EPR Properties (EPR) 2007 Q3 法說會逐字稿

Good day, welcome to the third quarter 2007 Entertainment Properties Trust earnings conference call. My name is Annie, and I'll be your coordinator for today. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's call, Mr. David Brain, Chief Executive Officer. Please proceed, sir.

Thank you, Annie. Good morning, everyone. Thank you for being with us this Halloween morning.

This is David Brain and let me start with the usual preface as follows and that is as we begin this morning, let me inform you that this conference call may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Identified by such words as will be, intend, continue, believe, may, expect, hope anticipate or other comparable terms, the company's actual financial position and results of operations may vary materially from those contemplated by such forward-looking statements.

A discussion of the factors that could cause actual results to differ materially from those forward-looking statements is contained in the company's SEC filings including the company's report and 10-K for the year ending December 31, 2006. Hi, let me say again thank you for joining us, we always appreciate your investment of time and interest. It's a real treat that you have joined us, chosen to join us this morning to go over our third quarter 2007 reports and all the Entertainment Properties news.

I want to start by introducing the other EPR executives on the phone with me this morning to bring you up to date on everything. I'm joined by Greg Silvers, our Chief Operating Officer.

Good morning.

And Mark Peterson, our CFO.

Good morning.

Before we get under way this morning, I do want to remind you that there is a simultaneous webcast available via a link from our website at www.eprkc.com. This is not a trick. It's just that we'll be using a few slides this morning to illustrate or reinforce some of our points, so if you can, I would advise you to go there now to catch the full presentation.

If you've arrived at the right website and taken the right direction, you should be looking at our new logo and name presentation slide that we introduced in Q1 of this year. For the agenda, which should just appear now, if you're looking at the website, the agenda, I'll do a few introductory comments and as is our usual course, we'll have the financial review, Mark will go through the capital markets update included in that and Greg then will go over the investment activity review and I'll join for some closing comments before we go to Q&A.

In terms of introductory remarks, I just want to say this has been a very active and productive quarter. And there is lots to cover. There was lots of transaction activity. We completed acquisition transactions involving theatre properties, ski hills, vineyards, and one in a new and exciting category, public schools. Greg will have a lot of detail on all these transactions and I'll have more to say about the education properties I mentioned in just a minute. But what I will say now is that all of this investment activity is guided by, and consistent with, our expressed five-star principles that we have been talking about and writing about for over a year now.

The quarter also saw lots of capital market activity well and we completed work on several individual property loans, a new multi-property term loan facility and a common equity offering. Mark will go through the details, all the particulars of this, but probably the broad issue is the more important here. In a quite volatile market, great progress was made in maintaining balance sheet quality. At very good rates, prices or costs, we were able to lower leverage and increase transaction capacity, that is capability. We view this as highly important because, one, it speaks volumes about the quality of our properties, our acquisitions, and, two, volatile markets often yield windows of transaction opportunities for which we remain prepared.

The many transactions of acquisitions and financings all add up to good things for our owners, our investors. All of this supports our ability to issue guidance for a sixth consecutive year of double digit growth in FFO per share. When I come back to you in a few minutes after the details are covered by Mark and Greg, I will have more to say about some of our current investments and the very robust outlook for EPR.

I will turn it over now. Mark?

Thank you, David. In reviewing our financial performance for the third quarter, as you can see on the first slide, our net income available to shareholders increased 16% compared to last year from $17.8 million to $20.7 million. Our FFO increased 16% compared to last year from $25.5 million to $29.6 million. On a diluted per-share basis, FFO was $1.10, compared to $0.95 last year for an increase of 16%. Turning to the next slide ... For the nine months ended September 30, 2007, our net income available to common shareholders increased 15% compared to last year from $52.1 million to $59.7 million. Our FFO increased 10% compared to last year from $74.9 million to $82.5 million. On a diluted per share basis, FFO was $3.07 compared to $2.83 last year for an increase of 8%.

