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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2015

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 or 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

 

Former name, former address and former fiscal year, if changed since last report

 

 

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  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The number of shares of common stock outstanding as of November 5, 2015 was 325,183,002.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART I. FINANCIAL INFORMATION

  

Item 1.

   Condensed Consolidated Financial Information (unaudited):   
   Condensed Consolidated Balance Sheets      1   
   Condensed Consolidated Statements of Operations      2   
   Condensed Consolidated Statements of Comprehensive Losses      3   
   Condensed Consolidated Statements of Stockholders’ Equity      4   
   Condensed Consolidated Statements of Cash Flows      5   
   Notes to Condensed Consolidated Financial Statements      6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      18   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      36   

Item 4.

   Controls and Procedures      37   

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings      38   

Item 1A.

   Risk Factors      38   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      38   

Item 3.

   Defaults Upon Senior Securities      38   

Item 4.

   Mine Safety Disclosures      38   

Item 5.

   Other Information      38   

Item 6.

   Exhibits      38   

Signatures

        39   

Exhibits

        40   


Table of Contents

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands except per share data)

 

     September 30,
2015
    December 31,
2014
 
ASSETS     

Real estate investment properties, net (including $60,763 and $67,789 related to consolidated variable interest entities, respectively)

   $ 841,576      $ 882,089   

Assets held for sale, net (including $89,811 and $103,753 related to consolidated variable interest entities, respectively)

     259,285        968,641   

Investments in unconsolidated entities

     72,679        127,102   

Cash

     310,726        136,985   

Deferred rent and lease incentives

     41,758        47,307   

Restricted cash

     28,565        35,227   

Other assets

     17,461        29,091   

Intangibles, net

     17,448        18,011   

Accounts and other receivables, net

     21,450        20,398   

Mortgages and other notes receivable, net

     7,570        19,361   
  

 

 

   

 

 

 

Total Assets

   $ 1,618,518      $ 2,284,212   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Mortgages and other notes payable (including $19,923 and $20,642 related to non-recourse debt of consolidated variable interest entities, respectively)

   $ 187,643      $ 397,849   

Senior notes, net of discount

     —          316,846   

Liabilities related to assets held for sale

     —          171,745   

Line of credit

     —          152,500   

Other liabilities

     40,318        41,388   

Accounts payable and accrued expenses

     23,949        46,005   

Due to affiliates

     415        489   
  

 

 

   

 

 

 

Total Liabilities

     252,325        1,126,822   
  

 

 

   

 

 

 

Commitments and contingencies (Note 13)

    

Stockholders’ equity:

    

Preferred stock, $.01 par value per share 200 million shares authorized and unissued

     —          —     

Excess shares, $.01 par value per share 120 million shares authorized and unissued

     —          —     

Common stock, $.01 par value per share

    

One billion shares authorized; 349,084 shares issued and 325,183 and 325,184 shares outstanding as of September 30, 2015 and December 31, 2014, respectively

     3,252        3,252   

Capital in excess of par value

     2,863,833        2,863,839   

Accumulated deficit

     (232,738     (494,129

Accumulated distributions

     (1,260,079     (1,211,302

Accumulated other comprehensive loss

     (8,075     (4,270
  

 

 

   

 

 

 

Total Stockholders’ Equity

     1,366,193        1,157,390   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 1,618,518      $ 2,284,212   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

1


Table of Contents

CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands except per share data)

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Revenues:

        

Rental income from operating leases

   $ 29,574      $ 31,720      $ 92,625      $ 97,634   

Property operating revenues

     97,901        110,866        191,145        205,910   

Interest income on mortgages and other notes receivable

     125        1,965        1,481        8,044   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     127,600        144,551        285,251        311,588   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Property operating expenses

     56,256        62,450        145,315        153,609   

Asset management fees to advisor

     3,665        4,394        12,193        14,173   

General and administrative

     2,984        4,320        11,467        13,172   

Ground lease and permit fees

     2,426        2,192        7,819        7,843   

Acquisition fees and costs

     —          (237     —          519   

Other operating expenses

     1,731        1,878        4,875        3,858   

Bad debt expense

     3,256        26        8,092        34   

Loan loss provision

     21        750        9,369        3,270   

Impairment provisions

     1,428        —          1,428        —     

Depreciation and amortization

     19,807        25,389        63,463        73,179   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     91,574        101,162        264,021        269,657   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     36,026        43,389        21,230        41,931   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest and other income

     309        153        1,066        449   

Interest expense and loan cost amortization

     (3,202     (15,012     (23,946     (44,380

Loss on extinguishment of debt

     —          (1,620     (21,065     (1,816

Equity in earnings of unconsolidated entities

     1,162        3,176        3,940        6,949   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (1,731     (13,303     (40,005     (38,798
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     34,295        30,086        (18,775     3,133   

Income (loss) from discontinued operations (includes $57 and $460 amortization of loss and loss on termination of cash flow hedge for the quarter and nine months ended September 30, 2014, respectively)

     7,614        537        214,386        (1,368
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income before gain on sale of real estate and unconsolidated entity

     41,909        30,623        195,611        1,765   

Gain (loss) on sale of real estate

     (1,064     —          26,528        —     

Gain from sale of unconsolidated entity

     —          —          39,252        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 40,845      $ 30,623      $ 261,391      $ 1,765   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share of common stock (basic and diluted)

        

Continuing operations

   $ 0.11      $ 0.09      $ 0.14      $ 0.01   

Discontinued operations

     0.02        0.00        0.66        0.00   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share

   $ 0.13      $ 0.09      $ 0.80      $ 0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     325,183        325,707        325,183        324,194   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSES

(UNAUDITED)

(in thousands)

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Net income

   $ 40,845      $ 30,623      $ 261,391      $ 1,765   

Other comprehensive income (loss):

        

Foreign currency translation adjustments

     (2,254     (1,478     (4,084     (1,383

Changes in fair value of cash flow hedges:

        

Amortization of loss and loss on termination of cash flow hedges

     —          56        180        3,487   

Unrealized gain (loss) arising during the period

     (53     204        99        816   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (2,307     (1,218     (3,805     2,920   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 38,538      $ 29,405      $ 257,586      $ 4,685   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2015 and the Year Ended December 31, 2014

(UNAUDITED)

(in thousands except per share data)

 

                                   Accumulated        
     Common Stock     Capital in                 Other     Total  
     Number     Par     Excess of     Accumulated     Accumulated     Comprehensive     Stockholders’  
     of Shares     Value     Par Value     Deficit     Distributions     Loss     Equity  

Balance at December 31, 2013

     322,627      $ 3,226      $ 2,846,265      $ (401,985   $ (1,073,422   $ (5,706   $ 1,368,378   

Subscriptions received for stock through public offering reinvestment plan

     3,970        40        27,169        —          —          —          27,209   

Redemption of common stock

     (1,413     (14     (9,595     —          —          —          (9,609

Net loss

     —          —          —          (92,144     —          —          (92,144

Distributions, declared and paid ($0.4252 per share)

     —          —          —          —          (137,880     —          (137,880

Foreign currency translation adjustment

     —          —          —          —          —          (2,933     (2,933

Amortization of loss on termination of cash flow hedges

     —          —          —          —          —          3,486        3,486   

Current period adjustment to recognize changes in fair value of cash flow hedges, net of reclassification (Note 9)

     —          —          —          —          —          883        883   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

     325,184        3,252        2,863,839        (494,129     (1,211,302     (4,270     1,157,390   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     —          —          —          261,391        —          —          261,391   

Redemption of common stock

     (1     —          (6     —          —          —          (6

Distributions, declared and paid ($0.1500 per share)

     —          —          —          —          (48,777     —          (48,777

Foreign currency translation adjustment

     —          —          —          —          —          (4,084     (4,084

Amortization of loss on termination of cash flow hedge

     —          —          —          —          —          180        180   

Current period adjustment to recognize changes in fair value of cash flow hedges (Note 9)

     —          —          —          —          —          99        99   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

     325,183      $ 3,252      $ 2,863,833      $ (232,738   $ (1,260,079   $ (8,075   $ 1,366,193   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

     Nine Months Ended
September 30,
 
     2015     2014  

Operating activities:

    

Net cash provided by operating activities

   $ 80,940      $ 132,818   
  

 

 

   

 

 

 

Investing activities:

    

Acquisition of property

     —          (128,390

Capital expenditures

     (35,787     (55,888

Proceeds from sale of real estate

     757,944        370,774   

Proceeds from sale of unconsolidated entity

     139,501        —     

Contribution to unconsolidated entity

     (54,572     —     

Proceeds from insurance

     3,907        —     

Principal payments received on mortgage loans receivable

     2,258        83,459   

Changes in restricted cash

     11,671        (1,876

Other

     —          823   
  

 

 

   

 

 

 

Net cash provided by investing activities

     824,922        268,902   
  

 

 

   

 

 

 

Financing activities:

    

Redemption of common stock

     (6     (9,412

Distributions to stockholders, net of reinvestments in 2014

     (48,777     (76,119

Proceeds under line of credit

     —          102,500   

Proceeds from mortgage loans and other notes payable

     —          57,790   

Principal payments on line of credit

     (152,500     (30,000

Principal payments on mortgage loans and senior notes

     (527,975     (231,846

Principal payments on capital leases

     (2,539     (4,545

Payments of entrance fee refunds

     —          (1,257

Payment of loan costs

     (239     (3,204
  

 

 

   

 

 

 

Net cash used in financing activities

     (732,036     (196,093
  

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash

     (85     (79
  

 

 

   

 

 

 

Net increase in cash

     173,741        205,548   

Cash at beginning of period

     136,985        71,574   
  

 

 

   

 

 

 

Cash at end of period

   $ 310,726      $ 277,122   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash financing activities:

    

Assumption of mortgage loans by third party

   $ 151,478      $ —     
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

 

1. Organization and Nature of Business:

CNL Lifestyle Properties, Inc. (the “Company”), was organized in Maryland on August 11, 2003. The Company operates and has elected to be taxed as a real estate investment trust (a “REIT”) for federal income tax purposes. Various wholly-owned subsidiaries have been and will be formed by the Company for the purpose of acquiring and owning direct or indirect interests in real estate. The Company generally invests in lifestyle properties in the United States that are primarily leased on a long-term (generally five to 20-years, plus multiple renewal options), triple-net or gross basis to tenants or operators that the Company considers to be industry leading. The Company also leases properties to taxable REIT subsidiary (“TRS”) tenants and engages independent third-party managers to operate those properties. In the event of certain tenant defaults, the Company has also engaged third-party managers to operate properties on its behalf until they are re-leased. The Company has engaged CNL Lifestyle Advisor Corporation (the “Advisor”) as its Advisor to provide management, acquisition, disposition, advisory and administrative services.

As of September 30, 2015, the Company owned 65 lifestyle properties directly and indirectly within the following asset classes: ski and mountain lifestyle, attractions, marinas and other lifestyle properties. Seven of these 65 properties were owned through one unconsolidated joint venture and three were located in Canada.

In March 2014, the Company engaged Jefferies LLC, a leading global investment banking and advisory firm, to assist the Company’s management and its board of directors in actively evaluating various strategic alternatives to provide liquidity to the Company’s shareholders. In connection with this process, during 2014 the Company sold its entire golf portfolio (consisting of 48 properties) and its multi-family development property. Additionally, during the first nine months of 2015, the Company (i) sold its 81.98% interest in the DMC Partnership for net sales proceeds of approximately $139.5 million to its co-venture partner, for a gain of approximately $39.3 million, (ii) sold all 38 of its senior housing properties and one of its attractions properties for aggregate net sales proceeds of approximately $757.9 million, which resulted in aggregate gains of approximately $236.3 million, (iii) entered into a purchase and sale agreement for the sale of the marinas portfolio for approximately its carrying value, and (iv) as of September 30, 2015, had a contract in place to sell one attraction property, a letter of intent to sell two attraction properties, a plan to sell a ski and mountain lifestyle property, and a plan to sell its undeveloped land. See Note 14. “Subsequent Events” for additional information.

 

2. Significant Accounting Policies:

Principles of Consolidation and Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles in the United States (“GAAP”). The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management are necessary for the fair statement of the Company’s results for the interim period presented. Operating results for the quarter and nine months ended September 30, 2015 may not be indicative of the results that may be expected for the year ending December 31, 2015. Amounts as of December 31, 2014 included in the unaudited condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date but do not include all disclosures required by GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The accompanying unaudited condensed consolidated financial statements include the Company’s accounts, the accounts of wholly owned subsidiaries or subsidiaries for which the Company has a controlling interest, the accounts of variable interest entities (“VIEs”) in which the Company is the primary beneficiary, and the accounts of other subsidiaries over which the Company has a controlling financial interest. All material intercompany accounts and transactions have been eliminated in consolidation.

