of our real estate investment properties subject to operating leases. The decrease is primarily a result of reduced rents on certain properties and three lease terminations. Additionally, the weighted-average lease rate of our portfolio will fluctuate based on our asset mix, timing of property acquisitions, lease terminations and reductions in rent granted to tenants.

Property operating revenues. As a result of terminating our leases on three of our properties, we engaged third-party management companies to operate the properties on our behalf and began recording property operating revenues and expenses. In addition, on August 6, 2009, we acquired the remaining interest in the Wolf Partnership, which owns waterpark hotels operated by a third-party hotel manager, and began recording the property operating results as opposed to equity in earnings (losses) from the previously unconsolidated venture.

Interest income on mortgages and other notes receivable. For the year ended December 31, 2009, we earned interest income of approximately $12.8 million on our performing loans with an aggregate principal balance of approximately $140.2 million. Comparatively, for the year ended December 31, 2008, we recorded interest income of approximately $7.4 million on our performing loans with an aggregate principal balance of approximately $129.7 million. The increase is attributable to partial interest income recognized on loans made by us during the year ended December 31, 2008 as compared to full year during 2009 coupled with new loans made by us during the year ended December 31, 2009.

Asset management fees to advisor. Monthly asset management fees of 0.08334% of invested assets are paid to the advisor for the acquisition of real estate assets and making loans. For the years ended December 31, 2009

 

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and 2008, asset management fees to our advisor were approximately $25.1 million and $21.9 million, respectively. The increase in such fees is due to the acquisition of additional real estate properties and loans made.

Acquisition fees and costs. Effective January 1, 2009, we began expensing acquisition fees and costs as a result of a newly issued accounting standard. Prior to the adoption of the standard, acquisition fees and costs incurred in connection with business combinations were capitalized and allocated to the cost basis of the assets we acquired. Upon adoption of the new standard on January 1, 2009, we were required to expense approximately $5.9 million in acquisition fees and costs that were previously incurred and capitalized in our balance sheet for acquisitions that were being pursued, but which did not close by December 31, 2008. Additionally, we expensed approximately $8.7 million in new acquisition fees and costs incurred during the year ended December 31, 2009.

General and administrative. General and administrative expenses totaled approximately $13.9 million and $14.0 million for the years ended December 31, 2009 and 2008, respectively. The slight decrease was primarily due to cost control efforts in 2009.

Property operating expenses. As a result of terminating our leases on three of our properties and purchase of the remaining interest in the Wolf Partnership as discussed above, we began recording property operating expenses totaling approximately $34.7 million for the year ended December 31, 2009 relating to these properties.

Ground leases and permit fees. Ground lease payments, concession holds and land permit fees are generally based on a percentage of gross revenue of the underlying property over certain thresholds and are paid by the tenants in accordance with the terms of our triple-net leases with those tenants. These expenses have corresponding equivalent revenues included in rental income above. For the years ended December 31, 2009 and 2008, ground lease, concession holds and land permit fees were approximately $11.6 million and $9.5 million, respectively. The increase is attributable to the growth of our property portfolio and gross revenues at certain properties. As of December 31, 2009, 37 of our properties are subject to ground leases, concession holds or land permit fees, as compared to 36 properties in 2008.

Other operating expenses. Other operating expenses totaled approximately $9.5 million and $8.9 million for the years ended December 31, 2009 and 2008, respectively. The increase is primarily a result of expensing approximately $3.5 million due to a change in estimate of contingent purchase consideration payable in connection with the acquisition of Wet’n’Wild Hawaii as discussed above, offset by a decrease in repairs and maintenance expenses incurred. Capital expenditures are made from the capital improvement reserve accounts for replacements, refurbishments, repairs and maintenance at our properties. Certain expenditures, which do not substantially enhance the property value or increase the estimated useful lives, cannot be capitalized and are expensed.

Bad debt expense. Bad debt expense was approximately $2.3 million and $0.3 million for the years ended December 31, 2009 and 2008, respectively. The increase is primarily due to the write-off of past due rents receivable that were deemed uncollectible from a tenant whose lease was terminated.

Loss on lease termination. Loss on lease termination was approximately $4.5 million for the year ended December 31, 2009 and is attributable to the termination of leases for three properties which are now operated by third-parties under management contracts. Prior to January 1, 2009, there were no lease terminations.