Now looking at the details of our third quarter performance, our total revenue increased 26% compared to the prior year to $61 million. Within the revenue category, rental revenue increased 16% to $48.1 million, an increase of $6.8 million versus last year. Percentage rents included in rental revenue increased 23% to $571,000 versus $463,000 in the prior year.

Tenant reimbursements increased 24% or $0.9 million. This increase is primarily due to the acquisition in May 2007 of a 2/3 interest in an entertainment center in White Plains, New York, which has been consolidated into our financial statement. Mortgage financing income was $7.7 million for an increase of $5 million versus last year.

As of the end of the third quarter, we had 7 mortgage notes outstanding totaling $277 million. The mortgage notes relate to our Toronto Life Square project formally known as Metropolis in downtown Toronto, our megaplex theatre in Louisiana, our investment in the development of a water park anchored entertainment complex in Wyandot County, Kansas called [inaudible] Vacation Village and our ski resorts in Vermont and New Hampshire.

I do want to reiterate a comment I made last quarter on the nature of our mortgage investments.

Of the balance of $277 million on September 30, only about $91 million relates to what we would expect to be part of a permanent financing structure. The $91 million relates to mortgages on our ski properties. As Greg will discuss in his comments, we added $31 million to this total subsequent to the end of the quarter, bringing our mortgages on ski properties to a total of $122 million.

The remaining mortgages are expected to be temporary in nature as in the case of Toronto Life Square where we have an option to purchase a 50% ownership interest at completion, and in the case of the water park investment where we ultimately expect to move to a sale leaseback structure. Moving on, our other income was $0.5 million, compared to $0.7 million last year. The decrease of $0.2 million was due to the closing of a restaurant we previously operated in Southfield, Michigan as a TRS, that is now under lease to an unrelated restaurant tenant.

On the expense side, our property operating expense has increased approximately $1.0 million for the quarter. As with tenant reimbursements, this increase is primarily due to the acquisition of our interest in the Entertainment retail center in White Plains, New York. Other expense was $1 million compared to $0.9 million last year. The increase of $0.1 million is due to $0.5 million in expense recognized upon settlement of foreign currency forward contracts, partially offset by a decrease in expense related to the restaurant in Southfield, Michigan that I -- that was closed that I explained earlier.

G&A expense increased $0.8 million versus last year to approximately $3.0 million for the quarter. This increase is due primarily to increases in personnel-related expense -- we've added three people since the beginning of the year -- as well as increases in franchise taxes and professional fees. The G&A, as a percentage of revenue, for the quarter was 5%, continuing at a rate well below the industry average. Interest expense increased $3.9 million or 31%. Approximately $1.7 million of this increase resulted from the $120 million of debt assumed in our White Plains acquisition. The remaining increase in interest expense resulted from increases in debt associated with financing our real estate investment and our mortgage notes receivable. Minority interest income is $988,000 for the quarter and relates solely to our White Plains investment.

The explanation of this minority interest income is complex and results from the structure under which we invested in White Plains and the accounting rules related to variable interest entities or VIEs.

I'm not going to go into great detail here regarding this treatment as it is explained in the footnotes to our 10-Q but suffice to say that the economics of the transaction are as previously discussed. We own a 2/3 voting interest in the entities that own the center and we have a 10% preferred return on our investment.

The operations of the center have been consolidated in our financial statements but an accounting nuance related to the structure of the deal in which a proportion of our investment was actually in the form of a loan to our partner, secured by our partner's equity interest in the center, requires us to book additional minority interest income for a period of time. However, as can you see in our FFO reconciliation in the press release, we subtract or back out this minority interest income so that it does not increase our FFO. Said differently, we record FFO based on our pro rata share of cash distributions, irrespective of whether the cash distributions come from the operating partnerships or via interest payments on our loan.

I apologize for the complexity here, but again, I think the key takeaway is that this minority interest income related to our White Plains acquisition does not impact FFO. Looking at the ratios for the quarter, interest coverage was 3.3x, fixed charge coverage was 2.4x and debt service coverage was 2.5x. All of these ratios remain very healthy. Now moving on the next slide ... As David mentioned, we have been very active in the debt and equity capital markets and I want to provide you an update in this area.

