EPR Properties (EPR) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Entertainment Properties Trust earnings conference call. My name is Jasmine, and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. David Brain, President and CEO. Please proceed.

Thank you. Thank you, Jasmine. Thank you everyone for joining us today. This is David Brain, I will start with our preface which is as follows. This conference call includes forward-looking statements as defined by the Private Securities Litigation Reform 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 conditions and results of operations may vary materially from those contemplated by such forward-looking statements, discussions of the factors that could cause such results to differ materially from those forward-looking statements are contained in the Company's SEC filings, including the Company's report on Form 10-K for the year ending 12/31/08, soon to be '09 as well. Again, thank you for joining us. We always appreciate your taking the time. It is the second installment of us holding our call here at the end of the day, to more immediately follow our press release outside of the trading day. We hope this provides a better and more informed market when trading opens. With me as always to elaborate on Company news, our Chief Operating Officer, Mr. Greg Silvers.

Good afternoon.

And Chief Financial Officer of the Company, Mark Peterson.

Good afternoon.

As usual, I want to remind direct to those of you who might be dialed in just by phone, once again there is a simultaneous webcast, we will have some slides, and that is available from our website, eprkc.com so you can go there to catch the slides.

Starting with those, I have here are your headlines for EPR for the fourth quarter of 2009. First, 2009 is over. The lessons learned will endure. Second, the Company raised substantial equity in the quarter just completed, about $190 million. Proceeds were used largely in two attractive multi-property transactions in core business areas.

Third, fundamentals for the vast majority of our portfolio outperformed the economy and most retail categories throughout '09, and continue to operate with attractive results.

Fourth, EPR's recurring FFO per share and dividend outlook for 2010 is a bit lower than earlier guidance, due to a little bit of additional equity raised, a delayed closing, again of our Toronto property acquisition, and reserves for expenses we may incur during the year, from a more aggressive posture towards rehabilitating our underperforming assets.

For all of this news let me go to our first headline, which deals with 2009 being behind us. Well, despite the pain of the year that has just ended, I think it is instructional to look back for what it can offer. 2009 was certainly a different year, and we all hope not to repeat it, but as we look back there are positives and there are lessons.

In 2009 our focus, along with the markets overall, changed from growth and accretion to liquidity and safety. We made it through the most perilous economy in capital markets in at least half a century, and we made progress on key issues of solvency and safety.

During the first half of '09 the depth of the capital market crisis, we successfully renegotiated our line of credit with substantially the same availability, and only a modest increase in rate, attributed to our investment portfolio quality and performance. In the first three quarters the year we raised nearly $100 million in common equity, and another $190 million in the fourth quarter.

Importantly, we were not sellers in late Q2 and early Q3 at the lows of the global crisis and our trading. Our stock sales were at an average gross price of over $30, more than a 25% premium to our annual 2009 volume weighted average price.

We acquired nearly $200 million in assets throughout the year at attractive, prices without incurring any new net debt.

The overall impact of these actions was to A) increase our pool of unpledged assets , and secondly, B) lower our debt to equity, and debt to asset ratios. While these good things were occurring, we did experience some setbacks as well.

We had about 10% of our investment portfolio fall into non-performance at about approximate another 5% reset to lower yield than originally expected. All of this brought us to reduce our cash flow per share by just under $1, and our dividend by approximately $0.75 from our '08 results.

We have taken over $100 million in charges and reserves for underperforming assets. There are lessons to be learned, and I want to mention them, as we have been asked what was learned by many shareholders. The impressions we take with us are also instructional about the future path we will follow.

Our great recession takeaways are primarily two-fold. First, stick with our demonstrated practice of maintaining a strong balance sheet, in terms of low leverage and high coverage of debt obligation requirements. Also continue to pay attention to massing asset and liability maturities, with a firm eye on spacing or laddering our large liability obligations, even at some cost. These practices served us well during the turmoil, and will do so during any aftershocks.

Second, invest in areas of high confidence and granular nature with in-place cash flow. We have been well served by the vast majority of our portfolio that follows these themes. We erred in a couple of large investments that seemed good, but were reliant on unsustainable trends, and partners that lacked appropriate confidence and/or capital.

I want to be clear that we have no intention of repeating investments in the type of large, speculative, multi-tenant public-subsidy supported projects that have been the dominant source of our reserves, write-downs and reduction in guidance.

That being said we still have a couple of large projects in our portfolio to which we are going to have to devote some effort and resources. Our first interest will be to sell down or out of these positions but we will be patient, and our overarching objective will be to maximize our recovery or return on those investments.

Interestingly, those things that were problems in '09, are now poised to be elements of increased returns as we progress in 2010 and beyond. As we rehabilitate or recover and redeploy these investment amounts, there is incremental FFO to be gained, that would be additive to our present guidance or future results.