Depreciation and amortization. Depreciation and amortization expenses were approximately $124.0 million and $98.1 million for the years ended December 31, 2009 and 2008, respectively. The increase is primarily due to the acquisition of real estate properties in 2008 of which partial depreciation and amortization were recognized as compared to a full year in 2009 coupled with acquisition of additional real estate properties in 2009.

Interest and other income. Interest and other income totaled approximately $2.7 million and $5.7 million for the years ended December 31, 2009 and 2008, respectively. The decrease primarily resulted from a general reduction in rates paid by depository institutions on short-term deposits during 2009 as compared to 2008. We

 

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continue to monitor depository institutions that hold our cash and cash equivalents. During 2009, we received an average yield of 0.8% as compared to an average yield of 2.4% during 2008. Our average uninvested offering proceeds, based on month-end money market balances, was approximately $166.2 million during 2009 as compared to approximately $222.8 million during 2008.

Interest expense and loan cost amortization. Interest expense and loan cost amortization were approximately $40.6 million and $32.1 million for the years ended December 31, 2009 and 2008, respectively. The increase is attributable to the increase in our borrowings as a result of acquisitions and renovation of our properties and an increase in interest expense on our line of credit of which partial expense was recognized in 2008 compared to a full year in 2009. As of December 31, 2009, we had loan obligations totaling $739.0 million as compared to total loan obligations of $639.2 million at December 31, 2008.

Equity in earnings of unconsolidated entities. The following table summarizes equity in earnings (losses) from our unconsolidated entities (in thousands):

 

     For the Year Ended December 31,  
     2009     2008     $ Change     % Change  

Wolf Partnership

   $ (2,657   $ (5,773   $ 3,116      54.0

DMC Partnership

     9,931        9,480        451      4.8

Intrawest Venture

     (1,644     (687     (957   -139.3
                          

Total

   $ 5,630      $ 3,020      $ 2,610      86.4
                          

Equity in earnings is recognized using the HLBV method of accounting due to the preferences we receive upon liquidation, which means we recognize income in each period equal to the change in our share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value. Because our equity in earnings is calculated in this manner, we have historically recognized more income than the underlying unconsolidated entities have generated and our partners have historically been allocated losses to offset the amount of earnings that we have recorded over and above the net income generated from the entities. This will continue until our partner’s capital has been reduced to zero, at which point no further losses can be allocated to our partners.

We received cash distributions from our unconsolidated entities of approximately $10.8 million and $14.9 million for the years ended December 31, 2009 and 2008, respectively.

Equity in earnings increased by approximately $2.6 million for the year ended December 31, 2009, as compared to 2008, primarily due to a decrease in the loss we were allocated from the Wolf Partnership of approximately $3.1 million, mainly as a result of negotiated reduction in management and license fees of $1.8 million and because on August 6, 2009, we acquired all the remaining interest in the Wolf Partnership and began consolidating the properties operations. As a result, we recorded equity in losses from the Wolf Partnership through August 5, 2009 compared to a full year in 2008. In addition, the increase in equity in earnings was due to the allocation from the DMC Partnership of approximately $0.5 million, resulting from a reduction in ground rent after the partnership acquired a majority of the underlying land.

The Intrawest Venture was significantly impacted by a reduction in retail spending at its resort village retail locations, which is a direct result of the recent recession. While visitation at many of these locations did not decline, spending by consumers during their visits declined. We believe that operations at these properties will return to historical levels when the broader economy improves. Additionally, during the first quarter of 2009, the Intrawest Venture determined that it made certain accounting errors in 2008 which totaled approximately $0.4 million. We concluded that these errors were not material to our financial statements for the year ended December 31, 2009 or 2008. As such, we recorded the cumulative effect of these adjustments during the three months ended March 31, 2009, which resulted in a reduction in equity in earnings of unconsolidated entities of $0.4 million.

 

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Discontinued operations. For the year ended December 31, 2008, results of discontinued operations were approximately $2.4 million relating to the Talega Golf Course property which was sold in December 2008.

Net income (loss) and earnings (loss) per share of common stock. The decrease in net income (loss) and earnings (loss) per share for the year ended December 31, 2009 as compared to the prior year was primarily due to (i) the reduction in rental income from certain of our properties, including those for which the leases were terminated and have been restructured offset by additional rent from properties acquired in 2008 and 2009, (ii) the adoption of a new pronouncement which requires the expensing of all acquisition fees and costs as operating costs, (iii) additional interest expense on our borrowings, and (iv) a reduction in the rates paid by depository institutions on short-term deposits offset by an increase in equity in earnings from unconsolidated entities. Our earnings and earnings per share may fluctuate while we continue to raise capital and make significant acquisitions. These performance measures are affected by the pace at which we raise offering proceeds and the time it takes to accumulate and invest such proceeds in real estate acquisitions and other income-producing investments. The accumulation of funds over time in order to make individually significant acquisitions can be dilutive to the earnings per share ratio.