During the third quarter, we completed two 10-year, non-recourse mortgage loans totaling $28 million at a rate of approximately 5.86%. These loans closed in July and have been locked in before the much publicized pullback in the debt market. Perhaps more important, however, are the mortgage loans we closed subsequent to July in a very volatile debt market environment when financing was difficult to obtain or even completely shut down for many companies. In September and October, we closed approximately $75 million in five-year, non-recourse mortgage loans at an average interest rate of 6.64%. While spreads on mortgage loans are higher by about 70 basis points on an apples-to-apples basis from where we were quoted prior to the pullback, it is easy to see that we still have plenty of room to accretively finance our investments with mortgage debt.

Turning to the next slide, on October 15th, we completed a 1.4 million common share offering raising approximately $74 million. This was a bought deal and was based off a closing price of $56.17 on October 9.

In addition, turning to the next slide, last week we completed a $120 million secured term loan with a syndicate of banks. The fully-funded loan is for a four-year term with a one-year extension option and has a $50 million accordion feature. The loan is prepayable without penalty following the first year and the interest rate is LIBOR plus 175 basis points. The security for this loan is a borrowing base of assets and the loan is recoursed to the company. The proceeds of this loan is to provide financing at a 55% advanced rate for non-theatre investments, including our ski, wine and water park assets and to free up availability on our existing unsecured credit facility. All in all, since June of this year, we have raised approximately $300 million in attractive long-term debt and equity and since the beginning of the year, we have raised nearly $500 million of such capital. Summarizing our success in the capital market provides an excellent segue to my comments on the strength of our balance sheet. As of September 30th, we had total outstanding debt of approximately $1.1 billion and our overall leverage on a book basis was a little over 51%. Our overall leverage on a market basis was a conservative 39%. Our debt balance at September 30th included approximately $929 million in fixed rate, long-term debt with blended coupon of approximately 6.1%. Our floating rate debt at September 30th was approximately $132 million, represented by our unsecured credit facility which carried a spread of 130 basis points over LIBOR.

The additional financing activity subsequent to the end of the quarter that I discussed earlier, including our recent common stock offering further strengthens our balance sheet. As of today, we have only $12 million outstanding under our unsecured credit facility, and keep in mind, this balance is subsequent to the investments we made after quarter end that Greg and David will review with you shortly.

In summary, our balance sheet is well-positioned for continued profitable growth and we have created significant [drive potter] to take advantage of future opportunities.

Turning on to the next slide, based on our performance today and management's expectations for the timing of additional real estate investments and financing activity over the remainder of the year, we are tightening our 2007 FFO per-share guidance towards the upper end of the range from the previously announced $4.09 to $4.18 to $4.13 to $4.18. In addition, as Greg will highlight in his comments, we're increasing our guidance for 2007 investment spending from $300 million to approximately $420 million. Finally, during the next slide, we are today announcing our 2008 guidance for FFO per share of $4.52 to $4.62, and our 2008 estimated investment spending of approximately $250 million.

Now, let me turn it over to Greg for his comments on leasing and investing activities.

Thank you, Mark. On our second quarter call, we revised our capital plan to $300 million to reflect the increased investment activity that we foresaw for the balance of the year.

I'm pleased to report to you today that through October 30 of this year, we have already exceeded that amount and as Mark mentioned, we are again revising our capital plan upwards to $420 million for the year. Our investments to date have allowed us to expand our asset base in all of our existing lines of business, including theatres, theatre-anchored retail, ski properties and vineyards.

Additionally as you saw in our press release, we continue the execution of our five-star investment criteria with the acquisition of a 50% interest in a joint venture form to capitalize on opportunities in public charter schools. David will talk more about this opportunity but first, I would like to highlight the investments since our last call. As I describe these investments, we will flip through various slides which show and describe these investments. We completed the development of a 14-screen, 2,000-seat theatre in Kalispell, Montana. The Stadium 14 cinema was completed for a total development cost of approximately $9.7 million and is leased and operated by Signature Theatres pursuant to a long-term triple-net lease. We continue to fund development of two additional theatres located in Glendora, California, and Greensboro, North Carolina. We continue to fund additional development at our Canadian and U.S. theatre-anchored retail centers.