In accordance with the guidance for the consolidation of VIEs, the Company analyzes its variable interests, including loans, leases, guarantees, and equity investments, to determine if the entity in which it has a variable interest is a VIE. The Company’s analysis includes both quantitative and qualitative reviews. The Company bases its quantitative analysis on the forecasted cash flows of the entity and its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and financial agreements. The Company also uses its quantitative and qualitative analyses to determine if it is the primary beneficiary of the VIE, and if such determination is made, it includes the accounts of the VIE in its consolidated financial statements.

 

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Table of Contents

CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

 

2. Significant Accounting Policies (Continued):

 

Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the disclosure of contingent liabilities. For example, significant estimates and assumptions are made in connection with the analysis of real estate, equity method investments and impairments. Actual results could differ from those estimates.

Reclassifications — Certain amounts in the prior year’s condensed consolidated financial statements have been reclassified to conform to current year presentation with no effect on previously reported net loss or equity. See Note 4. “Assets and Associated Liabilities Held for Sale, net of Discontinued Operations” for additional information.

Adopted Accounting Pronouncements In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This update changes the criteria for reporting discontinued operations where only disposals representing a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, such as a major line of business or geographical area, should be presented as a discontinued operation. This ASU is effective prospectively for all disposals (or classifications as held for sale) of components of an entity that occur on or after the effective date. As a result, no changes were made for properties classified as held for sale prior to January 1, 2015. Effective January 1, 2015, the Company adopted this ASU. This ASU impacts the determination of which property disposals qualify as discontinued operations, as well as requires additional disclosures about discontinued operations.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” as a new ASC topic (Topic 606). The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard further provides guidance for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, lease contracts). This ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, expected to be deferred one year, including interim periods within that reporting period, with earlier adoption not permitted. ASU 2014-09 can be adopted using one of two retrospective application methods: 1) retrospectively to each prior reporting period presented or 2) as a cumulative-effect adjustment as of the date of adoption. The adoption of ASU 2014-09 will not have a significant effect on the Company’s consolidated financial position, results of operations or cash flows.

Recent Accounting Pronouncements — In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires that loan costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts or premiums. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The ASU is to be applied retrospectively for each period presented. Upon adoption, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The FASB subsequently issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which clarifies that, given the absence of authoritative guidance in ASU 2015-03 regarding presentation and subsequent measurement of loan costs related to line-of-credit arrangements, the SEC Staff would not object to an entity deferring and presenting loan costs as an asset and subsequently amortizing the loan costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company has determined that it will not early adopt this ASU and that the amendments will not materially impact the presentation of the Company’s consolidated financial position and will not have a material impact on the Company’s consolidated results of operations or cash flows.

 

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CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

 

2. Significant Accounting Policies (Continued):

 

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which requires an acquirer to recognize provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The Company has determined that it will not early adopt this ASU and does not expect that adopting this guidance will have a material impact on its consolidated financial position, results of operations or cash flows.

 

3. Real Estate Investment Properties, net:

As of September 30, 2015 and December 31, 2014, real estate investment properties consisted of the following (in thousands):

 

     September 30,
2015
     December 31,
2014
 

Land and land improvements

   $ 415,783       $ 415,968   

Leasehold interests and improvements

     178,511         180,514   

Buildings

     272,917         273,210   

Equipment

     536,433         520,060   

Less: accumulated depreciation and amortization

     (562,068      (507,663
  

 

 

    

 

 

 

Total

   $ 841,576       $ 882,089   
  

 

 

    

 

 

 

For the quarter and nine months ended September 30, 2015, the Company had depreciation and amortization expenses of approximately $19.6 million and $63.0 million, respectively, as compared to approximately $25.2 million and 72.7 million, respectively, for the quarter and nine months ended September 30, 2014, excluding properties that the Company classified as discontinued operations.

 

4. Assets and Associated Liabilities Held for Sale, net and Discontinued Operations:

Assets Held for Sale, net — The Company had 22 and 61 properties classified as assets held for sale as of September 30, 2015 and December 31, 2014, respectively. The following table presents the net carrying value of the properties classified as held for sale (in thousands):

 

     September 30,
2015
     December 31,
2014
 

Land and land improvements

   $ 57,711       $ 213,129   

Leasehold interests and improvements

     48,910         52,589   

Building and building improvements

     106,510         599,923   

Equipment, net

     31,312         59,345   

Deferred rent and lease incentives

     —           4,832   

Other assets

     7,426         10,919   

Restricted cash

     5,938         14,714   

Intangibles, net

     1,027         10,503   

Accounts and other receivables, net

     451         2,687   
  

 

 

    

 

 

 

Total

   $ 259,285       $ 968,641   
  

 

 

    

 

 

 

 

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CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

 

4. Assets and Associated Liabilities Held for Sale, net and Discontinued Operations (continued):

 

Associated Liabilities Held for Sale — The following table presents the liabilities associated with the assets held for sale related to the senior housing properties (in thousands):

 

     September 30,      December 31,  
     2015      2014  

Mortgages and other notes payable

   $ —         $ 152,655   

Other liabilities

     —           19,090   
  

 

 

    

 

 

 

Total

   $ —         $ 171,745   
  

 

 

    

 

 

 

During the nine months ended September 30, 2015, the Company sold all 38 of its senior housing properties and received aggregate net sales proceeds of approximately $623.4 million, which resulted in a gain of approximately $210.6 million for financial reporting purposes. No disposition fee was payable to the Advisor on the sale of the senior housing properties. The third party buyer of the properties assumed $151.5 million of outstanding principal indebtedness collateralized by the senior housing properties that were sold.

In June 2015, the Company sold one of its attractions properties and received net sales proceeds of approximately $134.5 million, which resulted in a gain of approximately $25.7 million for financial reporting purposes. The Company did not pay the Advisor a disposition fee.

During the nine months ended September 30, 2015, the Company recorded approximately $7.7 million in impairment provisions related to the marinas properties (recorded as part of discontinued operations) and recorded $1.4 million in impairment provisions related to its undeveloped land, to adjust their net carrying value to their revised estimated sale price, less closing costs.

Discontinued Operations — The Company classified the revenues and expenses related to all real estate properties sold in 2014, the 37 senior housing properties sold in May 2015 and the one senior housing sold in September 2015, and 17 marinas properties classified as assets held for sale as of December 31, 2014, as discontinued operations in the accompanying unaudited condensed consolidated statements of operations for all periods presented.

The following table is a summary of income (loss) from discontinued operations for the quarter and nine months ended September 30, 2015 and 2014 (in thousands):

 

     Quarter Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Revenues

   $ 12,482       $ 51,619       $ 60,496       $ 146,468   

Expenses

     (10,286      (34,256      (43,774      (94,297

Impairment provision

     —           —           (7,749      (3,442

Depreciation and amortization

     —           (8,233      —           (28,403
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     2,196         9,130         8,973         20,326   

Gain from sale of real estate

     4,266         3,953         210,891         3,883   

Gain (loss) on extinguishment of debt (1)

     486         (8,293      (2,042      (5,690

Gain on insurance and retirements

     1,024         —           1,492         —     

Other expense (2)

     (358      (4,253      (4,928      (19,887
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from discontinued operations

   $ 7,614       $ 537       $ 214,386       $ (1,368
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

 

4. Assets and Associated Liabilities Held for Sale, net and Discontinued Operations (continued):

 

FOOTNOTES:

(1)  During the quarter and nine months ended September 30, 2015, the Company recorded gain (loss) on extinguishment of debt from the sale of one and 38 senior housing properties, respectively. During the quarter and nine months ended September 30, 2014, the Company recorded loss on extinguishment of debt from the sale of its 46 golf properties. In addition, during the nine months ended September 30, 2014, the Company recorded gain on extinguishment of debt from the sale of its multi-family residential property.
(2)  Amounts include amortization of loss and loss on termination of cash flow hedge of approximately $3.0 million for the nine months ended September 30, 2014.

The Company accounted for the revenues and expenses related to one attractions property sold in June 2015, one undeveloped land, one ski and mountain lifestyle and three attractions properties classified as held for sale, as income from continuing operations because the sale of these properties would not cause a strategic shift in the Company nor are they considered to have a major impact on the Company’s business; therefore, they do not qualify as discontinued operations under ASU 2014-08. However, the proposed disposition of the one ski and mountain lifestyle property will represent an individually significant component. The Company recorded net income from continuing operations of approximately $4.0 million and $6.9 million for the quarter and nine months ended September 30, 2015, respectively, and a net income (loss) from continuing operations of $1.9 million and $(0.1) million for the quarter and nine months ended September 30, 2014, respectively, related to the one ski and mountain lifestyle property classified as held for sale.

 

5. Intangibles, net:

The gross carrying amount and accumulated amortization of the Company’s intangible assets as of September 30, 2015 and December 31, 2014 are as follows (in thousands):

 

Intangible Assets

   Gross
Carrying
Amount
     Accumulated
Amortization
     September 30,
2015
Net Book Value
 

In place leases

   $ 11,479       $ (4,857    $ 6,622   

Trade name (infinite-lived)

     10,826         —           10,826   
  

 

 

    

 

 

    

 

 

 

Total

   $ 22,305       $ (4,857    $ 17,448   
  

 

 

    

 

 

    

 

 

 

 

Intangible Assets

   Gross
Carrying
Amount
     Accumulated
Amortization
     December 31,
2014

Net Book Value
 

In place leases

   $ 11,584       $ (4,399    $ 7,185   

Trade name (infinite-lived)

     10,826         —           10,826   
  

 

 

    

 

 

    

 

 

 

Total

   $ 22,410       $ (4,399    $ 18,011   
  

 

 

    

 

 

    

 

 

 

For each of the quarters and nine months ended September 30, 2015 and 2014, the Company had amortization expense of approximately $0.2 million and $0.5 million, respectively, excluding properties that the Company classified as discontinued operations.

 

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CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

 

6. Unconsolidated Entities:

As of December 31, 2014, the Company held an ownership interest in the DMC Partnership of $104.4 million. The Company sold its 81.98% interest in the DMC Partnership in April 2015 and received net sales proceeds of approximately $139.5 million from its co-venture partner, which resulted in a gain of approximately $39.3 million for financial reporting purposes. No disposition fee was paid to the Advisor on the sale of the DMC Partnership. The Company accounted for its pro-rata share of the net earnings of its investment in the DMC Partnership as continuing operations because although the properties owned by the DMC Partnership were outliers compared to the other assets invested in by the Company, the sale of the Company’s interest in the DMC Partnership did not cause a strategic shift in the Company, and it was not considered to have a major impact on the Company’s business; therefore, it did not qualify as discontinued operations under ASU 2014-08.

As of December 31, 2014, the Company held an 80% ownership interest in the Intrawest Venture. During the nine months ended September 30, 2015, the Company contributed approximately $54.6 million to the Intrawest Venture and the Intrawest Venture repaid mortgage loans of approximately $54.6 million. In July 2015, the co-venture partner of the Intrawest Venture accepted the Company’s offer to acquire the co-venture partner’s 20% interest in the Intrawest Venture in accordance with the buy-sell provisions of the Intrawest Venture partnership agreement. The Company will own a 100% controlling interest in the Intrawest Venture once it acquires the remaining 20% interest from the co-venture partner.

The Intrawest Venture is working with the Canada Revenue Agency to resolve matters related to its entities. The Intrawest Venture’s maximum exposure relating to these matters is approximately $12.1 million. However, the Intrawest Venture believes the more likely than not resolution will be approximately $1.5 million. As such, an accrual of $1.5 million has been reflected in the financial information of the Intrawest Venture.