Year ended December 31, 2008 vs. Year ended December 31, 2007

Rental income from operating leases. The significant increase in rental income for the year ended December 31, 2008 as compared to December 31, 2007 was principally due to the acquisition of 14 new properties in 2008 and 48 properties acquired during 2007 owned during the entirety of 2008. As of December 31, 2008 and 2007, the weighted-average lease rate for our portfolio of leased properties was 9.0% and 9.4%, respectively. These rates are based on annualized straight-lined base rent due under our leases and the weighted-average contractual lease basis of our real estate investment properties subject to operating leases. The weighted-average lease rate of our portfolio will fluctuate based on our asset mix and timing of property acquisitions. The following analysis quantifies the total rental income generated from our properties based on the year in which the properties were acquired and leased, and the increases in rental income attributable to those properties on a comparative basis, year over year:

 

Properties Subject to Operating Leases

   Number
of
Properties
    Total Rental Income
(in thousands) for the
Year Ended
December 31,
    Percentage
of Total
2008
Rental
Income
    Percentage
of Total
2007
Rental
Income
    Percentage
Increase
(Decrease) in
Rental
Income
 
           2008     2007                    

Acquired prior to 2007

   41      $ 51,962      $ 49,977      25.6   41.2   4.0

Acquired in 2007

   48        138,392        71,141      68.2   58.8   94.5

Acquired in 2008

   14        12,677        —        6.2   —        100.0
                                    

Total

   103 (1)    $ 203,031 (1)    $ 121,118 (1)    100.0   100.0  
                                    

 

FOOTNOTE:

 

(1) This number does not include the Coco Key Water Resort, which is currently closed during renovation and the Talega Golf Course property, which was sold on December 12, 2008 and is included in discontinued operations.

Rent from properties acquired prior to 2007 increased 4.0% primarily as a result of greater percentage rent being earned and base rent increases from capital expansion projects in 2008 that increased the contractual lease basis used to calculate rent. We acquired 48 properties in 2007 which generated approximately $138.4 million and $71.1 million or 68.2% and 58.8% of total rental income for the years ended December 31, 2008 and 2007, respectively. Approximately $12.7 million or 6.2% of total rental income for the year ended December 31, 2008 was derived from properties that were newly acquired during 2008.

 

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Property operating revenues. During the year ended December 31, 2007, property operating revenues totaled approximately $7.3 million and were attributable to the operations of Cowboys Golf Club which was operated through a TRS under a management agreement with EAGLE. On January 1, 2008, the management agreement was terminated and we simultaneously entered into a long-term triple-net lease agreement on the property which subsequently eliminated the Cowboys Golf Club operating revenues.

Interest income on mortgages and other notes receivable. For the year ended December 31, 2008, we recorded interest income totaling approximately $7.4 million on our 10 performing loans with an aggregate principal balance of $129.7 million. As of December 31, 2008, we had one non-performing loan with a principal balance of $40.0 million for which no interest income was recognized in 2008. Comparatively, for the year ended December 31, 2007, we recorded interest income of approximately $11.0 million, which included interest income of approximately $1.1 million relating to the non-performing loans that were subsequently deemed impaired, were foreclosed, or otherwise satisfied.

 

     Number
of
Loans(1)
   Years Ended
December 31,
   Change  
        2008    2007    $     %  

Performing loans

   10    $ 7,384    $ 9,961    $ (2,577   -25.9

Non-performing loan

   1      —        1,057      (1,057   -100.0
                                 

Total

   11    $ 7,384    $ 11,018    $ (3,634   -33.0
                                 

 

FOOTNOTE:

 

(1) During the year ended December 31, 2007, we had two non-performing loans, one of which we foreclosed upon and took ownership of on December 31, 2007 and the other we received title to the collateral property through a settlement agreement on May 28, 2008. In January 2008, one additional borrower ceased making payments on its $40.0 million loan obligation to us, which is classified as non-performing as of December 31, 2008.