The total for the quarter was approximately $7 million of additional investment. On October 30, we completed the financing of seven daily ski properties with Peak Resorts Inc. These properties, consistent with our criteria of investing in daily ski operations that are within short driving distances of major cities, serve the markets of Philadelphia, Cleveland, St. Louis, Kansas City and Louisville. The properties include over 500 skiable acres with 107 ski trails. We made additional investment of approximately $41.5 million in two vineyard transactions, the first involving the Cosentino brand included approximately 279 acres of vineyards and 71,500 square feet of winery facilities. The second involving the EOS brand included approximately 60 acres of vineyards and a 500,000-case winery facility. For the quarter, our capital expenditures totaled approximately $82 million and our subsequent investments beyond the quarter have totaled $70 million. We expect to see development activity in our core theatre business to increase next year, as our tenants complete IPO and M&A activity and again focus on growing their business by developing high-quality entertainment destinations. As Mark has indicated, we are positioning our balance sheet to take advantage of these opportunities.

Furthermore, during this year, there have been several portfolios of theatres that have been brought to the market by brokers and investment houses. We participate in this process. However, we continue to underwrite these assets for quality, coverage and sustainability and generally have been unsuccessful or unwilling to acquire assets as they cannot support the price expectations that are demanded.

While these portfolios may offer the opportunity to acquire a significant number of theatres, we will not ignore our underwriting principles that demand that we pay an appropriate cap rate for quality assets with sustainable coverage. We will, however, continue to evaluate these portfolio opportunities as they are presented to us. A quick update on occupancy. We continue to have 100% occupancy of our theatre assets and haved increased our occupancy at our non-theatre retail from 96% to 98% .With that, I will turn it back over to David.

Thanks, Greg. Thank you, Mark.

Another record-setting quarter of financial results, execution in our expressed investment strategy, more good advances on our capital funding arrangements and all in line with our plan of delivering another year of double-digit shareholder metric increase. In advance of opening up the line to your questions, I wanted to go over our thinking, specifically the application of our expressed investment guideline, our discipline to our newest investment property type, chartered public elementary school. For about two years, we have been examining and scrutinizing this general category, evaluating it as a potential investment opportunity. Evidence of this is in our financial statements.

Near the end of 2005, we made a small $3.5 million loan, that I will call a placeholder that opened the door to some information avenues. We did this with the appropriate disclosures and with no announcements or fanfare since we were still evaluating and not prepared with the decision or a clear direction. We have been assessing and evaluating this category in terms of our five-star investment principle. I want to go through a bit of that with you this morning. The five-star guidelines are up on the screen now. Yes. Let's see. I want to run through them quickly, since although we've introduced them before, they're still somewhat new. Number one is an inflection opportunity. What we look for here is a generational change or restructuring change in the industry's properties that creates an opportunity for insightful capital. Essentially, what we're saying here is we want to ride the wave. Enduring value. The description. I'm sorry. We're at the wrong slide. No, that's not -- I'm sorry. I think we have the wrong slide. We should have the description of the five star. No? No. Okay. Well, I'll go through the five-star principles. We don't have the slide up on the screen that I hoped to have for you.

But the five criteria are the inflection opportunity, a generational change or restructuring, in an industry's properties that creates an opportunity for insightful capital. Enduring value, by this what we mean is investments in real estate devoted to or improving upon long-live activity. Excellent execution -- here we're looking for premium locations and investment executions that lead to market-dominant performance and create credit beyond the particular tenant. Attractive economics -- we're looking for accretive initial returns, along with growth and yield over the life of the investments in categories and meaningful size, and advantageous position. Lastly, our fifth criteria, we're looking for sustainable competitive advantages, based on knowledge, relationships or access to key investment areas. Having gone through that key criteria, in this slide I guess on the screen, you may have begun to relate to this criteria opportunity and that is the slide I want to go through with you now.