Our second headline today deals with the substantial equity raise in the quarter, $190 million, and its use in a couple of recent transactions. Greg has details on these investments, but I want to point out a couple of things. We were very pleased with the reception on our offering, our ability to upsize it, further still the shoe being exercised to make the proceeds approximately $190 million, making it the largest secondary offering in the history of the Company.

We were also happy to report that we employed the vast majority of these funds, about $165 million, just as we had outlined in our offering documents, in two multiple property transactions with prior customers. Please note that these two transactions involving the purchase of 15 movie theatres and 5 Public Charter schools are exactly the type that I noted would be our focus going forward.

Our third headline was that the fundamentals for the vast majority of our portfolio outperformed most retail categories and the economy in general throughout 2009, and continue to do so. I think you have to be living under a rock not to be aware of the robust growth of box office receipts, but in case you are not, let me inform you that 2009 was a record year, with 10% growth over the prior, with a total of over $10 billion. Post-Avatar things have cooled a bit, but growth remains positive through the beginning of 2010, running about 2% ahead of the same time last year. And please note the door has been opened for the type of growth we have spoken about before on these calls, due to digital, 3D, and alternative content.

Now there is not a lot of news about our Public Charter Schools portfolio, except to tell you that the enrollment is strong at the five recently-acquired school properties, consistent with or better than our 86% occupancy reported for the in-place portfolio in '09 for the '09/'10 school year.

The ski season is not over at our ski properties, but the reports we do have that run through President's Day holiday, show revenues up about 1% year-to-date. And the outlook for the whole fiscal year better than that. This is because the year-to-date numbers include almost next to nothing for November, due to the warm weather that prevailed over the country at the time, and the current weather and snow outlook appears to carry, appears likely to carry us through a strong March and April this fiscal year, and these months last year were nearly zero due to an early spring. So the comparability ought to be very favorable.

Our Vineyard and Winery investments have felt the greatest negative impact from the great recession. Unit volume has remained solid for the industry overall, but pricing pressure and brand shifting, the lower cost labels compared to our clients, that represent more of the middle class price points, has brought us to need to recognize some impairments and create some reserves. We largely feel these are temporary or minor in nature, and look for improvement in this area, as the industry has begun to note some recovery.

As reported earlier, we are on hold regarding further investments in this category, until we gain greater clarity about the industry's outlook, and our key investment thesis of value stability.

Our last headline of the quarter concerns our outlook towards earnings growth in 2010, and it is that EPR's recurring FFO per share and dividend outlook for 2010 is a bit lower than our earlier guidance, due to the additional equity raised, a delayed closing in our Toronto property acquisition, and reserves for expense we may incur, due to a more aggressive posture towards rehabilitating our underperforming assets.

Last quarter we reported to you that we had an outlook towards a 1% to 4% increase in recurring FFO and dividend paying capacity, due to three things. The performance of our investments, the strong position of our balance sleet, and the prospect of some large attractive transaction opportunities. While these positives are still largely either completed or still in place, but we feel compelled to notch down our guidance a bit, due to raising a little more equity than anticipated, and deploying a bit less of it in our last transactions.

Not altogether a bad thing to have a little extra cash, or room in your capital structure, but it does come with a price, and that is a few cents per share in results. We had also planned on completing our purchase out of receivership, the Toronto Dundas Square project at the beginning of the year. This is our mezzanine investment property that is performing, for which we cannot by accounting rules recognize any income until a purchase is completed. We are working diligently to complete it, and we have signed a purchase agreement, but we are at the mercy of the Canadian court process to bring it to closure. We are hopeful to reach our objective any day now, but missing a couple of months of income recognition also cost us a couple of cents.

The remainder of the reduction in guidance, is due to provisions we are making for expenses we may incur, as a result of actively and aggressively pursuing the rehabilitation or recovery of some of our underperforming assets. In some cases we have been patient and largely our patience has been rewarded, but we feel broadly this time that the time has come to take steps to incur necessary costs and initiate actions, to get on the road to recovery, and we either are, or are beginning to do so.

Really there is no substantial change in our business outlook, but these couple minor adjustments of our perspective from last quarter lead us to adjust guidance. We do of course always endeavor to deliver actual results ahead of our guidance, and do think there is a decent possibility of such, through the rehabilitation or recovery and redeployment of the underperforming assets I mentioned earlier, or the greater execution of greater than $100 million of new investments in the second half of the year that our guidance contemplates.

For more detail on all of these, I will turn it over to Greg, and then later to Mark, and I will join you before we go to Q&A. Thank

Thank you, David. In 2009 most of our portfolio, particularly our theatre assets, performed quite well. We did have some underperforming wine assets needing rehabilitation, and some issues needing resolution that we focused on for much of 2009. However, in the fourth quarter we resumed our acquisition activity with a very strong theatre portfolio acquisition, which I will discuss in detail later.