Asset management fees to advisor. Asset management fees of 0.08334% of invested assets are paid to the advisor for the acquisition of real estate assets and making loans. For the years ended December 31, 2008 and 2007, asset management fees to our advisor were approximately $21.9 million and $14.8 million, respectively. The increase in such fees is due to the acquisition of additional real estate properties and loans made during late 2007 and in 2008.

General and administrative. General and administrative expenses were approximately $14.0 million and $9.8 million for the years ended December 31, 2008 and 2007, respectively. The increase was primarily due to an increase in legal fees of approximately $0.6 million and account maintenance fees under a new fee structure charged by our new stock transfer agent, of approximately $3.1 million.

Property operating expenses. During the year ended December 31, 2007, property operating expenses totaled approximately $5.3 million and were attributable to the operations of Cowboys Golf Club which was operated through a TRS under a management agreement with EAGLE. On January 1, 2008, the management agreement was terminated and we simultaneously entered into a long-term triple-net lease agreement on the property which subsequently eliminated the Cowboys Golf Club operating expenses.

Ground leases and permit fees. For the years ended December 31, 2008 and 2007, ground lease, concession holds and land permit fees were approximately $9.5 million and $5.8 million, respectively. The increase was attributable to the growth of our property portfolio and gross revenues of certain properties. As of December 31, 2008, 36 of our properties were subject to ground leases, concession holds or land permit fees, as compared to 28 properties in 2007.

 

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Other operating expenses. Other operating expenses were approximately $8.9 million and $5.0 million for the years ended December 31, 2008 and 2007, respectively. The increase was primarily a result of higher repair and maintenance expenses incurred and state income taxes. Capital expenditures are made from the capital improvement reserve accounts for replacements, refurbishments, repairs and maintenance at our properties. Certain expenditures, which do not substantially enhance the property value or increase the estimated useful lives, cannot be capitalized and are expensed.

Depreciation and amortization. Depreciation and amortization expenses were approximately $98.1 million and $63.9 million for the years ended December 31, 2008 and 2007, respectively. The increase was primarily due to the acquisition of real estate properties in 2007 of which partial depreciation and amortization were recognized as compared to a full year in 2008 coupled with acquisition of additional real estate properties in 2008.

Interest and other income. Interest and other income totaled approximately $5.7 million and $11.1 million for the years ended December 31, 2008 and 2007, respectively. The decrease primarily resulted from a general reduction in interest rates paid by depository institutions on short-term deposits during 2008 as compared to 2007. During 2008, we received an average yield of 2.4% as compared to an average yield of 4.7% during 2007. Our average uninvested offering proceeds, based on month-end money market balances, was approximately $222.8 million during 2008 as compared to approximately $205.2 million during 2007.

Interest expense and loan cost amortization. Interest expense and loan cost amortization were approximately $32.1 million and $14.2 million for the years ended December 31, 2008 and 2007, respectively. The increase was attributable to the increase in our borrowings as a result of acquisitions of properties. In October 2008, we drew $100.0 million from our revolving line of credit to ensure we had sufficient cash available for future acquisitions and working capital needs on hand due to uncertainty related to various financial institutions. We paid interest on our line totaling $1.1 million in 2008 as compared to zero in 2007. As of December 31, 2008, we had loan obligations totaling $639.2 million as compared to total loan obligations of $355.6 million at December 31, 2007.

Equity in earnings of unconsolidated entities. The following table summarizes equity in earnings (losses) from our unconsolidated entities (in thousands):

 

     For the Year Ended December 31,  
     2008     2007     $ Change     % Change  

Wolf Partnership

   $ (5,773   $ (4,779   $ (994   -20.8

DMC Partnership

     9,480        9,480        —        0.0

Intrawest Venture

     (687     (963     276      28.7
                          

Total

   $ 3,020      $ 3,738      $ (718   -19.2
                          

As noted above, equity in earnings is recognized using the HLBV method of accounting due to the preferences we receive upon liquidation. Equity in earnings decreased by approximately $0.7 million for the year ended December 31, 2008 as compared to December 31, 2007, primarily due to an increase in the loss we were allocated from the Wolf Partnership of approximately $1.0 million offset by a decrease in the loss we were allocated by the Intrawest Venture of $0.3 million.

We received cash distributions from our unconsolidated entities of approximately $14.9 million and $12.9 million for the years ended December 31, 2008 and 2007, respectively.

Discontinued operations. On December 12, 2008, we sold our Talega Golf Course property for $22.0 million, resulting in a gain of approximately $4.5 million. At the same time, we paid approximately $2.4 million in loan prepayment fees and repaid the portion of the mortgage loan collateralized by this property of approximately $8.8 million. In connection with the sale, we terminated our lease on the property with Heritage Golf.