The following tables present financial information for the Company’s unconsolidated entities for the quarters and nine months ended September 30, 2015 and 2014 (in thousands):

Summarized operating data:

 

     Quarter Ended September 30, 2015  
     DMC
Partnership(3)
     Intrawest
Venture
    Total  

Revenues

   $ —         $   4,503      $   4,503   

Property operating expenses

     —           (2,449     (2,449

Depreciation and amortization

     —           (807     (807

Interest expense

     —           (476     (476
  

 

 

    

 

 

   

 

 

 

Net income

   $ —         $ 771      $ 771   
  

 

 

    

 

 

   

 

 

 

Loss allocable to other venture partners (1)

   $ —         $ (408 )(2)    $ (408
  

 

 

    

 

 

   

 

 

 

Income allocable to the Company (1)

   $ —         $ 1,179      $ 1,179   

Amortization of capitalized costs

     —           (17     (17
  

 

 

    

 

 

   

 

 

 

Equity in earnings of unconsolidated entities

   $ —         $ 1,162      $ 1,162   
  

 

 

    

 

 

   

 

 

 

Distribution declared to the Company

   $ —         $ 1,592      $ 1,592   
  

 

 

    

 

 

   

 

 

 

Distributions received by the Company

   $       —         $ 918      $ 918   
  

 

 

    

 

 

   

 

 

 

 

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CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

 

6. Unconsolidated Entities (continued):

 

     Quarter Ended September 30, 2014  
     DMC
Partnership      
     Intrawest
Venture
    Total  

Revenues

   $ 6,870       $   4,856      $ 11,726   

Property operating expenses

     (305      (2,472     (2,777

Depreciation and amortization

     (2,327      (1,118     (3,445

Interest expense

     (1,909      (1,241     (3,150
  

 

 

    

 

 

   

 

 

 

Net income

   $ 2,329       $ 25      $ 2,354   
  

 

 

    

 

 

   

 

 

 

Loss allocable to other venture partners (1)

   $ (532    $ (406 )(2)    $ (938
  

 

 

    

 

 

   

 

 

 

Income allocable to the Company (1)

   $ 2,861       $ 431      $ 3,292   

Amortization of capitalized costs

     (64      (52     (116
  

 

 

    

 

 

   

 

 

 

Equity in earnings of unconsolidated entities

   $ 2,797       $ 379      $ 3,176   
  

 

 

    

 

 

   

 

 

 

Distribution declared to the Company

   $ 2,859       $ 742      $ 3,601   
  

 

 

    

 

 

   

 

 

 

Distributions received by the Company

   $   2,829       $ 492      $ 3,321   
  

 

 

    

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2015  
     DMC
Partnership(3)
     Intrawest
Venture
    Total  

Revenues

   $ 10,743       $ 13,809      $ 24,552   

Property operating expenses

     (173      (7,788     (7,961

Depreciation and amortization

     (3,038      (3,375     (6,413

Interest expense

     (1,555      (2,294     (3,849
  

 

 

    

 

 

   

 

 

 

Net income

   $ 5,977       $ 352      $ 6,329   
  

 

 

    

 

 

   

 

 

 

Income (loss) allocable to other venture partners (1)

   $ 3,477       $ (1,204 )(2)    $ 2,273   
  

 

 

    

 

 

   

 

 

 

Income allocable to the Company (1)

   $ 2,500       $ 1,556      $ 4,056   

Amortization of capitalized costs

     (25      (91     (116
  

 

 

    

 

 

   

 

 

 

Equity in earnings of unconsolidated entities

   $ 2,475       $ 1,465      $ 3,940   
  

 

 

    

 

 

   

 

 

 

Distribution declared to the Company

   $ 3,698       $ 6,142      $ 9,840   
  

 

 

    

 

 

   

 

 

 

Distributions received by the Company

   $ 6,558       $ 5,093      $ 11,651   
  

 

 

    

 

 

   

 

 

 

 

 

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CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

 

6. Unconsolidated Entities (continued):

 

     Nine Months Ended September 30, 2014  
     DMC
Partnership
     Intrawest
Venture
    Total  

Revenues

   $ 21,649       $ 14,694      $ 36,343   

Property operating expenses

     (569      (7,654     (8,223

Depreciation and amortization

     (6,779      (5,455     (12,234

Interest expense

     (5,743      (3,889     (9,632
  

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 8,558       $ (2,304   $ 6,254   
  

 

 

    

 

 

   

 

 

 

Income (loss) allocable to other venture partners (1)

   $ 72       $ (1,205 )(2)    $ (1,133
  

 

 

    

 

 

   

 

 

 

Income (loss) allocable to the Company (1)

   $ 8,486       $ (1,099   $ 7,387   

Amortization of capitalized costs

     (280      (158     (438
  

 

 

    

 

 

   

 

 

 

Equity in earnings (loss) of unconsolidated entities

   $ 8,206       $ (1,257   $ 6,949   
  

 

 

    

 

 

   

 

 

 

Distribution declared to the Company

   $ 8,485       $ 1,892      $ 10,377   
  

 

 

    

 

 

   

 

 

 

Distributions received by the Company

   $ 8,485       $ 1,411      $ 9,896   
  

 

 

    

 

 

   

 

 

 

 

FOOTNOTES:

(1)  Income (loss) is allocated between the Company and its venture partner using the hypothetical liquidation book value (“HLBV”) method of accounting.
(2)  This amount includes the venture partner’s portion of interest expense on a loan which the partners made to the venture. These amounts are treated as distributions for the purposes of the HLBV calculation.
(3)  On April 29, 2015, the Company completed the sale of its interest in the DMC Partnership as described above. As such, summarized operating data for the partnership is reported through April 29, 2015.

 

7. Mortgages and Other Notes Receivable, net:

During the nine months ended September 30, 2015, the borrower relating to one mortgage receivable, for which the Company restructured the mortgage loan during 2014, continued to experience financial difficulties. Additionally, during the nine months ended September 30, 2015, the Company entered into an agreement to receive an early repayment of its other mortgage receivable at a discounted amount. The Company recorded both mortgage receivables at their net realizable value during the nine months ended September 30, 2015 and in conjunction therewith, recorded loan loss provisions of approximately $9.4 million during the nine months ended September 30, 2015. During the nine months ended September 30, 2015, the Company collected the discounted amount for one of its mortgage receivable. In October 2015, the Company collected its other mortgage receivable at a discounted amount as further described below in Note 14. “Subsequent Events.”

The estimated fair market value of the Company’s one mortgage and other notes receivable was approximately $7.6 million as of September 30, 2015, and $16.6 million as of December 31, 2014 for the two mortgages and other notes receivable, respectively, based on the fair value of the collateral or expected collectible amount as of September 30, 2015 and based on discounted cash flows at December 31, 2014. Because this methodology includes inputs that are not observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values related to the Company’s mortgage and other notes receivable is categorized as Level 3 on the three-level valuation hierarchy. The estimated fair value of accounts and other receivables approximates the carrying value as of September 30, 2015 and December 31, 2014 because of the relatively short maturities of the receivables.

 

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CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

 

8. Indebtedness:

Line of Credit — During the nine months ended September 30, 2015, the Company repaid approximately $152.5 million of principal. In June 2015, the Company extended the maturity date of its revolving line of credit to August 31, 2016, with an additional one year extension option, and reduced the borrowing capacity to $100 million. As of September 30, 2015, the Company’s revolving line of credit did not have an outstanding principal balance.

Senior Unsecured Notes — In June 2015, the Company repaid all of its senior unsecured notes with an outstanding principal balance of $318.3 million at a premium of 103.625%. In connection with this repayment, the Company recorded a loss on extinguishment of debt of approximately $18.8 million.

Fixed and Variable Rate Debt — During the nine months ended September 30, 2015, the Company repaid approximately $209.7 million of outstanding indebtedness prior to their scheduled maturity and recorded a loss on extinguishment of debt of approximately $4.3 million, which included a prepayment penalty of $1.3 million. Also, in connection with the sale of its 38 senior housing properties, the buyer of these properties assumed approximately $151.5 million of outstanding indebtedness collateralized by the senior housing properties that were sold.

Certain of the Company’s loans require the Company to meet certain customary financial covenants and ratios including fixed charge coverage ratio, leverage ratio, interest coverage ratio and limitations on distributions except as required to maintain the Company’s REIT status. The Company was in compliance with all applicable provisions as of September 30, 2015.

The estimated fair values of mortgages and other notes payable, including those related to assets held for sale, and the line of credit were approximately $194.2 million and $707.3 million as of September 30, 2015 and December 31, 2014, respectively, based on rates and spreads the Company would expect to obtain for similar borrowings with similar loan terms. Because this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values related to the Company’s mortgage notes payable is categorized as Level 3 on the three-level valuation hierarchy. The estimated fair values of the senior notes was approximately $325.4 million as of December 31, 2014, based on prices traded for similar or identical instruments in active or inactive markets and were categorized as Level 2 on the three-level valuation hierarchy. The senior notes were repaid in June 2015 as described above. The estimated fair value of accounts payable and accrued expenses approximates the carrying value as of September 30, 2015 and December 31, 2014 because of the relatively short maturities of the obligations.

 

9. Fair Value Measurements:

The Company had 19 investment properties that were classified as assets held for sale at September 30, 2015 and December 31, 2014, respectively, that were recorded at fair value less estimated costs to sell for each period presented. The Level 3 unobservable inputs used in determining the fair value of the real estate properties included negotiated sales prices with third party buyers, comparable sales transactions and information from potential buyers.

As of December 31, 2014, the Company had two hedges that qualified as highly effective and, accordingly, all of the change in value was reflected in other comprehensive income (loss). During the nine months ended September 30, 2015, one of the loans was paid in full and the corresponding interest rate swap with an aggregate notional amount of approximately $14.2 million was terminated. As a result, the ineffective portion of the change in fair value resulting from the termination of the hedge included in other comprehensive loss in the accompanying condensed consolidated balance sheets was reclassified to interest expense and loan cost amortization in the accompanying condensed consolidated statements of operations in income (loss) from continuing operations for the nine months ended September 30, 2015. As of September 30, 2015, the Company had one interest rate swap with a notional amount of approximately $8.1 million. Determining fair value and testing effectiveness of this financial instrument 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 the Company’s results of operations.

The Company’s derivative instruments are valued primarily based on inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, volatilities, and credit risks) and are classified as Level 2 in the fair value hierarchy. The valuation of derivative instruments also includes a credit value adjustment which is a Level 3 input. However, the impact of the assumption is not significant to its overall valuation calculation, and therefore the Company considers its derivative

 

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CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

 

9. Fair Value Measurements (continued):

 

instruments to be classified as Level 2. The fair value of such instruments is included in other liabilities in the accompanying unaudited condensed consolidated balance sheets.

The following tables show the fair value of the Company’s financial assets and liabilities carried at fair value as of September 30, 2015 and December 31, 2014, as follows (in thousands):

 

                                                                           
     Fair Value
Measurement as
of September 30,

2015
     Level 1      Level 2      Level 3  

Assets:

           

Assets held for sale carried at fair value

   $ 116,489       $ —         $ —         $ 116,489   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative instruments

   $ 724       $ —         $ 724       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                           
     Fair Value
Measurement as
of December 31,
2014
     Level 1      Level 2      Level 3  

Assets:

           

Assets held for sale carried at fair value

   $ 122,126       $ —         $ —         $ 122,126   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative instruments

   $ 1,002       $ —         $ 1,002       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10. Related Party Arrangements:

In March 2014, the Company’s Advisor amended its advisory agreement, effective April 1, 2014, to eliminate all acquisition fees on equity, performance fees, debt acquisition fees and disposition fees, and to reduce asset management fees to 0.075% monthly (or 0.90% annually) of invested assets.

For the quarters and nine months ended September 30, 2015 and 2014, respectively, the Advisor collectively earned fees and incurred reimbursable expenses as follows (in thousands):

 

    

Quarters Ended

September 30,

    

Nine Months Ended

September 30,

 
     2015      2014      2015      2014  

Acquisition fees:

           

Acquisition fees from distribution reinvestment plan (1)

   $ —         $ —         $ —         $ 319   

Acquisition fees from debt proceeds (2)

     —           —           —           1,521   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —           —           1,840   
  

 

 

    

 

 

    

 

 

    

 

 

 

Asset management fees (3)

     3,702         7,506         15,853         23,584   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reimbursable expenses: (4)

           

Acquisition costs

     —           64         —           202   

Operating expenses

     1,157         1,710         4,286         5,213   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,157         1,774         4,286         5,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fees earned and reimbursable expenses

   $ 4,859       $ 9,280       $ 20,139       $ 30,839   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

 

10. Related Party Arrangements (continued):

 

 

FOOTNOTES:

(1)  Amounts are recorded as acquisition fees and costs in the accompanying unaudited condensed consolidated statements of operations. Effective April 1, 2014, the Advisor eliminated this fee going forward.
(2)  Amounts are recorded as loan costs and are included as part of other assets in the accompanying unaudited condensed consolidated balance sheets. Effective April 1, 2014, the Advisor eliminated this fee going forward.
(3)  Amounts are recorded as asset management fees to Advisor including fees related to properties that are classified as assets held for sale that are included as discontinued operations in the accompanying unaudited condensed consolidated statements of operations. Effective April 1, 2014, the asset management fees to Advisor were reduced as described above.
(4)  Amounts representing acquisition costs are recorded as part of acquisition fees and costs in the accompanying condensed consolidated statements of operations. Amounts representing operating expenses are recorded as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

Amounts due to affiliates for fees and expenses described above are as follows (in thousands):

 

     September 30,
2015
     December 31,
2014
 

Due to the Advisor and its affiliates:

     

Operating expenses

   $ 415       $ 476   

Acquisition fees and expenses

     —           13   
  

 

 

    

 

 

 

Total

   $ 415       $ 489   
  

 

 

    

 

 

 

 

11. Stockholders’ Equity:

Distribution Reinvestment Plan — For the nine months ended September 30, 2014, the Company received aggregate proceeds of approximately $27.2 million (representing 4.0 million shares) through its DRP. On September 4, 2014, the Company’s board of directors approved the suspension of its DRP, effective as of September 26, 2014. As a result of the suspension of the DRP, beginning with the September 2014 quarterly distributions, stockholders who were participants in the DRP received cash distributions instead of additional shares in the Company. The Company did not receive any proceeds through its DRP for the nine months ended September 30, 2015.