First I would like to discuss the portfolio and its performance for the year. The box office continued to demonstrate its strength through the holiday season with overall performance up 10% year-over-year. Our corresponding rent coverage was up approximately 8.5% and closely followed the success of box office. As we previously stated, our theatres remain 100% occupied.

In 2010, we will experience our first lease rollovers in the portfolio. As we have discussed in previous calls, we anticipate that three of four leases will be renewed, pursuant to the terms of their lease, as each of these theatres generates in excess of $1 million of free cash flow after rent.

One of our theatres, however, will need to be resized to reflect its current market position. This theatre was the original Megaplex Theater built in 1995 in Dallas, Texas, and as you can imagine with its success several theatres have been built to compete directly with it.

As a result the theatre will probably be reduced from its current 24 screen size to a 14 screen theatre, with EPR recapturing the excess space for use by another tenant. The lease term for this theater expires at the end of 2010, so any actual recapture of space will occur in 2011. The cost to redemise this space should be approximately $1 million to $2 million, and will be part of our 2011 capital budget. With regard to tenants for this space we are currently finalizing the term sheet for the theatre space, and we are actively talking to other entertainment users for the excess space.

Additionally, as a result of this reconfiguration, the parking requirement will be diminished allowing us to recapture approximately six to seven acres in the parking field, for pad site development, which should offset any significant income displacement from the resizing of the theatre. We are currently analyzing the parcel to determine the optimum location of these pads, and the various uses and tenancies that will complement the property.

Our ski assets continue to perform very well with overall ski revenues up approximately 1% through President's Day weekend. While there still remains approximately six to eight weeks in the season these numbers indicate that the 2009/2010 season continues to demonstrate the strength of the metropolitan daily ski model.

As we discussed in our last call, our Public Charter Schools have an 86% occupancy rate, and based upon these numbers should generate a strong 1.8 rent coverage. We are very pleased with these strong numbers, and are equally pleased with the increasing recognition of the success, enduring nature of the Public Charter School movement.

Our winery and vineyard portfolio continues to lag relative to the performance of our other assets, however, we are beginning to see tenant interest in some of our non-performing assets, and we are hopeful to release these assets in 2010, and make them once again a productive part of our portfolio.

While we often talk about challenges in our winery and vineyard portfolio, it should be noted that our largest tenant Ascentia, which comprises over 50% of our winery and vineyard assets, has been and remains current on their rent obligations.

Our investment activity for most of 2009 was concentrated on finalizing funding obligations and completing developments which were previously committed.

In the fourth quarter following our $190 million equity raise, we closed on a 15-theatre acquisition at a purchase price of approximately $121 million. We structured the transaction as a triple net master lease, with the tenant, Rave Cinemas, responsible for all costs associated with the properties.

This portfolio is geographically diverse, and significantly increases our northeast presence, and based upon the rent allocations in the transaction would have a strong 2.0 rent coverage. When we disclosed this transaction in the equity offering, we discussed the transaction involving 19 theatres at a $135 million acquisition price. However, as a result of due diligence and operator anti trust issues, four theatres were dropped from the group.

Notwithstanding the loss of the four theaters we were very pleased with the transaction as it demonstrates that EPR remains the primary supplier of real estate capital to the exhibition industry, an industry that has proven its stability through economic cycles.

Subsequent to year end we completed the other transactions reference in the equity offering, our acquisition of five Public Charter Schools for approximately $44.5 million, and our commitment for $4.5 million of expansion funding. These assets are consistent in quality and execution with the existing portfolio, and are subject to the terms of the existing master lease with Imagine. Furthermore, at their current enrollment levels the schools should generate rent coverage of 1.8 times, consistent with the existing portfolio.

With regard to our Toronto Dundas Square project, we continue to make progress on completing the acquisition. This process is taking longer than we had hoped, but the receivership process is dictated by the courts not us, and I am pleased to announce that we have now executed the purchase agreement, and are moving through the closing process.

We believe this process will take no more than 30 days, as the major hurdles such as the approval of the court and financing terms are now in place, and we are simply trying to finalize third-party estoppels and confirmations. We look forward to completing the transaction in the near term, and placing the asset into productivity.

With regard to our investments with Louis Cappelli and his affiliates, during the fourth quarter we commenced legal action demanding payment of all outstanding obligations. Given that these matters are now subject to a lawsuit there is little that we can say at this time other than the borrower under each of the respective notes has failed to meet their payment obligations under the notes, and we pursuing our legal remedies.