 

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Net income and earnings per share of common stock. Our net income and earnings per share are volatile as we were still in the early stages of operation and are experiencing significant growth. These performance measures are significantly affected by the pace at which we raise offering proceeds and the time it takes to accumulate and invest such proceeds in real estate acquisitions and other income-producing investments. The accumulation of funds over time in order to make large individually significant acquisitions can be dilutive to the earnings per share ratio. The decrease in earnings per share for the year ended December 31, 2008, as compared to 2007 was primarily due to this dilution and a reduction of interest income from a non-performing loan and in interest paid by depository institutions on short-term deposits.

OTHER

Funds from Operations and Modified Funds From Operations

FFO is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We use FFO, which is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures, as one measure to evaluate our operating performance. In addition to FFO, we use MFFO, which excludes acquisition-related costs and non-recurring charges such as the write-off of in-place lease intangibles, other similar costs associated with lease terminations and fair value adjustments to contingent purchase price obligation in order to further evaluate our ongoing operating performance.

FFO was developed by NAREIT as a relative measure of performance of an equity REIT in order to recognize that income-producing real estate has historically not depreciated on the basis determined under GAAP. We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which is not immediately apparent from net income (loss) alone.

We believe MFFO is helpful to our investors and our management as a measure of operating performance because it excludes costs that management considers more reflective of investing activities, such as the payment of acquisition expenses that are directly associated with property acquisition, and other non-operating items historically included in the computation of FFO such as non-recurring charges associated with lease terminations and the write-off of in-place lease intangibles and other deferred charges. Acquisition expenses are paid for with proceeds from our common stock offerings or debt proceeds rather than paid for with cash generated from operations. Costs incurred in connection with acquiring a property are generally added to the contractual lease basis of the property thereby generating future incremental revenue rather than creating a current periodic operating expense and are funded through offering proceeds rather than operations. Similarly, new accounting standards require us to estimate any future contingent purchase consideration at the time of acquisition and subsequently record changes to those estimates or eventual payments in the statement of operations even though the payment is funded by offering proceeds. Previously under GAAP, these amounts would be capitalized, which is consistent with how these incremental payments are added to the contractual lease basis used to calculate rent for the related property and generates future rental income. Therefore, we exclude these amounts in the computation of MFFO. By providing MFFO, we present information that is more consistent with management’s long term view of our core operating activities and is more reflective of a stabilized asset base.

Accordingly, we believe that in order to facilitate a clear understanding of our operating performance between periods and as compared to other equity REITs, FFO and MFFO should be considered in conjunction with our net income (loss) and cash flows as reported in the accompanying consolidated financial statements and notes thereto. Because acquisition fees and costs and adjustments to contingent purchase price obligations were not required to be expensed under GAAP prior to January 1, 2009, MFFO for the prior periods is the same as

 

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FFO. FFO and MFFO (i) do not represent cash generated from operating activities determined in accordance with GAAP (which, unlike FFO or MFFO, generally reflects all cash effects of transactions and other events that enter into the determination of net income (loss)), (ii) are not necessarily indicative of cash flow available to fund cash needs and (iii) should not be considered as alternatives to net income (loss) determined in accordance with GAAP as an indication of our operating performance, or to cash flow from operating activities determined in accordance with GAAP as a measure of either liquidity or our ability to make distributions. FFO or MFFO as presented may not be comparable to amounts calculated by other companies.

Reconciliation of net income (loss) to FFO and MFFO for the years ended December 31, 2009, 2008, and 2007 (in thousands except per share data):

 

     Year Ended December 31,  
     2009     2008     2007  

Net income (loss)

   $ (19,320   $ 36,636      $ 35,525   

Adjustments:

      

Depreciation and amortization

     124,040        98,901 (1)      64,883 (1) 

Gain on sale of real estate investment properties

     —          (4,470     —     

Net effect of FFO adjustment from unconsolidated entities(2)

     15,856        17,786        17,970   
                        

Total funds from operations

   $ 120,576      $ 148,853      $ 118,378   
                        

Acquisition fees and costs(3)

     14,616        —          —     

Contingent purchase price consideration(4)

     3,472        —          —     

Write-off of non-cash deferred charges(5)

     2,758        —          —     
                        

Modified funds from operations

   $ 141,422      $ 148,853      $ 118,378   
                        

Weighted average number of shares of common stock outstanding (basic and diluted)

     235,873        210,192        159,807   
                        

FFO per share (basic and diluted)

   $ 0.51      $ 0.71      $ 0.74   
                        

MFFO per share (basic and diluted)

   $ 0.60      $ 0.71      $ 0.74   
                        

 

FOOTNOTES:

 

(1) This amount includes depreciation and amortization for our Talega Golf Course property, which was sold on December 12, 2008 and reclassified to discontinued operations.

