Fitch Assigns Initial 'BBB-' IDR to Entertainment Properties Trust; Outlook Stable

The ratings are based on the assumed closing of certain transactions, including the company entering into a new $320 million senior unsecured revolving credit facility and issuing $250 million of senior unsecured notes, the proceeds of which would be used to repay a portion of the company's secured debt and pay other transaction expenses.

The IDR of 'BBB-' is driven by the cash flows generated by the company's triple-net leased megaplex movie theatres and charter schools, together with the cash flows from the company's other retail and entertainment-based loan investments, in excess of the company's fixed charges.

For the 12 months ended March 31, 2010, EPR's fixed charge coverage ratio (defined as recurring operating EBITDA less capital expenditures and straight-line rent adjustments, divided by interest expense, capitalized interest, and preferred stock dividends), pro forma for the company's disposition of its White Plains property, was 2.3 times (x), which is solid for a 'BBB-' IDR. Fitch anticipates that fixed charge coverage will remain above 2.2x for the next 12-24 months and that even in a more stressed environment than anticipated by Fitch, fixed charge coverage will remain in a range of 1.8x to 1.9x over the next two years.

In addition, the company's leverage, measured as net debt to recurring operating EBITDA, pro forma for the company's disposition of its White Plains property, was 4.9x as of March 31, 2010 up from 4.7x as of Dec. 31, 2008. Pro forma for the company's May 2010 common equity offering, the acquisition of 12 theatres leased to Cinemark U.S.A., Inc. for $124 million and expected sale of a winery property in Napa, California for $6.5 million announced on June 14, 2010, Fitch expects that leverage will decline to the mid 4.0x area by the end of 2010.

Pro forma for the recapitalization transactions, unencumbered asset coverage of net unsecured debt would be 3.7x utilizing a stressed 12% capitalization rate, a coverage ratio that is consistent with a 'BBB-' IDR given the non-core composition of several of the company's assets.

The company has a manageable lease expiration profile, with only 25% of rental revenue under leases expiring over the next five years. When taking into account tenant renewal options, only 6% of rental revenue expires over the next five years.

Pro forma for the recapitalization transactions, the company also has a manageable debt maturity profile, with only approximately 42% of total debt maturing over the next five years.

Fitch calculates that EPR's sources of liquidity (unrestricted cash, availability under its contemplated unsecured revolving credit facility, expected retained cash flows from operating activities after dividend payments) divided by uses of liquidity (debt maturities and expected capital expenditures) is expected to be 1.4x for the period April 1, 2010 to Dec. 31, 2011. This liquidity surplus is driven in large part by a mostly undrawn revolving unsecured credit facility on a pro forma basis, and further reflects a lack of upcoming debt maturities on a pro forma basis and the low-capital-intensive nature of EPR's business.

The ratings take into consideration certain offsetting factors including tenant concentration. Rent revenues from American Multi-Cinema, Inc. (AMC) comprised approximately 60% and 36% of EPR's annualized pro forma theatre rent revenue and total revenue, respectively, for the year ended Dec. 31, 2009. While the company recently received notification from AMC that it intends to exercise the extension options on three theatres in southern California, the company has entered into a letter of intent with another operator for the renovation and re-lease of the Grand 24 in Dallas, Texas, a lease that AMC elected not to renew.

While most of EPR's theatre leases and all of EPR's charter school leases for a given operator are cross-defaulted, a tenant bankruptcy would allow for the rejection of certain non-economic leases. Given that AMC's IDR is 'B' and most of EPR's other top tenants are either unrated or have below-investment grade ratings, the potential for corporate default, bankruptcy and lease rejection could reduce EPR's rental revenues. One mitigant to this risk is that on a portfolio basis, property-level EBITDAR covers rent payments by a healthy margin for nearly all of EPR's theatre and charter school assets, indicative of solid four-wall profitability. Further, there have also been only limited instances in which box office revenues have declined, indicative of stability in operator cash flows. In addition, since the company's formation in 1997, no theatre tenant has ever missed a lease payment.

The company's real estate investments are in, or are backed by, mostly non-core property types (e.g., megaplex movie theatres, charter schools, wineries, ski areas and waterparks) and thus may be less liquid or financeable in periods of company or market stress. While EPR's theatre properties are typically well located and have high quality amenities, the demonstrated alternative use of certain of the company's assets is fairly limited.

The company has also made certain mortgage and equity investments over the last few years collateralized by assets that deviated from EPR's core strategy. In particular, the company originated debt investments on a planned resort in Upstate New York, a multi-tenant retail center in Toronto and made an equity investment in a multi-tenant retail center in White Plains, NY. The company has recognized impairments on some of these assets and the ultimate recovery or value realization of these investments is uncertain.

The two-notch differential between EPR's IDR and its preferred stock rating of 'BB' is consistent with Fitch's 'Rating Hybrid Securities' Criteria Report dated Dec. 29, 2009, as EPR's preferred securities have cumulative coupon deferral options exercisable by EPR and thus have readily triggered loss absorption provisions in a going concern. Pro forma for the company's disposition of its White Plains property, net debt plus 25% of preferred stock to recurring operating EBITDA was 5.3x and 5.2x, as of March 31, 2010 and Dec. 31, 2008, respectively.

Any of the following factors may have a positive impact on the ratings or Outlook:

--Net debt to recurring operating EBITDA sustaining below 4.0x (pro forma leverage was 4.9x as of March 31, 2010);

--Fixed charge coverage sustaining above 3.0x (pro forma coverage was 2.3x for the twelve months ended March 31, 2010);

--Growth in the unencumbered portfolio, particularly for megaplex movie theatres.

Any of the following factors may have a negative impact on the ratings or Outlook:

--Net debt to recurring operating EBITDA sustaining above 5.5x;

--Fixed charge coverage sustaining below 2.2x;

--Unencumbered asset coverage of unsecured debt falling below 3.0x, utilizing a 12% capitalization rate;

--A liquidity shortfall.

In the absence of the contemplated recapitalization transactions, which include the proposed $250 million of senior unsecured notes and the company entering into a new $320 million senior unsecured credit facility, Fitch would expect to assign an IDR of 'BB-', a preferred stock rating of 'B', and a Stable Outlook to EPR. In the absence of the contemplated recapitalization transactions, the expected IDR of 'BB-' would center on the company's existing level of net operating income from unencumbered assets, the non-core composition of several of the company's existing unencumbered assets and the company's limited existing financial flexibility given that EPR is currently a secured borrower. The expected preferred stock rating of 'B' in the absence of the contemplated recapitalization transactions is consistent with corporate issuers with an IDR of 'BB-'.

Entertainment Properties Trust is a real estate investment trust (REIT) based in Kansas City, Missouri with $2.9 billion in undepreciated book assets and a market capitalization of $3.5 billion as of March 31, 2010. EPR's portfolio includes megaplex movie theatres and entertainment retail centers, as well as other recreational and specialty investments.

Relevant criteria available on the Fitch web site at '[ www.fitchratings.com ]' include:

--'Criteria for Rating U.S. Equity REITs and REOCs' (April 16, 2010);

--'Equity Credit for Hybrids & Other Capital Securities - Amended' (Dec. 29, 2009);

--'Rating Hybrid Securities' (Dec. 29, 2009);

--'Recovery Rating and Notching Criteria for REITs' (Dec. 23, 2009);

--'Corporate Rating Methodology' (Nov. 24, 2009);

--'Evaluating Corporate Governance' (Dec. 12, 2007).

Additional information is available at '[ www.fitchratings.com ]'.

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Fitch Assigns Initial 'BBB-' IDR to Entertainment Properties Trust; Outlook Stable