With the execution of our recent transactions, we are beginning to see more opportunities for both theatre and Public Charter School acquisitions. As a result our 2010 capital plan provides for investment spending of approximately $100 million of additional spending beyond our recently-announced Public Charter School acquisition, and our pending acquisition of the Toronto Dundas project. However, as most of these opportunities are still in the early stages, this spending should occur in the latter half of the year.

With that, I will turn it over to Mark.

Thank you, Greg. Hopefully everyone listening to the call is aware of our quarterly investor supplemental, which can be downloaded from our website. Before we get into the details of the various line items I think it is important to help you understand our results for the fourth quarter and the full year, excluding the impact of the charges recorded for these periods.

I will provide additional color on these charges when I go through the variance analysis, but for now I simply want to draw your attention to these items, so you can more clearly understand our operating results.

As illustrated by the first slide, during the fourth quarter we recorded $5.2 million, or $0.13 per share, in loan loss provisions, and an additional $6.4 million, or $0.16 per share, for an impairment charge. Additionally we expensed $3.2 million in transaction costs, or $0.08 per share.

As such, FFO for the fourth quarter was $17 million, or $0.43 per share. If we add back the combined $14.8 million, or $0.37 per share for these charges, our FFO per share as adjusted was $0.80 for the fourth quarter. In a similar exercise if we adjust the full year results for these same types of charges, our FFO per share as adjusted was $3.35 for 2009.

I will now walk through the quarter's results, and explain the key variances from the prior year. As you can see on the next slide, for the quarter our net income available to common shareholders decreased compared to last year from $27.8 million to $6.7 million. Our FFO also decreased compared to last year, from $38.4 million to $17 million. On a diluted per share basis FFO was $0.43, compared to $1.15 last year, for a decrease of $0.72.

Now looking at the details of our fourth quarter performance, our total revenue decreased 10%, compared to the prior year to $69.3 million. Within the revenue category rental revenue increased 2% to $52.4 million, an increase of approximately $1 million versus last year, and related primarily to an increase in base rents on existing properties, partially offset by vacancies, as well as the impact of a weaker Canadian exchange rate. Percentage rents included in rental revenue were $236,000 versus $268,000 in the prior year.

Mortgage and other financing income was $11.6 million for the quarter, down $8.2 million from last year. For the fourth quarter of 2008 financing income recognized on the Toronto Dundas Square and Concord projects totaled $8.4 million, and no income was recognized for these investments in the fourth quarter of 2009. In fact, no income was recognized for these investments for all of 2009.

On the expense side, our property operating expense increased approximately $0.9 million for the quarter versus last year, due to an increase in the provision for bad debts of $0.4 million, and increases in expenses at certain of our retail centers.

G&A expense decreased approximately $0.9 million versus last year to approximately $3.4 million for the quarter. This decrease is due primarily to lower compensation expense. Transaction costs were $3.2 million for the quarter, versus $0.6 million last year.

In 2009 a new accounting pronouncement on business combinations, Topic 805, went into effect requiring acquisition related costs incurred in connection with business combinations to be expensed as incurred. Prior to 2009 these costs were capitalized as part of the acquisition.

Accordingly, cost expense related to such transactions as well as costs associated with terminated transactions increased versus the prior year, and are now included as a separate line item entitled transaction costs in the Company's consolidated Statements of Income.

During the fourth quarter we recorded a loan loss reserve of $5.2 million on a note receivable and impairment charges of $6.4 million. These non-cash charges related to our EOS and Cosentino Winery and vineyard investments and were based on third-party appraisals, as well as management's judgment.

Now turning to our full results in the next slide, for the year ended December 31, 2009 our net income available to common shareholders decreased compared to last year from $101.7 million, to a loss of $22.2 million. Our FFO decreased compared to last year from $142.6 million to $4.9 million, on a diluted per share basis FFO was $0.13 compared to $4.54 last year for a decrease of $4.41.

Looking at some of the significant items for the full year 2009 our total revenue decreased 5% compared to the prior year to $270.8 million. Percentage rents included in rental revenue were $1.5 million, versus $1.7 million in the prior year. Mortgage and other financing income was $45 million for the year, or a decrease of $15.4 million versus last year.

As I mentioned earlier, we recognize no financing income on either the Toronto Dundas Square or Concord projects in 2009, and $23.1 million in financing income was recognized for these projects in 2008. This decrease was partially offset by the growth in financing income associated with additional investments we made in 2008 and 2009.

On the expense side, transaction costs were $3.3 million for the year, an increase of $1.7 million versus last year, and were up for the same reasons I discussed earlier for the fourth quarter.

As detailed in our press release, the non-cash charges for loan losses and impairments for the year of $71 million and $42.2 million respectively, relate to Cappelli-related investments, the Toronto Dundas Square project, and certain investments related to our vineyard and winery portfolio. We have previously discussed each of these items as well.