Distributions — In March 2015, the Company’s board of directors reduced the quarterly distributions from $0.1063 per share to $0.05 per share to stockholders of record at the close of business on March 9, 2015. For the nine months ended September 30, 2015 and 2014, the Company declared and paid distributions of approximately $48.8 million ($0.15 per share) and $103.3 million ($0.3189 per share), respectively.

 

12. Supplemental Guarantor Information:

As of December 31, 2014, the Company had senior notes outstanding which were guaranteed by certain of the Company’s consolidated subsidiaries (the “Guarantor Subsidiaries”). As described in Note 8, “Indebtedness,” in June 2015, the Company repaid all of its senior unsecured notes with an outstanding principal amount of $318.3 million at a premium of 103.625%.

 

13. Commitments and Contingencies:

From time to time the Company may be exposed to litigation arising from operations of its business in the ordinary course of business. Management is not aware of any litigation that it believes will have a material adverse impact on the Company’s financial condition or results of operations.

 

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CNL LIFESTYLE PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

 

14. Subsequent Events:

In October 2015, the Company entered into a purchase and sale agreement for two of its attraction properties for $62.0 million, which exceeds the carrying value of the properties.

In October 2015, the Company collected its only outstanding mortgage receivable.

In November 2015, we entered into a purchase and sale agreement for one of our ski and mountain lifestyle properties for $90.5 million, which exceeds the carrying value of the property.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The following discussion is based on our unaudited condensed consolidated financial statements as of September 30, 2015 and December 31, 2014 and for the quarter and nine months ended September 30, 2015 and 2014 of CNL Lifestyle Properties, Inc. and its subsidiaries (hereinafter referred to as the “Company,” “we,” “us,” or “our”). Amounts as of December 31, 2014 included in the unaudited condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as the audited consolidated financial statements, notes and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2014. Capitalized terms used in this Item 2 have the same meaning as in the accompanying condensed financial statements.

Cautionary Note Regarding Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q for the nine months and the quarter ended September 30, 2015 may constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements be subject to the safe harbor created by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of the Company’s business and its performance, the economy, and other future conditions and forecasts of future events and circumstances. Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should” and “could,” and words and terms of similar substance in connection with discussions of future operating or financial performance, business strategy and portfolios, projected growth prospects, cash flows, costs and financing needs, legal proceedings, amount and timing of anticipated future distributions, estimated of per share net asset value of the Company’s common stock, and/or other matters. The Company’s forward-looking statements are not guarantees of future performance. While the Company’s management believes its forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances. As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. The Company’s forward-looking statements are based on management’s current expectations and a variety of risks, uncertainties and other factors, many of which are beyond the Company’s ability to control or accurately predict. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements due to a variety of risks, uncertainties and other factors.

Important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements include, but are not limited to, government regulation, economic, strategic, political and social conditions, and the following: illiquidity of the investment, risks associated with the Company’s inability to identify a liquidity event or other strategic alternative or, if identified, the Company’s inability to complete such a transaction on favorable terms or at all, and liquidation at less than the subscription price of the stock; the impact of regulations requiring periodic valuation of the Company on a per share basis, including the uncertainties inherent in such valuations and liquidation at less than the estimated net asset value; risks associated with the Company’s investment strategy; history of losses; no guarantee of distributions; reliance on the Company’s advisor and its affiliates, including, conflicts of interest, and the payment of substantial fees to the advisor and its affiliates; a worsening economic environment in the U.S. or globally, including financial market fluctuations; risks associated with real estate markets, including declining real estate values; the use of debt to finance the Company’s business activities, including refinancing and interest rate risk and the Company’s failure to comply with debt covenants; the Company’s inability to make necessary improvements to properties on a timely or cost-efficient basis; competition for properties and/or tenants; defaults on or non-renewal of leases by tenants; failure to lease properties on favorable terms or at all; the impact of current and future environmental, zoning and other governmental regulations affecting the Company’s properties; the impact of changes in accounting rules; inaccuracies of the Company’s accounting estimates; unknown liabilities of acquired properties or liabilities caused by property managers or operators; material adverse actions or omissions by any joint venture partners; increases in operating costs and other expenses; uninsured losses or losses in excess of the Company’s insurance coverage; the impact of outstanding and/or potential litigation; risks associated with the Company’s tax structuring; failure to maintain the Company’s REIT qualification; and the Company’s inability to protect its intellectual property and the value of its brand. Given these uncertainties, the Company cautions you not to place undue reliance on such statements.

For further information regarding risks and uncertainties associated with the Company’s business and other important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements, please refer to the factors listed and described in the Company’s reports filed from time to time with the Securities and Exchange Commission, including, but not limited to, the Company’s quarterly reports on Form 10-Q and the Company’s annual report on Form 10-K, copies of which may be obtained from the Company’s website at www.cnllifestylereit.com.

 

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All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are qualified in their entirety by this cautionary note. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to, and expressly disclaims any obligation to, publicly release the results of any revisions to its forward-looking statements to reflect new information, changed assumptions, the occurrence of unanticipated subsequent events or circumstances, or changes to future operating results over time, except as otherwise required by law.

GENERAL

CNL Lifestyle Properties, Inc. is a Maryland corporation incorporated on August 11, 2003. We were formed primarily to acquire lifestyle properties in the United States that we generally lease on a long-term, triple-net basis (generally five to 20 years, plus multiple renewal options) to tenants or operators that we consider to be industry leading. We also engage third-party managers to operate certain properties on our behalf as permitted under applicable tax regulations. We define lifestyle properties as those properties that reflect or are impacted by the social, consumption and entertainment values and choices of our society. When beneficial to our investment structure and as a result of tenant defaults, we engage third-party managers to operate certain properties on our behalf as permitted under applicable tax regulations. We also made loans (including mortgage, mezzanine and other loans) generally collateralized by interests in real estate. We engaged CNL Lifestyle Advisor Corporation (the “Advisor”) as our Advisor to provide management, acquisition, disposition, advisory and administrative services.

Our principal business objectives included 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 built a portfolio of properties that we considered to be well-diversified by region, asset type and operator. In March 2014, we engaged Jefferies LLC, a leading global investment banking and advisory firm, to assist management and the board of directors in actively evaluating various strategic opportunities including the sale of either us or our assets, potential merger opportunities, or the listing of our common stock. See “Our Exit Strategy” below for additional information.

We currently operate and 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 100% of our REIT taxable income and capital gains to our stockholders and meet other compliance requirements. We are subject to income taxes on taxable income from certain properties operated by third-party managers. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on all of 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 operating results 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.

Our Exit Strategy

As required under our articles of incorporation, we began a process of evaluating strategic alternatives in an effort to undertake to provide stockholders with liquidity of their investment by December 31, 2015, either in whole or in part, including, without limitation, through (i) the commencement of an orderly sale of our assets, outside of the ordinary course of business and consistent with our objectives of qualifying as a REIT, and the distribution of the net sales proceeds thereof to the stockholders or (ii) our merger with or into another entity in a transaction which provides the stockholders with cash or securities of a publicly traded company or (iii) a listing of our shares on a national stock exchange (“Listing”). In accordance with our undertaking to provide stockholders with partial liquidity, we intend to use a portion of net sales proceeds received from the sale of real estate during the nine months ended September 30, 2015 and any net sales proceeds from the proposed sale of other properties during the remainder of 2015 to make a special distribution to stockholders by the end of 2015.

We will seek to maximize the total value of our portfolio in connection with our evaluation of various strategic opportunities in preparation for an exit strategy. In connection with these objectives, in March 2014, we engaged Jefferies LLC, a leading global investment banking and advisory firm, to assist management and the board of directors in actively evaluating various strategic opportunities including the sale of either us or our assets, potential merger opportunities, or the Listing of our common stock. In connection with this process, during 2014 we sold our entire golf portfolio (consisting of 48 properties) and our multi-family development property. During 2015 and through November 5, 2015, we (i) sold our 81.98% interest in the DMC Partnership for net sales proceeds of approximately $139.5 million to our co-venture partner, (ii) sold all 38 of our senior housing properties and one attractions property for aggregate net sales proceeds of approximately $757.9 million, (iii) entered into a purchase and sale agreement for the sale of our marinas portfolio for approximately its carrying value, (iv) had purchase and sale agreements in place to sell three attraction properties and a ski and mountain lifestyle property, and (v) a plan to sell our undeveloped land.

We used the net sales proceeds from the 2015 sales described above and other cash on hand to repay $152.5 million on our line of credit, repay $209.7 million in outstanding indebtedness and to repay all of our senior unsecured notes with a principal balance of $318.3 million at a premium of 103.625%. We intend to use a portion of existing net sales proceeds received from the sale of real estate during the nine months ended September 30, 2015 and any net sales proceeds from the proposed sale of other properties during

 

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the remainder of 2015 to make a special distribution to stockholders by the end of 2015. We may also use a portion of these net sales proceeds to make strategic capital expenditures to enhance certain of our remaining properties and/or for other corporate purposes. We are evaluating the sale of other assets as part of our strategic alternatives.

As of November 5, 2015, we had a portfolio of 65 lifestyle properties, of which 22 properties had been classified as held for sale. When aggregated by initial purchase price, the portfolio was diversified as follows: approximately 49% in ski and mountain lifestyle, 36% in attractions, 12% in marinas and 3% in additional lifestyle.

Portfolio Trends

A large number of the properties in our real estate portfolio are operated by third-party tenant operators under long-term triple-net leases for which we report rental income and are not directly exposed to the variability of property-level operating revenues and expenses. We also engage third-party managers to operate certain properties on our behalf for which we record the property-level operating revenues and expenses and are directly exposed to the variability of the property’s operations which impacts our results of operations. We believe that the financial and operational performance of our tenants and managers, and the general conditions of the industries within which they operate, provide indicators about our tenants’ health and their ability to pay contractually obligated rent. For example, positive growth in visitation and per capita spending may result in our receipt of additional percentage rent and, better rent coverage, while, conversely, declines may impact our tenants’ ability to pay rent to us.

The following table illustrates property level revenues and EBITDA reported to us by our tenants and managers for the asset types below and includes both our leased and managed properties. We have not included performance data on acquisitions made after January 1, 2014 or properties sold during the periods presented because we did not own those properties during the entirety of all periods presented below. We have only included property-level operating performance for consolidated properties in the table below. Property-level operating performance from our unconsolidated properties has been excluded because we do not believe it is as relevant and meaningful particularly since we are entitled to receive cash distribution preferences where we receive a stated return on our investment each year ahead of our partners. Our tenants and managers are contractually required to provide this information to us in accordance with their respective lease and management agreements. While this information has not been audited, it has been reviewed by management to determine whether the information is reasonable and accurate in all material respects. In connection with this review, management reviews monthly property level operating performance versus budgeted expectations, conducts periodic operational review calls with operators and conducts periodic property inspections. We monitor the credit of our tenants by reviewing their rental payment history, timeliness of rent collections, their operational performance on our properties and by monitoring news and industry reports regarding our tenants and their underlying businesses. We have aggregated this performance data on a “same-store” basis only for comparable properties that we have owned during the entirety of all periods presented and have included information for both leased and managed properties. For these reasons, we consider the property level data to be performance information that gives us information on trends which does not directly represent our results of operations. We do not consider this information to be a non-GAAP measure which can be reconciled to our GAAP financial statements because it includes the performance of properties that are leased to third-party tenants. However, we believe this information is useful to help readers of our financial statements understand and evaluate trends, events and uncertainties in our business as it relates to our prior periods and to broader industry performance (in thousands):

 

                                                                                                                                    
            Quarter Ended September 30,              
     Number of      2015     2014     Increase (Decrease)  
     Properties      Revenue (1)      EBITDA (1)     Revenue (1)      EBITDA (1)     Revenue     EBITDA  

Ski and mountain lifestyle

     17       $ 53,263       $ (5,147   $ 51,132       $ (6,560     4.2     21.5

Attractions

     22         130,987         62,036        120,495         57,331        8.7     8.2

Marinas(2)

     17         12,310         4,474        12,073         4,475        2.0     0.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

     

Total

     56       $ 196,560       $ 61,363      $ 183,700       $ 55,246        7.0     11.1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

     

 

                                                                                                                                    
            Nine Months Ended September 30,               
     Number of      2015      2014      Increase (Decrease)  
     Properties      Revenue (1)      EBITDA (1)      Revenue (1)      EBITDA (1)      Revenue     EBITDA  

Ski and mountain lifestyle

     17       $ 312,147       $ 77,298       $ 331,994       $ 90,088         (6.0 )%      (14.2 )% 

Attractions

     22         238,119         79,629         217,503         67,810         9.5     17.4

Marinas(2)

     17         27,386         8,634         26,574         8,543         3.1     1.1
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

Total

     56       $ 577,652       $ 165,561       $ 576,071       $ 166,441         0.3     (0.5 )% 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

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FOOTNOTE:

(1)  Property operating results for tenants under leased arrangements are not included in the company’s operating results. Property-level EBITDA above is disclosed before rent and capital reserve payments to us, as applicable.
(2)  The marinas properties were held for sale as of September 30, 2015.