First, the inflection opportunity. The charter movement generally. This movement began in the late '90s and now represents over 4,000 charter public schools that are open, with over 1 and a quarter million enrollments. Charter public schools are opening now at the rate of 350 to 400 per year and this is with no available organized financing markets, despite representing about $2 billion in annual real estate financing needs.

The second criteria, enduring value. Elementary education. Well I just don't know that there is any more long live or enduring use than schools, and I will leave it at that. The third criteria, excellent execution -- the best available alternatives. The public school properties in which we're investing are simply the finest in their market. And by virtue of their attraction of enrollment, they absolutely create credit beyond the tenants. This is an industry that is supported by a taxing authority, generally a highly-rated credit, double- to triple-A. Charter public schools with as little as two or three years of stabilized enrollments earn investment grade ratings themselves from Moody's and Standard & Poor's. In the end, we are financing public schools. The fourth criteria, attractive economics, compelling economics in an enormous market with a rated credit payer. We want you to know that the yield, the lease lives and the credit support we're getting in this transaction are all superior to our usual strong transaction profile.

As mentioned before, the market potential for new facilities is about $2 billion annually and that's all now on a static basis without the effect of our entry into the marketplace and the potential catalyst we can provide. The in-place market of properties is about $20 billion. And the long-term potential is large enough that it need only be said that market size will not be a limitation. Likely in the range of $500 billion to a trillion (dollars). As I explained just before, that the credit in these transactions is ultimately the state. Credits don't get much better than, that usually. And the fifth criteria: advantageous position, first mover advantage. Despite the large size of the charter public school market that I just outlined, charter public schools only account for about 3% of total elementary education today. So we're still early to the market here.

There have been occasions of other minor investments in this category by public and private investors, but we believe no one has or is focusing on it with the type of systematic dedication that we expect to exhibit with our partner, JER Investors. Through this, by building a greater base of knowledge and relationships, we expect to build a sustainable competitive advantage. Now, I want to go through that explanation with you of this investment. I appreciate your attention and endurance but by no means do I want this approximately $40 million transaction to overshadow the larger, more important, very positive themes we have outlined for you this morning. Themes of surpassing our transaction guidance. Note if you will, that this is the first quarterly reporting period where we're over $2 billion in assets.

Successful well-priced capital formation in a very choppy market. It keeps us ready for attractive transaction opportunities. And guidance for a sixth consecutive year of double-digit increase in key shareholder unit metrics. With all that, let me now turn you over, turn you back over to the operator and open the line to your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jonathan Litt with Citigroup. Please proceed.

Hi, this is Ambeka with John. Can you talk about how he should think about the split of the $250 million guidance for '08 between non-theatre deals and theatre deals?

As we currently have it now -- Anmbeka, it's Greg -- the visibility right now, is at least, about half of that is theatre core deals, a little more than half right now and so uh, you know, that kind of moves around on us right now, that is kind of what we have visibility on right now.

Okay, and are you still planning to stick with your previous guidance? I think it was like 80% theatres and entertainment and 20% other? Is that still the goal?

I think we're still looking at those numbers. You know, as we evaluate some of these opportunities and some of what you know David talked today about the depth of this opportunity, we may take a look at that, but for the foreseeable, what we're looking at is still in that consistent range. Frankly with our starting point, it's tough to move the needle meaningfully with the emphasis we have on theatres and entertainment centers, so it takes awhile before that needle moves.

And the theatre development, are you seeing those pick up in this current market?

Yes, we are, and I kind of alluded to that. You know, if you look over the last year, we've had several IPOs or attempted IPOs, we've got several regional chains that had put themselves up for sale, and so we are seeing some of that work its way through the distractions that our theatre operators ... and we're seeing a lot more opportunities that they're wanting us to take a look at and bid.

Okay, and then, just turning to the charter schools, now I don't know much about this sector, so you can correct me if I'm wrong, but if these are state credits, then can't they get some type of municipal, you know, government-type of financing at a lower rate? If so, why not? And then on top of that, if can you give us some more specifics on the exact yields of the charter schools and also,what your potential relationship with, uh, JER is.