Turning to the next slide, I would now like to turn our discussion to some of the Company's key ratios. Please note that our expanded supplemental summarizes these key ratios on Page 14. We continue to report healthy levels of interest coverage at 3.1 times, fixed charge coverage at 2.2 times, and debt service coverage at 2.3 times.

Our supplemental includes the calculation of AFFO, or Adjusted Funds From Operations, and AFFO per share on Page 10. Given the charges for this quarter and for the year, as well as other items considered in the calculation we believe that AFFO per share provides an important measurement of our operating performance. You will see that for the fourth quarter we had AFFO per share of $0.79. This number is impacted by the timing of the investments made with the proceeds of our $190 million equity offering in early November.

As Greg mentioned, we deployed over $160 million of these proceeds, but not until late December and January. With our cash common dividend of $0.65 per share, we had an AFFO payout ratio of 82%, which is a bit higher than last quarter, due in part to the investment timing that I just discussed. Nonetheless, this ratio continues to be a top notch metric compared to other REITs.

Next I would like to point out our debt to adjusted EBITDA ratio, which was a very healthy 5.1 times for the quarter. Adjusted EBITDA in this calculation is defined as EBITDA adjusted for the non-cash charges and transaction costs.

Let me turn to a discussion of our capital market activities for 2009, as well as our liquidity position. Due to the downturn in the economy and distress in the capital markets for most of 2009, we were primarily focused on maintaining adequate liquidity and a strong balance sheet.

As shown on the next slide, we completed our amended and restated line of credit in June 2009, six months ahead of its maturity, and we deleveraged our balance sheet primarily through periodic equity issuances under our direct share purchase plan.

As conditions became more favorable in the capital markets towards the latter part of 2009 and our costs of capital improved, we raised approximately $190 million of common equity in November in a larger public offering and began making new investments as David and Greg described. For the year we raised a total of $285 million in common equity.

Turning to the next slide, at year end we had total outstanding debt of $1.1 billion, of which approximately $1 billion was fixed rate long term debt, with a blended coupon of approximately 5.9%. We had $35 million outstanding under our revolving credit facility at year end, leaving approximately $178 million of availability.

Our unrestricted cash on hand at year-end was $23 million. Our book leverage was 43%, or 39% on an undepreciated book basis. We have finalized the terms of a credit facility with a group of banks, to provide CAD$100 million first mortgage financing, that is expected to close in conjunction with the purchase of the Toronto Dundas Square project. The interest rate is 6% at today's rates, and the term is two years with an extension option of one year subject to lender's approval.

The shorter term duration of this debt provides us greater flexibility if we decide to sell the property, or enter into a new joint venture. We expect to consolidate the financial results of this property subsequent to the purchase.

As we have previously stated, our only consolidated debt maturity in 2010 and 2011 without a contractual extension option, is the $56 million secured by our Concord investment. The $114 million note on the White Plains project matures in October of 2010 is non-recourse to EPR, and has an extension option for two to four years.

However, the combination of the projects in-place income, and our dispute with Cappelli, makes it unlikely that we will provide the level of financial support that the lender will require in order to extend the note, and thus the lender may choose to foreclose on their collateral.

Our current plan has approximately $2 million of negative FFO for this project. However, any negative FFO related to this project will effectively become a non-cash item for EPR, if we do not further contribute capital to the partnership.

As you can see, with manageable debt maturities over the coming years, we are well-positioned for growth.

Turning to the next slide, we are revising our 2010 guidance for FFO per share to $3.30 to $3.45. This FFO guidance reflects the revised outlook on the timing of the purchase of Toronto Dundas Square, the impact of the Company's issuance of common shares in November that I described earlier, the reserves that David described related to rehabilitating underperforming assets, and additional capital spending of $100 million in the latter half of the year. The revised guidance for 2010 excluded any transaction costs that must be expensed per the new accounting guidance.

Additional transaction costs related to the acquisition of Toronto Dundas Square are expected to total up to $8 million in the first quarter, or $0.19 per share consisting primarily of land transfer taxes. Including the additional transaction costs of $0.19 per share related to this acquisition, our FFO per share guidance for 2010 is $3.11 to $3.26.

Our investment spending guidance for 2010 is approximately $270 million, and consists of $117 million associated with the acquisition of Toronto Dundas Square, $53 million associated with the acquisition of Public Charter Schools, and $100 million of additional investments in the latter half of 2010.

Now I will turn it over to David for his closing remarks.

Alright. Thank you, Mark. Thank you, Greg before that. We will go to your Q&A, just to wrap up, just to recap I mean I think hopefully the message was clear that the fundamentals are broadly good at the tenant level in our portfolio.

We certainly have more adjustments and charges that we would want for sure, but this is a product of the recent economy, but from where we stand now, with a balance sheet we are in great shape, on the I think, looking at the potential recovery of some of our dormant assets and some good acquisition opportunities as we have talked about in the property categories that are really performing well, these are elements that can support growth and a positive outlook.