 

(2) This amount represents our share of the FFO adjustments allowable under the NAREIT definition (primarily depreciation) multiplied by the percentage of income or loss recognized under the HLBV method.

 

(3) Acquisition fees and costs that were directly identifiable with properties acquired were not required to be expensed under GAAP prior to January 1, 2009. Accordingly, no adjustments to funds from operations are necessary for periods prior to 2009.

 

(4) In connection with the acquisition of Wet’n’Wild Hawaii, we recorded the fair value of the additional incremental contingent purchase price consideration as a result of the property exceeding certain performance thresholds which entitled the seller to additional contingent purchase consideration above what we initially estimated at the acquisition date. In accordance with GAAP, this amount is required to be expensed even though it is funded by offering proceeds and added to the contractual lease basis used to calculate rent.

 

(5) This amount includes non-recurring charges associated with lease terminations such as the write-off of in-place lease intangibles and other deferred charges. Prior to January 1, 2009, there were no lease terminations.

Total FFO decreased from approximately $148.9 million for the year ended December 31, 2008 to $120.6 million for the year ended December 31, 2009. FFO per share decreased from $0.71 per share for the year ended

 

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December 31, 2008 to $0.51 per share for the year ended December 31, 2009. The decrease in FFO is attributable principally to (i) the reduction in rental income from certain of our properties, including those for which the leases were terminated and have been restructured offset by additional rent from properties acquired in 2008 and 2009, (ii) an increase in bad debt expense and the write-off of in-place lease intangibles related to terminated and restructured leases, (iii) the adoption of a new accounting pronouncement and expensing of acquisition fees and costs and (iv) additional interest expense paid on our borrowings. During 2009, we earned proportionally lower interest of 0.8% as compared to 2.4% during 2008. We also had a lower balance of uninvested cash, which was approximately $166.2 million during 2009 as compared to approximately $222.8 million during 2008.

MFFO decreased from approximately $148.9 million for the year ended December 31, 2008 to $141.4 million for the year ended December 31, 2009. MFFO per share decreased from $0.71 per share for the year ended December 31, 2008 to $0.60 per share for the year ended December 31, 2009. The decrease in MFFO is attributable principally to (i) the reduction in rental income from certain of our properties, including those for which the leases were terminated and have been restructured offset by additional rent from properties acquired in 2008 and 2009, (ii) an increase in bad debt expense and the write-off of in-place lease intangibles related to terminated and restructured leases, (iii) the adoption of a new accounting pronouncement and expensing of acquisition fees and costs, and (iv) additional interest expense paid on our borrowings. During 2009, we earned proportionally lower interest of 0.8% as compared to 2.4% during 2008. We also had a lower balance of uninvested cash, which was approximately $166.2 million during 2009 as compared to approximately $222.8 million during 2008.

Total FFO increased from approximately $118.4 million for the year ended December 31, 2007 to $148.9 million for the year ended December 31, 2008. FFO per share decreased from $0.74 per share for the year ended December 31, 2007 to $0.71 per share for the year ended December 31, 2008. The decrease is attributable principally to (i) a reduction of interest income from a non-performing loan, (ii) a reduction in interest paid by depository institutions on short-term deposits and (iii) and the dilution due to a higher amount of uninvested cash.

OFF BALANCE SHEET AND OTHER ARRANGEMENTS

We have investments in unconsolidated entities that own and lease commercial real estate: the DMC Partnership, in which we own an 81.9% interest, and the Intrawest Venture, in which we own an 80.0% interest. Our equity in earnings from unconsolidated entities for the years ended December 31, 2009, 2008 and 2007 contributed approximately $5.6 million, $3.0 million and $3.7 million, respectively, to our results of operations. The partnership agreements governing the allocation of cash flows from the entities provide for the annual payment of a preferred return on our invested capital and thereafter in accordance with specified residual sharing percentages. See also Item 8. “Financial Statements and Supplementary Data” for additional information about our unconsolidated entities.