Ambeka, this is David. I guess starting in reverse order, the relationship with JER is we're a straight shoulder-to-shoulder 50-50 partner in this space with them. We're very pleased to be there with them. I think Joe Roberts is a smart investor and a guy, by virtue of his philosophy and involvement in children's causes, he's very well-informed and very well-connected in this space and we came to that after we started investigating this space. The access to public financing, really is a ... it's traditional that schools are financed that way. But these are really de novo schools and that is usually not available without a lot of credit insurance and reserves that essentially burden the school when they access that channel or financing. On a de novo basis that these schools are burdensome to the point they're paying a comparable rate with more complications, delays and uncertainties than if they go with us. So that's what makes us an advantageous solution despite the apparent allure of, uh, savings we all know attracts them to the bond market. So we do expect that as these things mature, they will be available for a very... for lower cost financing and enhance our yield, so we're very excited about that. As far as the yields, I mean these are yielding at, uh, I mean you saw, I think Ambeka we saw your note, the way these are drafted, we have a straight line that's significantly higher but our initial yields are approximately 10 with annual escalators of approximately 3%. Yes, I ,mean that's really how we think of these things, our 10-cap yields, the annual escalators, they have very long lives, they're 25-year leases, but, uh, they straight-line out to very high numbers. We almost hate to report that. We're one of the guys who resist straight lining. I think we have to in this case, compelled to report them in a straight line ...

Compare that, Ambeka, to where educational reimbursements are generally running at 5% to 7% increase annually, so we're participating in ... our 3% escalators are reflective of the annual increase of the reimbursements by the state.

Okay and then should we think of additional charter school deals that you might do in partnership with JER? Is this like an established JV that you have going forward with charter schools?

Yes.

Okay. Great. Thank you.

Your next question comes from the line of Anthony Paolone with J.P. Morgan. Please proceed.

Thank you. Good morning. Can you talk about the cap rates on the theatre deals that are being brought to you? You mentioned you're still seeing a lot of flow and has there been any change there?

On the development rates, no. Like I said, Tony, we're seeing some portfolio deals that ,uh, are, you know, where people are bidding 8 and low 8s for coverages that are just not supportable for assets that we think are not sustainable, that the assets that we typically have built against. And we just -- we, I mean what looks attractive to some people, I mean I can't tell you that it's not accretive to us but it's just not our quality of assets. Tony probably in the last year, we've seen $400 million worth of portfolio deals and theatres that we have not bought. Now, some of those could have been bought at initial cap rates as Greg mentioned. They're being bid into the low 8s to 8 and maybe high 7s and still could be accretive mathematically, but these assets, the quality of the leases are not written the way we like them and the quality of assets are not the way we like them. And in fact, we feel they're not long enough lived and they're vulnerable, but even though they may be attractive on the front end, they're not where we want to be ... take our shareholders in the long run and we do nothing but potentially dilute down the quality of our portfolio which we don't want to do. So we're resisting those things, we are bidding them, we're bidding them at levels that we find them interesting and we find them attractive but we're not necessarily chasing them down where everybody else is and we think that, you know, there has been some evidence that we have been right and we'll continue to be.

Have you seen anything of substance trade in the last few months post, say the credit volatility?

Yes, there have been one or two portfolios that have traded in the last two months, that I think the people who have bought those do not have their debts for those. I think they're in for a pretty ... awakening when they go out and try to source that based on the coverage levels that those portfolios are at, at the prices they're bidding them.

Do you all think, either with your developments or with other transactions you'll have the ability to bump up some of your rates, given potentially fewer alternatives for the sellers or for prospective tenants?

You know -- we would all like to think that we would; however, Tony, I've got to tell you we didn't really write it down. We kind of stayed in the 9s and 10s and it really gets to, you know, when we do our coverage analysis, you know, what will the theatre support from an occupancy cost and, you know, on a one-off basis with a new tenant if there is a credit that we're not sure, maybe we'll get some increases but I think our day-in and day-out tenants you will see stay in the 9 to 10 range.