So we look for, although we are taking down guidance a bit, we still look for good things ahead, and we will go to your question and answers now.

(Operator Instructions). Your first question comes from the line of Greg Schweitzer with Citigroup. Please proceed.

Hi guys, Michael Bilerman is on with me as well.

Hello, Greg. How are you doing?

Hi Michael.

The $100 million in additional investments that you have for this year, how much of that is allocated towards the rehabilitation assets?

The current plan is that's for new acquisition, not for the rehabilitation assets.

So they are for new theatres then?

New theatres, Public Charter Schools, the kind of things that David talked about we are concentrating on.

And then how much are you planning to spend on the rehabilitation assets?

Greg, that is a difficult thing in the sense that it could be a lot of different things in the sense as we have talked about earlier, we have commenced some legal actions, so there could be expenses related to that. So it is not necessarily a plan for new capital to spend in there, as much as it is expense dollars necessary to push agendas forward.

Greg, we will have legal costs, in some cases professional fees and some marketing expenses, but we don't really know how much capital investment we'll have given a reuse, we may be selling out of these assets, so we don't have a budget for any of that $100 million for capital reinvestment in those rehabilitation assets at this time.

Okay. Then what is the current marked value on the total of all those assets?

Well, I think we said before I said it is about 15% of the portfolio, so that would make it around $400 million or so in assets, broadly taken I think about 10% or thereabout, about $300 million in non-contributing assets right now that includes we think one that is going to come on very shortly in terms of Toronto project, the Concord project, and then there are some that are lower performing that we expect to notch up, because they just have excess land parcels and things, and that includes like our Schlitterbahn project.

But - - so overall as I said before, the round numbers are 10% on a nonperforming basis of the portfolio, and another 5% on an underperforming basis of the portfolio, and we have in those same numbers are some of the smaller investments we have in the wineries and vineyards, that are also either non- or underperforming.

Okay. And then just a question on guidance. Do you have any expectation on what the potential transaction costs related to Topic 1805 could be?

Well, on Toronto Dundas Square we specifically gave that, that is $0.19 per share. So we gave guidance kind of with and without that.

I thought it was on top of that. Okay. Great. Thank you.

Thank you, Greg.

Your next question comes from the line of Anthony Paolone with JPMorgan. Please proceed.

Thank you. Can you walk us through just how you arrive at not taking any reserves against or impairments against the Concord deal at this point?

Tony, we felt before we have appraisals that support a level of value, far in excess of our level of investment. It is not going to - - the income associated with it right now, but that is what we have been provided by third parties through this same process, and so we really don't have an election to take any charge there.

Okay. So I mean is there, just trying to get a sense of the risk that at some point down the road that could change. Do you have to update those appraisals, or how does that work now that it seems like you are flipping the switch, and moving into more of a litigation mode on that stuff?

Yes. We do talk to the appraisal on a quarterly basis, I am sorry to the appraiser on a quarterly basis to get an update, and make sure nothing has changed in terms of what they think the valuation is. As Greg - - as David mentioned there is quite a bit of room there, from their original detailed valuation, but nonetheless we do talk to them quarterly.

Yes, so I don't know. I don't know it's a part of the process we are going to start, there may be additional appraisals, Tony. As it stands right now I don't have any calendar, any specific schedule of when that would be, other than what Mark just outlined of what we do in looking at that. So we don't have any expectation of it at this time.

Okay. On Toronto can you just refresh us on the NOI coming off the project right now, and I guess outside of the $8 million that you outlined, how much more do you have to inject into that to get it all wrapped up, I guess the difference between the current first mortgage and the line you have set up? What does all of that add up to?

Well, on the capital side we had $120 million, there was a $119 million first mortgage Canadian on the project, and we have agreed upon terms and have a bank group set up for $100 million. So there is about a $20 million Canadian difference there, and then we have the transaction costs that I spoke about, of around $8 million to $10 million. A couple million dollars was recorded, part of that was recorded this quarter.

Is there any other capital just from other leasing, or otherwise that you will need to put into the project?

Tony, not at this point. I mean we do have, we are about 90% to 91% occupied, so we have opportunities, and I am sure that will come with some TI allowances, as we have it, but there is none built in initially.

The real upside for leasing income there doesn't come with any additional TI's from the billboards, which are at a lower level of utilization than we think they ought to be, we've led to believe they ought to be even by some people that have looked at it, experts in the field, so we are talking to leasing agents. So there is substantial NOI, potential upside there without any additional TI because the billboards don't require that.

Okay. Got it. And what was the NOI on that, just refresh our memory?

I think it current is 12.5 to 13, in that range.

US or--?

No. That is Canadian.