Borrowings of Our Unconsolidated Entities

The aggregate principal debt of our unconsolidated entities was approximately $211.4 million and $212.4 million as of December 31, 2009 and 2008, respectively. In connection with the loans encumbering properties owned by our unconsolidated entities, if we engage in certain prohibited activities, we could become liable for the obligations of the unconsolidated entities which own the properties for certain enumerated recourse liabilities related to those entities and their properties. In the case of the borrowing for the resort village properties located in Canada, our obligations are such that we could become liable for the entire loan if we triggered a default due to bankruptcy or other similar events.

 

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COMMITMENTS, CONTINGENCIES AND CONTRACTUAL OBLIGATIONS

The following tables present our contractual obligations and contingent commitments and the related payments due by period as of December 31, 2009:

Contractual Obligations

 

     Payments Due by Period (in thousands)
     Less than
1 year
   Years 1-3    Years 3-5    More than
5 years
   Total

Mortgages and other notes payable (principal and interest)(1)

   $ 185,982    $ 168,104    $ 345,270    $ 231,624    $ 930,980

Obligations under capital leases

     3,974      3,205      105      —        7,284

Obligations under operating leases(2)

     12,569      24,594      24,594      195,691      257,448
                                  

Total

   $ 202,525    $ 195,903    $ 369,969    $ 427,315    $ 1,915,712
                                  

 

FOOTNOTES:

 

(1) This line item includes all third-party and seller financing obtained in connection with the acquisition of properties, and the $100.0 million drawn on our syndicated revolving line of credit. Future interest payments on our variable rate debt and line of credit were estimated based on a 30-day LIBOR forward rate curve.

 

(2) This line item represents obligations under ground leases, concession holds and land permits which are paid by our third-party tenants on our behalf. Ground lease payments, concession holds and land permit fees are generally based on a percentage of gross revenue of the related property exceeding a certain threshold. The future obligations have been estimated based on current revenue levels projected over the term of the leases or permits.

Contingent Commitments

 

     Payments Due by Period (in thousands)
     Less than
1 year
   Years 1-3    Years 3-5    More than
5 years
   Total

Contingent purchase consideration(1)

   $ 11,349    $ 3,351    $ —      $ —      $ 14,700

Capital improvements(2)

     71,872      9,705      —        250      81,827
                                  

Total

   $ 83,221    $ 13,056    $ —      $ 250    $ 96,527
                                  

 

FOOTNOTES:

 

(1) In connection with the acquisition of Wet’n’Wild Hawaii we agreed to pay additional purchase consideration of up to $14.7 million upon the property achieving certain financial performance goals over the next three years. The additional purchase price consideration is not to provide compensation for services but is based on the property achieving certain financial performance goals. In accordance with relevant accounting standards, we recorded the fair value of this contingent liability in our consolidated balance sheets as of December 31, 2009.

 

(2) We have committed to fund equipment replacements and other capital improvement projects on our existing properties.

EVENTS OCCURRING SUBSEQUENT TO DECEMBER 31, 2009

Our board of directors declared distributions of $0.0521 per share to stockholders of record at the close of business on January 1, 2010, February 1, 2010 and March 1, 2010. These distributions are to be paid by March 31, 2010.

 

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On March 12, 2010, we acquired a portfolio of four coastal marinas in California for an aggregate purchase price of approximately $55.0 million, excluding transaction costs. The marinas were acquired through a sale-leaseback arrangement and are subject to long-term triple-net leases with an initial term of 20 years and two 10-year renewal options. In connection with the transaction we assumed three existing loans collateralized by the properties with aggregate outstanding principal balances of approximately $14.0 million.

In connection with the acquisition of Wet’n’Wild Hawaii, on February 19, 2010, we paid additional purchase consideration of approximately $11.4 million as a result of the property achieving certain financial performance goals pursuant to the purchase agreement. This additional purchase consideration will be added to the contractual lease basis and will result in additional rent being generated from this property.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate changes primarily as a result of long-term debt used to acquire properties, make loans and other permitted investments. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives, we expect to borrow and lend primarily at fixed rates or variable rates with the lowest margins available, and in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.