Overall, for the quarter ended September 30, 2015, our tenants and managers reported to us an increase in property-level revenue and EBITDA of 7.0% and 11.1%, respectively, as compared to the same period in the prior year. For our ski and mountain assets, those properties with summer operations saw generally strong revenues during the quarter ended September 30, 2015 from increased visitation and group business, which was bolstered by increased activity offerings at several resorts. Operators with resorts in the Pacific West which struggled through a difficult 2014-15 winter season successfully implemented tight labor controls and various operating cost reduction programs, helping to improve EBITDA over the prior year period. Our attractions properties, whose peak season falls within the summer months, also experienced an increase in revenues driven by the combination of favorable weather and effective operating strategies which continue to result in increased attendance.

Overall, for the nine months ended September 30, 2015, our tenants and managers reported to us an increase in property-level revenue of 0.3% and decrease in EBITDA of 0.5%, as compared to the same period in the prior year. The increase in property-level revenue was primarily due to improved summer operations at our attractions properties. The attractions properties, whose peak season falls within the summer months, exhibited an increase due to improved season pass sales, expanded group sales, and better in-park spending which was enhanced by favorable weather. The increase in property-level revenue attributable to our attractions properties was partially offset by our ski and mountain lifestyle properties, which saw mixed results for the 2014-15 winter season based on geographic region, but also a generally strong summer operating period. Along the West Coast, record-breaking drought conditions continued for the third straight season in California, coupled with unusually low snowfall and warmer than average temperatures in the Pacific Northwest which significantly reduced skier visit volumes, and permitted some resorts to open only on an exceptionally limited basis. In contrast, the Northeast saw ample snowfall and cold temperatures from numerous winter storm cycles, driving strong visitation though April. The Rocky Mountain region saw a balanced if not moderately strong season throughout, with skier visits in line with forecasted expectations.

Seasonality

Many of the asset classes in which we invest experience seasonal fluctuations due to the nature of their business, geographic location, climate and weather patterns. As a result, these 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. 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 portfolio diversification strategy, we have specifically considered the varying and complimentary seasonality of our asset classes and portfolio mix. For example, the peak operating season for our ski and mountain lifestyle assets is highly complementary to the peak seasons for our attractions and marinas to balance and mitigate the risks associated with seasonality. Generally, seasonality does not significantly affect our recognition of rental income from operating leases due to straight-line revenue recognition in accordance with GAAP. However, seasonality may impact the timing of when base rent payments are made by our tenants, which impacts our operating cash flows. Additionally, seasonality affects the amount of rental revenue we recognize in connection with capital improvement reserve revenue and percentage rents paid by our tenants, which is recognized in the period in which it is earned and is generally based on a percentage of tenant revenues.

Seasonality also directly impacts certain of our properties where we engage independent third-party operators to manage on our behalf and where we record property operating revenues and expenses rather than straight-line rents from operating leases. These properties will likely generate net operating losses during their non-peak months while generating most, if not all, of their operating income during their peak operating months. Our consolidated operating results and cash flows during the first, second and fourth quarters will be lower than the third quarter primarily due to the non-peak operating months of our larger attractions properties.

Bad Debt Expense, Loan Provisions and Impairments

During 2014, one of our ski tenants with two leases on properties in the Pacific-West began experiencing financial difficulties and we recorded a loss on lease termination (representing the write-off of straight-line rents) during 2014. During 2015, this tenant has been unable to pay rent due to lower operating results from the continued low levels of snow accompanied by unusually warm weather. As a result, during the nine months ended September 30, 2015, we reserved their outstanding rent related receivables and recorded bad debt expense of approximately $8.1 million due to uncertainty of collectability.

 

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During the nine months ended September 30, 2015, the borrower relating to one mortgage receivable, for which we restructured the mortgage loan during 2014, continued to experience financial difficulties. Additionally, during the quarter and nine months ended September 30, 2015, we entered into an agreement to receive an early repayment of our other mortgage receivable at a discounted amount. We recorded both mortgage receivables at their net realizable value and recorded loan loss provisions of $3.3 million and $9.4 million during the quarter and nine months ended September 30, 2015, respectively. During the nine months ended September 30, 2015, we collected one mortgage receivable and in October 2015, we collected our last outstanding mortgage receivable.

LIQUIDITY AND CAPITAL RESOURCES

General

Our principal demand for funds will be for operating expenses, debt service and cash distributions to stockholders. Generally, our cash needs will be covered by cash generated from our investments including rental income, property operating income from managed properties, and distributions from our unconsolidated entities. To the extent we dispose of assets, we plan to use the net sales proceeds to retire indebtedness, make special distributions to our stockholders, to enhance existing assets or use for other corporate purposes.

We believe that our current liquidity needs for operating expenses, debt service and cash distributions to stockholders will be adequately covered by cash generated from our investments and other sources of available cash which may include debt proceeds or asset sales proceeds. Additionally, as previously discussed, many of our asset classes experience seasonal fluctuations where they make rental payments to us during their peak operating months. As a result, our operating cash flows will fluctuate due to the seasonality of those properties. We believe that we will be able to refinance or repay our debt as it comes due in the ordinary course of business.

Cash Flows. Our primary sources of cash include rental income from operating leases, property operating revenues, distributions from our unconsolidated entities, proceeds from sales of properties and borrowings under our revolving line of credit, offset by payments made for operating expenses, including property operating expenses, asset management fees to our Advisor, debt service payments (principal and interest), investments in unconsolidated entities, distributions and real estate investments (including acquisitions and capital expenditures). The following is a summary of our cash flows (in thousands):

 

     Nine Months Ended
September 30,
 
     2015      2014  

Cash at beginning of period

   $ 136,985       $ 71,574   

Cash provided by (used in):

     

Operating activities

     80,940         132,818   

Investing activities

     824,922         268,902   

Financing activities

     (732,036      (196,093

Effect of foreign currency translation on cash

     (85      (79
  

 

 

    

 

 

 

Cash at end of period

   $ 310,726       $ 277,122   
  

 

 

    

 

 

 

Sources of Liquidity and Capital Resources

Operating Activities. Net cash provided from operating activities decreased $51.9 million or 39% for the nine months ended September 30, 2015 as compared to the same period in 2014. The change in operating activities for the nine months ended September 30, 2015 as compared to same period in 2014 is primarily attributable to the sale of 41 properties subsequent to September 30, 2014.

Proceeds from Sales of Real Estate and an Unconsolidated Entity. As described above in “Our Exit Strategy”, we engaged Jefferies LLC to assist management and our Board of Directors in actively evaluating various strategic opportunities including the sale of our assets. During the nine months ended September 30, 2015, we received aggregate net sales proceeds of approximately $757.9 million from the sale of our 38 senior housing properties and one attractions property. We also received net sales proceeds of approximately $139.5 million from the sale of our 81.98% interest in the DMC Partnership, an unconsolidated entity. We used the net sales proceeds from these sales to pay down indebtedness, as further described below under “Uses of Liquidity and Capital Resources - Indebtedness”. During the nine months ended September 30, 2014, we received net sales proceeds of approximately $370.8 million from the sale of our multi-family residential property and the sale of 46 of our 48 golf properties. As described above under “Our Exit Strategy”, during 2015 and through November 5, 2015, we (i) sold our 81.98% interest in the DMC Partnership for net sales proceeds of approximately $139.5 million to our co-venture partner, (ii) sold all 38 of our senior housing properties and one attractions property for aggregate net sales proceeds of approximately $757.9 million, (iii) entered into a purchase and sale agreement for the sale of our

 

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marinas portfolio for approximately its carrying value, (iv) had purchase and sale agreements in place to sell three attraction properties and a ski and mountain lifestyle property, and (v) a plan to sell our undeveloped land. We intend to use a portion of existing net sales proceeds received from the sale of real estate during the nine months ended September 30, 2015 and any net sales proceeds from the proposed sale of other properties during the remainder of 2015 to make a special distribution to stockholders by the end of 2015. We may also use a portion of these net sales proceeds to make strategic capital expenditures to enhance certain of our remaining properties and/or for other corporate purposes.

Distributions from Unconsolidated Entities. We are entitled to receive quarterly cash distributions from our unconsolidated entities to the extent there is cash available to distribute. As of December 31, 2014, we owned an 81.98% interest in the DMC Partnership and an 80% interest in the Intrawest Venture. In April 2015, we sold our 81.98% interest in the DMC Partnership to our co-venture partner and received net sales proceeds of approximately $139.5 million. For the nine months ended September 30, 2015, we received distributions of approximately $11.7 million (of which $6.6 million related to the DMC Partnership) as compared to approximately $9.9 million (of which $8.5 million related to the DMC Partnership) for the same period in 2014. Distributions from our Intrawest Venture increased for the nine months ended September 30, 2015, due to the payment of interest under the intercompany loan being treated as a distribution for financial reporting purposes. Distributions from unconsolidated entities will significantly decrease going forward due to the sale of our interest in the DMC Partnership.

During the nine months ended September 30, 2015, our co-venture partner of the Intrawest Venture accepted our offer to acquire their 20% interest for a nominal amount in accordance with the buy-sell provisions of the Intrawest Venture partnership agreement. Upon acquisition of their 20% interest, we will own a 100% controlling interest in the entities that own seven properties and will include these properties in the overall assessment of strategic alternatives of our assets.

Distribution Reinvestment Plan. For the nine months ended September 30, 2014, we received aggregate proceeds of approximately $27.2 million (representing 4.0 million shares) through our distribution reinvestment plan (the “DRP”). In September 2014, our board of directors approved the suspension of our DRP, effective as of September 26, 2014. As a result of the suspension of the DRP, beginning with the September 2014 quarterly distributions, stockholders who were participants in the DRP received cash distributions instead of additional shares of our common stock. We did not receive proceeds from the DRP for the nine months ended September 30, 2015.

Proceeds from Mortgages and Other Notes Receivables. During the nine months ended September 30, 2015 and 2014, we collected principal payments of approximately $2.3 million and $83.5 million, respectively. We used the funds to pay down some of our existing indebtedness as described in “Indebtedness” below. In October 2015, we collected our only outstanding mortgage and other notes receivable.

Uses of Liquidity and Capital Resources

Investments in Unconsolidated Entities. During the nine months ended September 30, 2015, we contributed approximately $54.6 million to the Intrawest Venture and the Intrawest Venture repaid two mortgage loans of approximately $54.6 million, which matured in January 2015 and June 2015.

Indebtedness. We have borrowed and, subject to our goal of providing liquidity to our shareholders, may continue to borrow money to fund ongoing enhancements to our portfolio, pay certain related fees and to cover periodic shortfalls between distributions paid and cash flows from operating activities to avoid distribution volatility. See “Distributions” below for additional information. In many cases, we have pledged our assets in connection with such borrowings. The aggregate amount of long-term financing is not expected to exceed 50% of our total assets. As of September 30, 2015, our leverage ratio, calculated as total indebtedness over total assets, was 11.6%.

During the nine months ended September 30, 2015, we paid $10.9 million in scheduled principal payments under our mortgage loans. We also used net sales proceeds from the sales of real estate and our interest in an unconsolidated entity and repaid $135.0 million of outstanding indebtedness collateralized by the senior housing properties sold, repaid $63.8 million of outstanding indebtedness collateralized by two attractions properties and one ski and mountain lifestyle property, repaid all of our senior unsecured notes with an outstanding principal amount of $318.3 million at a premium of 103.625%, and repaid $152.5 million of our revolving line of credit. In June 2015, we extended the maturity of our revolving line of credit to August 31, 2016, with an additional year extension option, and reduced the borrowing capacity to $100 million. As of September 30, 2015, our revolving line of credit did not have an outstanding principal balance.

We have scheduled maturities of $23.2 million within the next twelve months, which we intend to repay using cash on hand or proceeds from sales of properties.

Certain of our loans require us to meet certain customary financial covenants and ratios including fixed charge coverage ratio, leverage ratio, interest coverage ratio and limitations on distributions except to maintain our REIT status. We were in compliance with all applicable provisions as of September 30, 2015.

 

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Acquisitions and Capital Expenditures. We did not have any acquisitions during the nine months ended September 30, 2015 but funded approximately $35.8 million in capital improvements at our properties. During the nine months ended September 30, 2014, we acquired four senior housing properties for an aggregate purchase price of approximately $128.4 million and funded approximately $55.9 million in capital improvements at our properties.