Okay. And then lastly on the vineyards, I guess there is about $8.5 million that you put into Ascentia in the quarter. Just was that your choice to put more capital into that deal, or is that part of a broader commitment?

That was part of a broader - - a commitment of relating back for a long period of time when they made some improvements and they put $12 million of capital in, then we fulfilled the remaining balance of some things that we had talked about initially willing to do.

Across either that or your other vineyard investments, how much remains in terms of capital that you all have committed to those?

I don't think we have anything further. I don't think, we do not have anything --

We don't have scheduled capital, further capital investment in the (inaudible).

Okay. That is all I have got. Thanks.

Thank you, Tony.

Your next question comes from the line of Andrew DiZio with Janney Scott. Please proceed.

Yes. Thank you. Good afternoon. With your ski loans, is there still $25 million plus accrued interest due this April?

There is, but the agreement provides that if that is not paid off, that it rolls into their other mortgage loans we have with the same tenant, Peak Resorts.

Right. And does this become a current payer at that point?

It does.

It does.

Okay. Thank you. And then looking over more towards the movie portfolio, how close would you say you are with regards to percentage rent thresholds, just broadly across your portfolio?

Well, I would say that we probably have about 10% of our theatres that are at or very near their percentage rent thresholds. That varies, Andy, just a little bit because a lot of our leases reset their rents every year, and if their rents go up that changes your break point. But as long as, if we can consistently have some of these double-digit growth years it closes those gaps significantly.

So we have close to 10% of the portfolio in the percentage rent payment mode. Now that is not 10% of the rents, but it is just 1% closer, but then we have another as Greg indicates, another 10% or like amount that could come in to percentage rents as well.

Okay. Thanks. And then just lastly with theatres, how do you look at potential opportunities internationally beyond, I know you are in Ontario right now, but beyond that?

I mean it is clearly something that we see opportunities at occasionally. I mean we have talked about our exploration of ideas in China, and the explosive box office that is going on there. Right now other than those two opportunities, I would say we are primarily exclusively focused on North America and those markets, and continuing our exploration of China.

The primary international opportunity we think as of interest is in China. China is in the early stages of an explosive growth. We are still determining the opportunity really to take advantage of that. We have spent some money. We are in a definite exploratory mode there, and spending some small amounts of money, to try and determine the best way to take advantage of that opportunity.

But to David's point, Andy, I don't want to, David you can correct me, the box office growth in China for the last four years, whereas this year's 10% it's been averaging 30%.

Yes. In the US it has been 10%. This year in China, really the box office is more like 40%, and this is about the sixth consecutive year, and China box office just rolled over $1 billion, where US box office is $10 billion. So it is still despite its high level of growth, it shows you how embryonic it has been, but it is in a hyper growth mode, new theatre openings are being well received, well attended, but it still has a long way to go, because the opportunity for China's box office is to, well, I shouldn't say, is to be comparable to the US. I mean that is it could grow ten-fold over the next five years.

Okay. Thanks, guys.

Thanks, Andrew.

Thanks.

Your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed.

Hi, guys. Afternoon. The first question, is the Concord in default?

Yes.

Yes.

Oh, it is. Okay. And can you just remind me of your position in the capital stack, and then the process of foreclosure?

We are in a first position loan on the resort land and areas, about 6, 1,500 acres, and we are in a first mortgage position.

First mortgage position.

And our other - - that is on the Concord. On the other matters with Cappelli we generally have mortgages secured. I should say, we have security instruments, secured by his interest in those projects, and then personal guarantees on all of that.

And did you have a more junior position in another tranche at the Concord, had another tranche of collateral?

Yes. On the other, we have a second position and we have a pledge of equity in the entity that owns the license.

Okay. And so are you in the foreclosure process - -?

No.

- - at this point?

At this point we are just demanding payment.

Okay. And so in terms of timing what should we anticipate?

Jordan, I think it is kind of a very difficult situation and is really dependent upon how the facts play out. I mean borrowers have lots of alternatives that they can explore too, and including bankruptcy. So we don't know how, as David said, I think we were patient for a while, we talked about in our previous calls being patient. I think our patience had worn thin, and we felt it was time to begin the process of taking control of our destiny.

Okay. But just to be clear do you fully intend on moving forward, and aiming to perfect your interest in the collateral at the Concord?

Well, I mean if the case may be if we, the idea would be you would get a monetary judgment and then you would go to seek, realize on your collateral. However, at any time, let us be clear that we can go away in exchange for a payment of what we are owed.

I mean we are demanding first what we are owed and this is a recourse loan, so that is the first thing before actually going to a foreclosure on the property. We will have to see what we get in that regard first.

Okay. Thank you. David, in your commentary you opened up, you said you looked to sell down or out of some of the positions that seem to be non-income producing, and/or trying to maximize recovery. Can you just maybe elaborate on that a little bit with specifics?