The following is a schedule of our fixed and variable debt maturities for each of the next five years, and thereafter (in thousands):

 

    Expected Maturities    

Total

   

Fair
Value

 
  2010     2011     2012     2013     2014     Thereafter      

Fixed rate debt

  $ 17,731      $ 63,839      $ 12,474      $ 195,720      $ 93,092      $ 115,075      $ 497,931      $ 465,001 (1) 

Weighted average interest rates of maturities

    6.28     8.95     6.54     6.12     6.17     6.65     6.63  

Variable rate debt

    125,212        7,206        831        887        17,246 (4)      93,962        245,344        235,638 (6) 

Average interest rate

   
 

 

Prime or
LIBOR +

2%

  
  

(2) 

      (3)        (3)        (3)     
 
CDOR +
3.75
  
   
 
LIBOR +
Spread
  
(2)(5) 
   
                                                               

Total debt

  $ 142,943      $ 71,045      $ 13,305      $ 196,607      $ 110,338      $ 209,037      $ 743,275      $ 700,639   
                                                               

 

FOOTNOTES:

 

(1) The fair value of our fixed-rate debt was determined using discounted cash flows based on market interest rates as of December 31, 2009. We determined market rates through discussions with our existing lenders pricing our loans with similar terms and current rates and spreads.

 

(2) The 30-day LIBOR rate was approximately 0.23% and 0.44%, respectively as of December 31, 2009 and 2008. The 30-day CDOR rate was approximately 0.40% as of December 31, 2009.

 

(3) The average interest rate from year 2011 through 2013 consists of (i) 30-day LIBOR +3.25% on the $10.0 million loan collateralized by our Jimmy Peak Mountain Resort property and (ii) 30-day CDOR + 3.75% on the $20.0 million loan collateralized by our Cypress Ski Resort property.

 

(4) On November 30, 2009, we obtained a $20.0 million loan (denominated in Canadian dollars) collateralized by our Cypress Ski Resort property. The loan matures on December 1, 2014 and bears interested at CDOR plus 3.75% that has been fixed with an interest rate swap to 6.43% for the term of the loan. The loan requires monthly payments of principal and interest based on a 20-year amortization schedule. The balance as of December 31, 2009 has been converted from Canadian dollars to U.S. dollar at an exchange rate of 1.049 Canadian dollars for $1.00 U.S. dollar on December 31, 2009. The fair value of this instrument has been recorded as a liability of approximately $15,000.

 

(5) On December 31, 2007, we obtained a loan for approximately $85.4 million. The loan bears interest at 30-day LIBOR plus 1.72% on the first $57.3 million, 30-day LIBOR plus 1.5% (of which 1.25% is deferred until maturity) on the next $16.7 million and 30-day LIBOR plus 1.5% on the remaining $11.4 million (of which approximately all is deferred until maturity). On January 2, 2008, we entered into two interest rate swaps to hedge the variable interest rate. The instruments, which were designated as cash flow hedges of interest payments from their inception, swap the rate on the first $57.3 million of debt to a blended fixed rate of 6.0% per year and on the next $16.7 million to a blended fixed rate of 5.8% for the term of the loan (of which 1.25% is deferred until maturity). The fair value of these instruments has been recorded as a liability of approximately $4.9 million.

 

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On September 29, 2009, we obtained a $10.0 million loan collateralized by the Jiminy Peak Mountain Resort property. The loan requires monthly payments of interest and principal with the remaining principal and accrued interest payable upon maturity on September 1, 2019. For the entire term, the loan bears interest at a 30-day LIBOR plus 3.25%. However, we entered into an interest rate swap and thereby fixing the rate to 6.89%. The fair value of this instrument has been recorded as a liability of approximately $46,000.

 

(6) The estimated fair value of our variable rate debt was determined using discounted cash flows based on market interest rates as of December 31, 2009. We determined market rates through discussions with our existing lenders pricing our loans with similar terms and current rates and spreads.

Management estimates that a hypothetical one-percentage point increase in the variable interest rates would have resulted in additional interest costs of approximately $1.4 million and $0.5 million for the years ended December 31, 2009 and 2008, respectively. This sensitivity analysis contains certain simplifying assumptions, and although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results and our actual results will likely vary.

Our fixed rate mortgage notes receivable, which totaled $140.2 million at December 31, 2009, are subject to market risk to the extent that the stated interest rates vary from current market rates for borrowings under similar terms. The estimated fair value of the mortgage notes receivable was approximately $137.6 million and $164.9 million at December 31, 2009 and 2008, respectively.

We are exposed to foreign currency exchange rate fluctuations as a result of our direct ownership of one property in Canada which is leased to a third-party tenant. The lease payments we receive under the triple-net lease and debt service payments are denominated in Canadian dollars. Management does not believe this to be a signifi