Related Party Arrangements. Through March 31, 2014, our Advisor received fees and compensation in connection with the acquisition, management and sale of our assets. In March 2014, our Advisor amended the advisory agreement, effective April 1, 2014, to eliminate acquisition fees on equity, performance fees, debt acquisition fees and disposition fees, and to reduce asset management fees to 0.075% monthly (or 0.90% annually), down from 0.083% monthly (or 1.00% annually), of average invested assets. Amounts incurred relating to these transactions were approximately $15.9 million and $25.4 million for the nine months ended September 30, 2015 and 2014, respectively. Our Advisor and its affiliates were also entitled to reimbursement of certain expenses and amounts incurred on our behalf in connection with our acquisitions and operating activities. Reimbursable expenses for the nine months ended September 30, 2015 and 2014 were approximately $4.3 million and $5.4 million, respectively. Of these amounts, approximately $0.4 million and $0.5 million are included in due to affiliates in the unaudited condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively.

Pursuant to the advisory agreement, we will not reimburse our Advisor for 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”) in any expense year. For the expense years ended September 30, 2015 and 2014, operating expenses did not exceed the Expense Cap.

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

 

    Sources of cash available for distribution such as expected cash flows from operating activities, funds from operations (“FFO”), modified funds from operations (“MFFO”) and Adjusted EBITDA from Continuing Operations;

 

    Limitations and restrictions contained in the terms of our current and future indebtedness concerning the payment of distributions;

 

    Needs for capital expenditures in our portfolio; 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 have and may continue to use borrowings to fund a portion of our distributions in order to avoid distribution volatility. In March 2015, our board of directors approved our 2014 estimated net asset value (the “2014 NAV”) of $5.20 per share as of December 31, 2014 and reduced distributions per share to $0.05 from $0.1063 per share on a quarterly basis. The distributions of $0.05 per share represented an annualized yield of 3.8% on our revised estimated 2014 NAV. The reduction in distributions was the result of selling our golf portfolio and other individual assets, the repayment of two mortgage notes receivable in 2014, the expected sale of our senior housing portfolio and other assets in 2015, and the associated impact of such sales on our operating cash flows. The transactions not yet completed are expected to result in additional reductions to our future cash flows from operations, earnings before interest, taxes, depreciation and amortization and our modified funds from operations (“MFFO”), which may result in additional reductions to distributions.

During the nine months ended September 30, 2015 and 2014, we paid $48.8 million and $76.2 million, respectively, in distributions, net of proceeds received under our DRP. Our cash flows from operating activities covered 100% of distributions paid for each of the nine months ended September 30, 2015 and 2014.

 

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The following table presents total distributions declared including cash distributions, distributions reinvested and distributions per share for the quarters and nine months ended September 30, 2015 and 2014 (in thousands, except per share data):

 

                                 Sources of
Distributions
Paid in Cash
 
     Distributions
Per Share
     Total
Distributions
Declared
     Distributions
Reinvested (2)
     Net Cash
Distributions
     Cash Flow From
Operating
Activities (1)
 

2015 Quarter

              

First

   $ 0.0500       $ 16,259       $ —         $ 16,259       $ 36,075   

Second

     0.0500         16,259         —           16,259         6,074   

Third

     0.0500         16,259         —           16,259         38,791   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.1500       $ 48,777       $ —         $ 48,777       $ 80,940   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2014 Quarter

              

First

   $ 0.1063       $ 34,278       $ 13,627       $ 20,651       $ 37,560   

Second

     0.1063         34,442         13,582         20,860         39,197   

Third

     0.1063         34,608         —           34,608         56,061   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.3189       $ 103,328       $ 27,209       $ 76,119       $ 132,818   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

FOOTNOTES:

(1)  Cash flows from operating activities calculated in accordance with GAAP are not necessarily indicative of the amount of cash available to pay distributions. For example, GAAP requires that the payment of acquisition fees and costs be classified as a use of cash in operating activities in the statement of cash flows, which directly reduces the measure of cash flows from operations. However, acquisition fees and costs are paid for with subscription proceeds and other financing sources as opposed to operating cash flows. The Board also uses other measures such as FFO and MFFO in order to evaluate the level of distributions.
(2)  In September 2014, our Board suspended the DRP and beginning with the September 2014 quarterly distributions, stockholders who were participants in the DRP received cash distributions instead of additional shares of our common stock.

Our cash flows from operating activities will fluctuate due to the seasonality of certain properties. As such, we anticipate cash flows from operating activities to increase during the third quarter to reflect the peak seasonal period of our attractions properties.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

See our annual report on Form 10-K for the year ended December 31, 2014 for a summary of our Significant Accounting Policies.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

See Item 1. “Financial Statements” for a summary of the impact of recent accounting pronouncements.

RESULTS OF OPERATIONS

As of September 30, 2015 and 2014, we had invested in 65 and 107 properties, respectively, through the following investment structures:

 

     September 30,  
     2015      2014  

Wholly-owned:

     

Leased properties

     24         43   

Managed properties (1)(2)

     33         55   

Unimproved land

     1         1   

Unconsolidated joint ventures: (3)

     

Leased properties

     7         8   
  

 

 

    

 

 

 
     65         107   
  

 

 

    

 

 

 

 

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FOOTNOTES:

(1)  As of September 30, 2015 and 2014, wholly-owned managed properties are as follows:

 

     September 30,  
     2015      2014  

Ski & mountain lifestyle

     1         1   

Golf

     —           1   

Attractions

     15         16   

Senior housing

     —           20   

Marinas

     17         17   
  

 

 

    

 

 

 
     33         55   
  

 

 

    

 

 

 

 

(2)  Under applicable tax regulations, certain properties are permitted to be temporarily managed and certain properties are permitted to be indefinitely managed. As of September 30, 2015 and 2014, 29 and 31 properties, respectively, were temporarily managed and four and 24 properties were indefinitely managed under management agreements, respectively.
(3)  In April 2015, we sold our 81.98% interest in the DMC Partnership, which held one property. As of September 30, 2015, our co-venture partner of the Intrawest Venture had accepted our offer to buy out their 20% non-controlling interest. See “Distributions from Unconsolidated Entities” for additional information.

The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto.

During the quarter and nine months ended September 30, 2015 and 2014, the results of 41 and 42 real estate investment properties, respectively, contributed to income from continuing operations. As of September 30, 2015, the results of operations for 17 properties held for sale as of September 30, 2015 along with the results of operations of 38 senior housing properties sold during 2015 and 49 properties sold during 2014 are included in income from discontinued operations in the accompanying statements of operations for all periods presented.

Rental income from operating leases. Rental income for the quarter and nine months ended September 30, 2015 decreased by approximately $2.1 million and $5.0 million, respectively, as compared to the same period in 2014. Additional billings permitted under our leases calculated as a percent of ski property level operating revenues generated by our tenants declined by approximately $1.9 million and $5.2 million during the quarter and nine months ended September 30, 2015, respectively, due to lower levels of snow particularly in the Pacific West. Additionally, rental income from operating leases declined an additional $1.3 million and $1.6 million during the same periods, respectively, due to one of our ski tenants with two leases on properties in the Pacific-West experiencing financial difficulties and defaulting on their rent. This decline was partially offset by an increase in revenues attributed to capital improvements made at our attractions properties that resulted in higher lease basis, which increased rent due from our tenants. The following information summarizes trends in rental income from operating leases and base rents for certain of our properties excluding properties that have been classified as discontinued operations (in thousands):

 

     Quarter Ended September 30,                

Properties Subject to Operating Leases

   2015      2014      $ Change      % Change  

Ski and mountain lifestyle

   $ 19,695       $ 22,876       $ (3,181      (13.9 )% 

Attractions

     9,879         8,844         1,035         11.7
  

 

 

    

 

 

    

 

 

    

Total

   $ 29,574       $ 31,720       $ (2,146      (6.8 )% 
  

 

 

    

 

 

    

 

 

    
     Nine Months Ended
September 30,
               

Properties Subject to Operating Leases

   2015      2014      $ Change      % Change  

Ski and mountain lifestyle

   $ 68,315       $ 75,114       $ (6,799      (9.1 )% 

Attractions

     24,310         22,520         1,790         7.9
  

 

 

    

 

 

    

 

 

    

Total

   $ 92,625       $ 97,634       $ (5,009      (5.1 )% 
  

 

 

    

 

 

    

 

 

    

As of September 30, 2015 and 2014, the weighted-average lease rate for our portfolio of wholly-owned leased properties (excluding assets held for sale) was 10.2% and 10.3%, respectively. These rates are based on annualized straight-line 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 may fluctuate based on our asset mix, timing of property acquisitions, lease terminations and reductions in rent granted to tenants.

 

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Property operating revenues. Property operating revenues from managed properties, which are not subject to leasing arrangements, are derived from room rentals, food and beverage sales, ski and spa operations, ticket sales, concessions, waterpark and theme park operations, and other service revenues. The following information summarizes the revenues of our properties that are operated by third-party managers (in thousands):

 

     Quarter Ended September 30,                

Properties Operated by Third-Party Managers

   2015      2014      $ Change      % Change  

Ski and mountain lifestyle

   $ 16,571       $ 15,495       $ 1,076         6.9

Attractions

     81,330         95,371         (14,041      (14.7 )% 
  

 

 

    

 

 

    

 

 

    

Total

   $ 97,901       $ 110,866       $ (12,965      (11.7 )% 
  

 

 

    

 

 

    

 

 

    
     Nine Months Ended
September 30,
               

Properties Operated by Third-Party Managers

   2015      2014      $ Change      % Change  

Ski and mountain lifestyle

   $ 44,548       $ 41,449       $ 3,099         7.5

Attractions

     146,597         164,461         (17,864      (10.9 )% 
  

 

 

    

 

 

    

 

 

    

Total

   $ 191,145       $ 205,910       $ (14,765      (7.2 )% 
  

 

 

    

 

 

    

 

 

    

As of September 30, 2015 and 2014, we had a total of 16 and 17 managed properties (excluding properties that we classified as discontinued operations), respectively, of which certain properties are operated seasonally due to geographic location, climate and weather patterns. The decrease in property operating revenues is primarily due to the sale of one of our attraction properties in June 2015. This decrease was partially offset by increases in property operating revenue for our other attractions properties primarily due to higher ticket sales, retail shop sales and food and beverage sales. This decrease was also partially offset by our Mount Washington Resort which experienced higher room, ski and food and beverage revenues as a result of renovations and enhancements we have made at the property and operational strategies that have been implemented, as well as strong group and conference business.

Interest income on mortgages and other notes receivable. For the quarter and nine months ended September 30, 2015, we earned interest income of approximately $0.1 million and $1.5 million, respectively, as compared to approximately $2.0 million and $8.0 million for the same periods in 2014, respectively. The decrease is primarily due to $83.5 million in principal received during the nine months ended September 30, 2014.

Property operating expenses. Property operating expenses decreased primarily due to the sale of one of our attractions properties in June 2015, offset by increases at our other attractions properties consistent with the increase in property operating revenues. The following information summarizes the expenses of our properties that are operated by third-party managers (in thousands):

 

     Quarter Ended September 30,                

Properties Operated by Third-Party Managers

   2015      2014      $ Change      % Change  

Ski and mountain lifestyle

   $ 12,357       $ 11,565       $ 792         6.8

Attractions

     43,899         50,885         (6,986      (13.7 )% 
  

 

 

    

 

 

    

 

 

    

Total

   $ 56,256       $ 62,450       $ (6,194      (9.9 )% 
  

 

 

    

 

 

    

 

 

    
     Nine Months Ended
September 30,
               

Properties Operated by Third-Party Managers

   2015      2014      $ Change      % Change  

Ski and mountain lifestyle

   $ 34,730       $ 34,477       $ 253         0.7

Attractions

     110,585         119,132         (8,547      (7.2 )% 
  

 

 

    

 

 

    

 

 

    

Total

   $ 145,315       $ 153,609       $ (8,294      (5.4 )% 
  

 

 

    

 

 

    

 

 

    

Asset management fees to advisor. Monthly asset management fees equal to 0.08334% prior to April 1, 2014 and 0.075% effective April 1, 2014 of invested assets were paid to the Advisor for the management of our real estate assets, loans and other permitted investments. For the quarter and nine months ended September 30, 2015, asset management fees to our Advisor were approximately $3.7 million and $12.2 million, respectively, as compared to approximately $4.4 million and $14.2 million, respectively, for the quarter and nine months ended September 30, 2014. The decrease in such fees is primarily attributable to the reduction in asset fee rates described above and the sale of one attraction property and our interest in the DMC Partnership subsequent to September 30, 2014.

 

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General and administrative. General and administrative expenses totaled approximately $3.0 million and $11.5 million for the quarter and nine months ended September 30, 2015, as compared to approximately $4.3 million and $13.2 million, respectively, for the quarter and nine months ended September 30, 2014. General and administrative expenses were comprised primarily of reimbursable personnel expenses of affiliates of our Advisor, accounting and legal fees, and board of directors’ fees. The decrease in general and administrative expenses for the quarter and nine months ended September 30, 2015, is primarily the result of a reduction in legal, accounting and other professional services necessary to account and report on our smaller portfolio of assets.