Okay. On the Peaks Resort transaction, what was the yield on that?

It was in the 9s. We had the mid-9s.

Okay. Is that lower than the last few deals you did with them?

It was lower than the Mount Snow deal, because that was really kind of one geographic deal that just gave us a little better diversity and had better coverage on that. So we kind of give them a reflection of that.

Yes it was the same as our Crotched Mountain note however that was done prior to the Mount Snow ...

From our standpoint, when you look at the number of properties and the amount of the investment on each property, the coverage on those can get better and our risk factors are different and concentrate more investment in one particular area.

Okay. How much of the Peak Resorts portfolio do you now own effectively through the loans?

Almost all of it. Yes.

Okay. And then I just want to switch over to the charter schools, first of all, can you give us a description of the real estate that you bought in terms of how many square feet are we talking about, how old are these schools, these sorts of things?

Well, they're very new. Let's start with that. They're all, by and large, new build. Year open, '05, '05, '06, '05, '05, '05, '06, they're all '05, '06 and '07. In terms of square footage, it's about 560,000 square feet. Enrollment capacity is about 7,500 and they're, uh, the ones that have been open two years are over 90% of capacity and the ones open about a year are 80% capacity and that is up about 15 points from their opening-year enrollment, so they're growing nicely. And I think that the one thing that David didn't mention that we're seeing continued high enrollment, we look at this over the last several years as school choices becoming more and more important to parents that these, these charter public schools are definitely feeding into that, that parental involvement and as we have seen problems in the traditional public schools, I don't know if you have followed but the Phoenix and New Orleans school districts have turned their entire districts over to, to public charter schools.

Are these leases like cross collateralized?

This is one master lease.

Yes. Yes, they are.

And you mentioned 25 years of term, does the actual Imagine, do they have a charter that is co-terminus with the lease or does their charter only last for five years? How does that work?

It's state-by-state but typically it would not last to the term of that lease.

That's right, usually less.

And is there a way to get a sense of coverage or to get a sense of the budgets that are provided to these schools like if there is any sort of subjects of appropriations or whatever it might be?

Absolutely. We can get that information. I mean you know, it's public record of what their reimbursement by state is and understanding that the, as the structure of this deal is written, the EMO, Imagine, the education mandatory organization, their fee is subordinate to us so we have significant coverage when you take into fact that it's generally in the neighborhood of 1.5 to 2.

Yes, Tony, this is an industry where it's not a profit-making industry as much so you don't really have coverage determined by profit. So, because the schools spend all of its reimbursement. But what you do look at is what are the subordinated or discretionary elements below us, and that gives us our 1-1/2 to two times coverage. Otherwise, you also look at what's called our occupancy burden rate, and occupancy burden rates are in the school area, are usually about 15% of their operating budget and we're generally in some of these, we're maybe coming upwards to 20%. That gives us a little lower coverage, the 1 1/2 times with new schools and then they're trending down towards 15% or below 15% towards 10%. Now beyond that, we have credit support in this transaction where we have posted a letter of credit for 10% of our investment, uh, for a period of time until there is a demonstrated seasoned enrollment in place that is prenegotiated bases for release of that credit support.

And does Imagine have much of a balance sheet of their own? Do they own any of their other schools, what portion of the portfolio does this represent?

This represents right now about half the schools that they have.

A third to a half.

They also manage additional schools. So, Yes, they have a balance sheet beyond what we have done with them.

So they actually own -- .

They own some, they developed them. Generally we're buying them post construction so they're carrying some of that on their balance sheet.

And that general credit secures your portfolio?

Yes.

Okay. Thanks.

Thank you, Tony.

(OPERATOR INSTRUCTIONS) At this time, there are no further questions.

Okay. Hearing that, I guess we'll thank you for joining us. I know this is always a busy season of other calls. Let you go to pursue those other opportunities. Thank you and we look forward if you want to call, give us a call. We'll try to answer your questions otherwise. Thank you very much.

Thank you.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.