Ground leases and permit fees. Ground lease payments and land permit fees are generally based on a percentage of gross revenue of the underlying property over certain thresholds. For properties that are subject to leasing arrangements, ground leases and permit fees are paid by the tenants in accordance with the terms of our leases with those tenants and we record the corresponding equivalent revenues in rental income from operating leases. For the quarter and nine months ended September 30, 2015, ground lease and land permit fees were approximately $2.4 million and $7.8 million, respectively, as compared to approximately $2.2 million and $7.8 million, respectively, for the quarter and nine months ended September 30, 2014.

Other operating expenses. Other operating expenses were approximately $1.7 million and $4.9 million for the quarter and nine months ended September 30, 2015, respectively, as compared to approximately $1.9 million and $3.9 million for the quarter and nine months ended September 30, 2014, respectively.

Bad debt expense. Bad debt expense totaled approximately $3.3 million and $8.1 million for the quarter and nine months ended September 30, 2015, respectively. The increase is related to one of our ski tenants with two leases on properties in the Pacific-West experiencing financial difficulties as a result of lower operating results from the low levels of snow accompanied by unusually warm weather.

Loan loss provision. Loan loss provision was approximately $21 thousand and $9.4 million for the quarter and nine months ended September 30, 2015, respectively. As described above in “Bad Debt Expense, Loan Provisions and Impairments”, we recorded these loan loss provisions to record our mortgage receivables at their net realizable values at September 30, 2015. Loan loss provision was approximately $0.7 million and $3.3 million for the quarter and nine months ended September 30, 2014, respectively, as a result of uncertainty in the collectability of one of our notes receivable.

Impairment provision. Impairment provision was approximately $1.4 million for the quarter and nine months ended September 30, 2015, respectively. The impairment related to an adjustment to the net carrying value of our undeveloped land due to a revised estimated sale price, less closing costs. There were no impairment provisions during 2014.

Depreciation and amortization. Depreciation and amortization expenses were approximately $19.8 million and $63.5 million for the quarter and nine months ended September 30, 2015, respectively, as compared to approximately $25.4 million and $73.2 million for the quarter and nine months ended September 30, 2014, respectively.

Interest and other income. Interest and other income was approximately $0.3 million and $1.1 million for the quarter and nine months ended September 30, 2015, respectively, as compared to approximately $0.2 million and $0.4 million for the quarter and nine months ended September 30, 2014, respectively.

Interest expense and loan cost amortization. Interest expense and loan cost amortization was approximately $3.2 million and $23.9 million for the quarter and nine months ended September 30, 2015, respectively, as compared to approximately $15.0 million and $44.4 million, for the quarter and nine months ended September 30, 2014, respectively. The decrease is primarily attributable to the pay down of approximately $703.0 million of indebtedness, excluding indebtedness related to properties classified as discontinued operations, subsequent to September 30, 2014.

Loss on extinguishment of debt. Losses on extinguishment of debt were approximately $21.1 million for the nine months ended September 30, 2015, as compared to $1.6 million and $1.8 million for the quarter and nine months ended September 30, 2014, respectively. The losses incurred during the nine months ended September 30, 2015, related to the early repayments of our senior unsecured notes and certain loans during 2015. Loss on extinguishment of debt included legal fees incurred with the transaction, prepayment penalty fees and the write-off of unamortized bond issue costs and loan costs. The losses incurred during the nine months ended September 30, 2014, related to an early repayment on two of our loans and repurchasing at a premium, the face value of $24.5 million of our senior notes.

 

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

 

     Quarter Ended September 30,                
     2015      2014      $ Change      % Change  

DMC Partnership

   $ —         $ 2,797       $ (2,797      (100.0 )% 

Intrawest Venture

     1,162         379         783         206.6
  

 

 

    

 

 

    

 

 

    

Total

   $ 1,162       $ 3,176       $ (2,014      (63.4 )% 
  

 

 

    

 

 

    

 

 

    
     Nine Months Ended
September 30,
               
     2015      2014      $ Change      % Change  

DMC Partnership

   $ 2,475       $ 8,206       $ (5,731      (69.8 )% 

Intrawest Venture

     1,465         (1,257      2,722         216.5
  

 

 

    

 

 

    

 

 

    

Total

   $ 3,940       $ 6,949       $ (3,009      (43.3 )% 
  

 

 

    

 

 

    

 

 

    

Equity in earnings of unconsolidated entities decreased by approximately $2.0 million and $3.0 million for the quarter and nine months ended September 30, 2015, respectively, as compared to the same periods of 2014. The change was primarily due to the sale of our interest in the DMC Partnership in April 2015. This decrease was offset by improved results from our Intrawest Venture in 2015 due to the fact that during the quarter and nine months ended September 30, 2014, we recorded catch up depreciation and amortization expense due to the reclassification of seven Intrawest village retail properties from assets held for sale to held and used. Equity in earnings will decrease significantly going forward due to the sale of our 81.98% interest in the DMC Partnership in April 2015.

In July 2015, our co-venture partner accepted our offer to acquire their 20% interest in the Intrawest Venture for a nominal amount in accordance with the buy-sell provisions of the Intrawest Venture partnership agreement. Upon acquisition of their 20% interest, we will own a 100% controlling interest in the entities that own seven properties and will include these properties in the overall assessment of strategic alternatives of our assets.

Discontinued operations. Income from discontinued operations was approximately $7.6 million and $214.4 million for the quarter and nine months ended September 30, 2015, as compared to income (loss) of approximately $0.5 million and $(1.4) million for the quarter and nine months ended September 30, 2014. The results of operations of 104 properties (which included our marinas properties classified as held for sale as of September 30, 2015, the 38 senior housing properties sold during 2015 and all properties sold during 2014), are reflected in discontinued operations for all periods presented. Income from discontinued operations for the quarter and nine months ended September 30, 2015, includes $4.2 million and $210.8 million, respectively, of gains from the sale of one and 38 senior housing properties, respectively. Income due to the gains on the sale of real estate was partially offset by a decline in net operating income from the sale of 41 properties subsequent to September 30, 2014, and the recording of impairment provisions related to the marinas properties during the second quarter of 2015. See Note 4. “Assets and Associated Liabilities Held for Sale, net and Discontinued Operations” for additional information.

Gain (loss) on sale of real estate. Gain (loss) on sale of real estate from continuing operations was approximately $(1.1) million and $26.5 million for the quarter and nine months ended September 30, 2015. The gain on sale of real estate primarily related to the sale of one of our attractions properties. There was no gain on sale of real estate in 2014 as the gains were recorded through discontinued operations.

Gain from sale of unconsolidated entity. Gain from sale of our interest in the DMC Partnership, our unconsolidated entity, was approximately $39.3 million for the nine months ended September 30, 2015. There was no gain on sale of unconsolidated entity during 2014.

Other

Funds from Operations and Modified Funds From Operations

Due to certain unique operating characteristics of real estate companies, as discussed below, NAREIT, promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under GAAP.

 

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We define FFO, a non-GAAP measure, consistent with the standards approved by the Board of Governors of NAREIT. NAREIT defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, real estate impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our FFO calculation complies with NAREIT’s policy described above.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value of the property. We believe that, because real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses for business combinations from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses as items that are expensed under GAAP and accounted for as operating expenses. Our management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. Due to the above factors and other unique features of publicly registered, non-listed REITs, the IPA, an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we acquired our properties and once our portfolio is in place. By providing MFFO, we believe it is presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income or loss: acquisition fees and expenses; amounts relating to straight-line rent adjustments for leases and notes receivable; gains or losses included in net income from the extinguishment or sale of debt and hedges; amounts relating to the amortization of above and below market leases and liabilities (which are adjusted in order to remove the impact of GAAP straight-line adjustments from rental revenues); loan loss provisions related to mortgages and other notes receivable; accretion of discounts and amortization of premiums on debt investments; eliminations of adjustments relating to contingent purchase price obligations where such adjustments have been included in the derivation of GAAP net income or loss, mark-to-market adjustments included in net income or loss; and adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we are responsible for managing interest rate, hedge and foreign exchange risk, we do retain an outside consultant to review all of our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of on-going operations.

 

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Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, straight-line adjustments for leases and notes receivable, amortization of above and below market leases, impairments of lease related assets, loss from early extinguishment of debt and accretion of discounts or amortization of premiums for debt investments. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income or loss. These expenses are paid in cash by us. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income or loss in determining cash flow from operating activities.

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisitions costs are funded from our subscription proceeds and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different non-listed REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way and as such comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flows available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of its liquidity, or indicative of funds available to fund cash needs including our ability to make distributions to stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value or based on an estimated net asset value. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO and MFFO.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust its calculation and characterization of FFO or MFFO.

 

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The following table presents a reconciliation of net income or loss to FFO and MFFO for the quarter and nine months ended September 30, 2015 and 2014 (in thousands, except per share data):

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Net income

   $ 40,845      $ 30,623      $ 261,391      $ 1,765   

Adjustments:

        

Depreciation and amortization

        

Continuing operations

     19,807        25,389        63,463        73,179   

Discontinued operations

     —          8,233        —          28,403   

Impairment of real estate assets (1)

        

Continuing operations

     1,428        —          1,428        —     

Discontinued operations

     —          —          7,749        3,442   

(Gain) loss on sale of real estate investment (2)

        

Continuing operations

     1,064        —          (26,528     —     

Discontinued operations

     (5,290     (3,953     (212,383     (3,883

Gain on sale of unconsolidated entity (3)

        

Continuing operations

     —          —          (39,252     —     

Net effect of FFO adjustment from unconsolidated entities (4)

     824        3,819        4,721        12,208   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total funds from operations

     58,678        64,111        60,589        115,114   
  

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition fees and expenses (5)

        

Continuing operations

     —          (237     —          519   

Discontinued operations

     —          746        —          1,994   

Straight-line adjustments for leases and notes receivable (6)

        

Continuing operations

     6,277        5,436        1,958        1,072   

Discontinued operations

     —          (819     —          (2,619

Loss (gain) on early extinguishment of debt (7)

        

Continuing operations

     —          1,620        21,065        1,816   

Discontinued operations

     (486     8,293        2,042        5,690   

Contingent purchase price consideration adjustment (8)

        

Continuing operations

     —          (665     —          (665

Amortization of above/below market intangible assets and liabilities

        

Continuing operations

     (19     (12     (57     12   

Discontinued operations

     —          101        —          460   

Loan loss provision (9)

        

Continuing operations

     21        750        9,369        3,270   

Realized loss on the extinguishment of cash flow hedge (7)

        

Continuing operations

     —          62        180        466   

Discontinued operations

     —          —          —          2,337   

Accretion of discounts/amortization of premiums on debt investments

        

Continuing operations

     —          44        1        50   

MFFO adjustments from unconsolidated entities: (4)

        

Straight-line adjustments for leases and notes receivable (6)

        

Continuing operations

     68        113        338        175   

Amortization of above/below market intangible assets and liabilities

        

Continuing operations

     (8     (41     (4     (116
  

 

 

   

 

 

   

 

 

   

 

 

 

Modified funds from operations

   $ 64,531      $ 79,502      $ 95,481      $ 129,575   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     325,183        325,707        325,183        324,194   
  

 

 

   

 

 

   

 

 

   

 

 

 

FFO per share (basic and diluted)

   $ 0.18      $ 0.20      $ 0.19      $ 0.36   
  

 

 

   

 

 

   

 

 

   

 

 

 

MFFO per share (basic and diluted)

   $ 0.20      $ 0.24      $ 0.29      $ 0.40   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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FOOTNOTES:

(1)  While impairment charges are excluded from the calculation of FFO, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.
(2)  Gains and loss on the sale of real estate for the quarter and nine months ended September 30, 2015, primarily includes the gains and losses recognized on the sale of our 38 senior housing properties and one attractions property.
(3)  In April 2015, we completed the sale of our interest in one unconsolidated joint venture that held one property. See “Distributions from Unconsolidated Entities” for additional information.
(4)  This amount represents our share of the FFO or MFFO adjustments allowable under the NAREIT or IPA definitions, respectively, multiplied by the percentage of income or loss recognized under the HLBV method.
(5)  In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. By adding back acquisition fees and expense relating to business combinations, management believes MFFO provides useful supplemental information of its operating performance and will also allow comparability between real estate entities regardless of their level of acquisition activities. Acquisition fees and expenses include payments to our advisor or third parties. Acquisition fees and expenses relating to business combinations under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property.
(6)  Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.
(7)  (Gain) loss of extinguishment of debt includes legal fees incurred with the transaction, prepayment penalty fees and write-off of unamortized loan costs, as applicable. Loss from extinguishment of cash flow hedge includes swap breakage fees and reclassification of loss on termination of cash flow hedges from other comprehensive income (loss) from interest expense.
(8)  Management believes that the elimination of the contingent purchase price consideration adjustment, which respects the Yield Guarantee as mentioned above, included in interest and other income (expense) for GAAP purposes is appropriate because the adjustment is a noncash adjustment that is not reflective of our ongoing, operating performance and aligns with management’s analysis of operating performance.
(9)  During the nine months ended September 30, 2014, we recorded a loan loss provision on one of our mortgages and other notes receivable as a result of uncertainty related to the collectability of the note receivable. During the nine months ended September 30, 2015, we recorded loan loss provisions on our mortgage notes receivables to adjust the carrying values to net realizable values.

Total FFO and FFO per share was approximately $58.7 million and $60.6 million or $0.18 and $0.19 for the quarter and nine months ended September 30, 2015, respectively, as compared to approximately $64.1 million and $115.1 million or $0.20 and $0.36 for the same periods in 2014. The decrease in FFO and FFO per share is primarily attributable to (i) loss on early extinguishment of debt, (ii) the loan loss provisions recorded on our mortgage notes receivables to adjust the carrying values to net realizable values, (iii) bad debt expense recorded related to two ski properties, (iv) a decrease in rental income and net operating income from leased and managed properties due to the sale of our golf portfolio, our multi-family residential property, our 38 senior housing properties and one of our attractions properties, (v) a decrease in the net effect of FFO adjustment from unconsolidated entities primarily as a result of the sale of our interest in the DMC Partnership, and (vi) a decrease in interest income on mortgage notes receivable due to the collection of $83.5 million of principal during the nine months ended September 30, 2014. The decreases were partially offset by (i) a decrease in interest expense primarily due to a decrease in weighted average debt outstanding, (ii) an increase in “same-store” net operating income from managed properties primarily related to our attractions properties, and (iii) a decrease in asset management fees.

 

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Total MFFO and MFFO per share was approximately $64.5 million and $95.5 million or $0.20 and $0.29 for the quarter and nine months ended September 30, 2015, respectively, as compared to approximately $79.5 million and $129.6 million or $0.24 and $0.40 for the same periods in 2014. The decrease in MFFO and MFFO per share is primarily attributable to (i) bad debt expense recorded related to two ski properties, (ii) a decrease in rental income and net operating income from leased and managed properties due to the sale of our golf portfolio, our multi-family residential property, our 38 senior housing properties and one of our attractions properties, (iii) a decrease in the net effect of FFO adjustment from unconsolidated entities primarily as a result of the sale of our interest in the DMC Partnership, and (iii) a decrease in interest income on mortgage notes receivable due to the collection of principal subsequent to September 30, 2014. The decreases were partially offset by (i) a decrease in interest expense primarily due to a decrease in weighted average debt outstanding, (ii) an increase in “same-store” net operating income from managed properties primarily related to our attractions properties, and (iii) a decrease in asset management fees.

Adjusted EBITDA from Continuing Operations

We present Adjusted EBITDA from Continuing Operations as a supplemental measure of our performance. We define Adjusted EBITDA from Continuing Operations as net income (loss), less discontinued operations and other income, plus (i) interest expense, net, and loan cost amortization and (ii) depreciation and amortization, as further adjusted for the impact of equity in earnings (loss) of our unconsolidated entities, straight-line adjustments for leased properties and mortgages and other notes receivables, cash distributions from our unconsolidated entities and certain other items that we do not consider indicative of our ongoing operating performance. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA from Continuing Operations, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA from Continuing Operations should not be construed as an inference that our future results will be unaffected by unusual items.

We present Adjusted EBITDA from Continuing Operations because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.

Adjusted EBITDA from Continuing Operations has limitations as an analytical tool. Some of these limitations are:

 

    Adjusted EBITDA from Continuing Operations does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

    Adjusted EBITDA from Continuing Operations does not reflect changes in, or cash requirements for, our working capital needs;

 

    Adjusted EBITDA from Continuing Operations does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA from Continuing Operations does not reflect any cash requirements for such replacements;

 

    Adjusted EBITDA from Continuing Operations does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and

 

    Other companies in our industry may calculate Adjusted EBITDA from Continuing Operations differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA from Continuing Operations should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA from Continuing Operations only supplementally.

 

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Set forth below is a reconciliation of Adjusted EBITDA from Continuing Operations to net income (loss) (in thousands):

 

     Quarter Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Net income

   $ 40,845       $ 30,623       $ 261,391       $ 1,765   

(Income) loss from discontinued operations

     (7,614      (537      (214,386      1,368   

(Gain) loss on sale of real estate

     1,064         —           (26,528      —     

Gain on sale of unconsolidated entity

     —           —           (39,252      —     

Interest and other income

     (309      (153      (1,066      (449

Interest expense and loan cost amortization

     3,202         15,012         23,946         44,380   

Equity in earnings of unconsolidated entities (1)

     (1,162      (3,176      (3,940      (6,949

Depreciation and amortization

     19,807         25,389         63,463         73,179   

Loss from extinguishment of debt

     —           1,620         21,065         1,816   

Loan loss provision

     21         750         9,369         3,270   

Impairment provision

     1,428         —           1,428         —     

Straight-line adjustments for leases and notes receivables (2)

     6,277         5,436         1,958         1,072   

Cash distributions from unconsolidated entities (1)

     918         3,321         11,651         9,896   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA from Continuing Operations

   $ 64,477       $ 78,285       $ 109,099       $ 129,348   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

FOOTNOTES:

(1)  Investments in our unconsolidated joint ventures are accounted for under the HLBV method of accounting. Under this method, we recognize income or loss based on the change in liquidating proceeds we would receive from a hypothetical liquidation of our investments based on depreciated book value. We adjust EBITDA from continuing operations for equity in earnings (loss) of our unconsolidated entities because we believe this is not reflective of the joint ventures’ operating performance or cash flows available for distributions to us. We believe cash distributions from our unconsolidated entities, exclusive of any financing transactions, are reflective of their operating performance and its impact to us and have been added back to adjusted EBITDA from continuing operations above.
(2)  We believe that adjusting for straight-line adjustments for leased properties and mortgages and other notes receivable is appropriate because they are non-cash adjustments and reflect the actual cash receipts received by us from our tenants and borrowers.

Adjusted EBITDA from Continuing Operations was approximately $64.5 million and $109.1 million for the quarter and nine months ended September 30, 2015, respectively, as compared to approximately $78.3 million and $129.3 million for the same periods in 2014, respectively. The decrease was primarily attributable to (i) bad debt expense recorded related to two ski properties, (ii) a decrease in interest income on mortgage notes receivable due to the collection of $83.5 million of principal during the nine months ended September 30, 2014, and (iii) the sale of one of our attractions properties in June 2015. The decreases were partially offset by (i) an increase in “same-store” net operating income from managed properties primarily related to our attractions properties and (ii) a reduction in asset management fees.

Off-Balance Sheet and Other Arrangements

During the nine months ended September 30, 2015, we made contributions of approximately $54.6 million to the Intrawest Venture and Intrawest Venture repaid approximately $54.6 million in mortgage loans that matured in January and June 2015. In April 2015, we sold our 81.98% interest in the DMC Partnership to our co-venture partner, which included $131.5 million of indebtedness related to the partnership. As of September 30, 2015, the Intrawest Venture had one intercompany loan payable to its joint venture partners of approximately $11.1 million which matures in December 2029.

In July 2015, our co-venture partner accepted our offer to acquire their 20% interest in the Intrawest Venture for a nominal amount in accordance with the buy-sell provisions of the Intrawest Venture partnership agreement. Upon acquisition of their 20% interest, we will own a 100% controlling interest in the entities that own seven properties.

 

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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 September 30, 2015:

Contractual Obligations

 

     Payments Due by Period (in thousands)  
     2015      2016-2017      2018-2019      Thereafter      Total  

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

   $ 21,954       $ 170,807       $ 8,076       $ 1,705       $ 202,542   

Capital lease

     818         3,434         978         —           5,230   

Obligations under operating leases (2)

     3,142         25,140         25,140         168,948         222,370   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     25,914         199,381         34,194         170,653         430,142   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

FOOTNOTES:

(1) This line item includes all third-party and seller financing obtained in connection with the acquisition of properties. 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 of which the majority 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)  
     2015      2016-2017      2018-2019      Thereafter      Total  

Capital improvements (1)

   $ 4,531       $ —         $ —         $ —         $ 4,531   

 

FOOTNOTE:

(1)  We have committed to fund ongoing equipment replacements and other capital improvement projects on our existing properties through capital reserves set aside by us for this purpose and additional capital investment in the properties that will increase the lease basis and generate additional rental income.

 

Item 3. 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.

Our fixed-rate mortgage and other notes receivable totaled $7.6 million and $19.4 million at September 30, 2015 and December 31, 2014, respectively. The estimated fair value of the mortgage notes receivable was approximately $7.6 million and $16.6 million, respectively, and is subject to market risk to the extent that the stated interest rates vary from current market rates for borrowings under similar terms.

 

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

 

     2015      2016      2017      2018      2019      Thereafter      Total      Fair Value  

Fixed-rate debt

   $ 862       $ 34,678       $ 85,369       $ —         $ —         $ 1,705       $ 122,614       $ 126,672   

Variable-rate debt (2)

     19,213         1,618         37,029         437         6,799         —           65,096         67,485   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 20,075       $ 36,296       $ 122,398       $ 437       $ 6,799       $ 1,705       $ 187,710       $ 194,157   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     2015   2016   2017   2018   2019   Thereafter    Total

Weighted average fixed interest rate of maturities

   6.23%   6.57%   6.10%   —     —     —      6.14%

Average interest rate on variable debt(3)

   LIBOR +

3.01%

  LIBOR+
3.45%
  LIBOR +
3.50%
  LIBOR +

3.30%

  LIBOR +
3.30%
    

 

FOOTNOTES:

(1)  The fair value of our fixed-rate debt was determined using discounted cash flows based on market interest rates as of September 30, 2015. We determined market rates through discussions with our existing lenders pricing our loans with similar terms and current rates and spreads.
(2)  As of September 30, 2015, one of our variable-rate debt in mortgages and notes payable was hedged.
(3)  The 30-day LIBOR rate was approximately 0.19% at September 30, 2015.

Management estimates that a hypothetical one-percentage point increase in LIBOR would have resulted in additional interest costs of approximately $0.4 million for the nine months ended September 30, 2015 related to variable rate debt outstanding as of September 30, 2014. 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.

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 are denominated in Canadian dollars. Management does not believe this to be a significant risk or that currency fluctuations would result in a significant impact to our overall results of operations.

We are also indirectly exposed to foreign currency risk related to our investment in unconsolidated Canadian entities and interest rate risk from debt at our unconsolidated entities. However, we believe our risk of foreign exchange loss and exposure to credit and interest rate risks are mitigated as a result of our right to receive a preferred return on our investments in our unconsolidated entities. Our preferred returns as stated in the governing venture agreements are denominated in U.S. dollars.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.

Changes in Internal Controls over Financial Reporting

During the most recent fiscal quarter, there were no changes in our internal controls over financial reporting (as defined under Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II OTHER INFORMATION

 

Item 1. Legal Proceedings None

 

Item 1A. Risk Factors None

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None

 

Item 3. Defaults Upon Senior SecuritiesNone

 

Item 4. Mine Safety DisclosuresNot Applicable

 

Item 5. Other InformationNone

 

Item 6. Exhibits

The exhibits required by this item are set forth in the Exhibit Index attached hereto and are filed or incorporated as part of this report.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 13th day of November, 2015.

 

  CNL LIFESTYLE PROPERTIES, INC.
By:  

/s/ Stephen H. Mauldin

  STEPHEN H. MAULDIN
  President and Chief Executive Officer
  (Principal Executive Officer)
By:  

/s/ Tammy J. Tipton

  TAMMY J. TIPTON
  Chief Financial Officer and Treasurer
  (Principal Financial Officer)

 

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EXHIBIT INDEX

Exhibits

The following exhibits are included, or incorporated by reference in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (and are numbered in accordance with Item 601 of Regulation S-K).

 

Exhibit
No.
   Description
  10.13    First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions by and between the Company and Buyer, dated May 1, 2015. (Filed on May 6, 2015 as Exhibit 10.1 to the Company’s Current Report on Form 8-K, and incorporated herein by reference.)
  31.1    Certification of Chief Executive Officer of CNL Lifestyle Properties, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
  31.2    Certification of Chief Financial Officer of CNL Lifestyle Properties, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
  32.1    Certification of Chief Executive Officer and Chief Financial Officer of CNL Lifestyle Properties, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
101    The following materials from CNL Lifestyle Properties, Inc. Quarterly Report on Form 10-Q for the nine months ended September 30, 2015 formatted in XBRL (Extensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Other Comprehensive Income (Losses), (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements.

 

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