Sure. I think the Concord is foremost of that list, that is what we are going to try and do. And then second of all we have, as we have indicated at the development project we have had here in the Kansas City area, the Schlitterbahn Park, that got truncated to a much smaller development by virtue of the economy, and we have a significant amount of surplus land, so we are looking to sell down or out of those, that position. And likewise we have indicated our Toronto project during the process of the receivership, we had significant interest of people approach us with regard to interest in that property in whole or in part, and we are continuing to follow-up on that.

Okay. Did you give the expected NOI off of Toronto?

Yes.

Yes, I think we did.

I'm sorry. I didn't catch it.

Currently 12.5 to 13 on that.

So 2010, basically?

2010. For the full year 2010.

That is a full year, yes.

Okay. Perfect. And then just as it relates to the transaction costs you booked in the quarter, did those - - were those related to a business combination with the theatres or what?

The business combination portions really is related to the Toronto Dundas Square acquisition, we have been working on that project in the fourth quarter, and we will continue to work on it in the first quarter. So that was the business combination aspect of it.

So you sort of have to expense them as you go?

You do. That is the new rule and you will start seeing that in a lot of REITs that are acquiring businesses that meet the definition of a business combination.

Less the net lease, yes.

Okay. And lastly just on the reserves, can you maybe quantify the amount of reserves that seem to be causing some amount of the reduction in guidance?

Well, I think I indicated that we have lost by virtue of kind of being over equitized here a little bit, and the transactions we lost a few cents there, we lost a couple cents with regard to the Toronto Life timing, we have a couple cents of pickup. By virtue of - - we think we are going to pickup by virtue of our investments in the second half the year, so that makes gross would be - - would net down 8 kind of mid-point, so that would be something on the $0.05 we are allowing per share for these expenses. That kind of order of magnitude of expenses.

But you said that is missing on a couple of months of Toronto for instance, that is included in there?

No. No. It is really getting to that. There are multiple components. We're down about $0.08 from prior guidance, kind of mid-point to mid-point is where we feel like it.

Okay.

So you really come down $0.03 for the - - the Toronto Life rather, timing is $0.02. You come down $0.03 for the over-equitization. You come down another $0.05 for the reserves we are going to take for collections, and then you come back up $0.02, because we think we are going to have a little more acquisitions in the second half of the year that will add some accretive benefit.

Okay. Anything in particular on the reserve? I guess I'm not understanding the language, a reserve due to more aggressive posture on rehabilitating the Company's underperforming assets? What is that in English?

We anticipate higher, we anticipate higher expenses. We decided as we relook at the year and the way we are going to aggressively approach this, we are going to incur more expense than we originally budgeted when we had our guidance last time.

I think, Jordan, you can also look at that as anything, any legal expense that we pursue in some of the litigation we have talked about are expense numbers.

Yes. And we didn't have that all in. We didn't necessarily, but we've decided on the timing to press ahead, and so we are now budgeting something for those expenses.

Okay. That makes sense. Thank you.

All right. Thanks.

Your next question comes from the line of Gabe Poggi with FBR Capital Markets. Please proceed.

Good afternoon, guys. How are you doing?

Hi Gabe. How are you doing?

Three quick questions. One is the new theatre assets, newly acquired theatre assets, you guys historically had given kind of some quartile ranking numbers for where your movie theatres are, you know X%, number 1 X%, Top 25, et cetera. Where do those new assets fit? Are they in that same ballpark, are they top assets? I assume they are in top quartiles.

Second question is for the $100 million you guys are looking to deploy in the back half of the year, I know it is going to be core stuff, you had mentioned that earlier. Are there still those same opportunities you had mentioned in the past, distressed owners of good assets? Are you still seeing that? You guys have already obviously already acted on one chunk of it, but is that still out there? And then three, David, you just mentioned potential land sales at Schlitterbahn, just didn't know if you had any - - had been having any conversations with potential suitors? Any update on that front? Thanks.

Gabe I will take the first two. Yes, they are top quartile, top in their markets type theatres, so we are very happy with where this - - where they are at, and at the end of next quarter we will get that information specifically for you, but they are very strong theatres. With regard to what are we buying. Clearly we are still looking out for some portfolio type transactions. We are talking to some people, but we are also going to see this year we think some return back to some theatre builds with theatre operators as well, so we will have a - - we are going to have a little bit of both coming on. Now those clearly won't come online but we will begin to look at both existing portfolio and product that is out there, as well as some of our theatre operators are starting to begin to take advantage of what is their growing business, in build and locations that are underserved.

Great. Thanks.

Gabe, with regard to your last question about Schlitterbahn, we mentioned I think in the last call out at the location where we own that land, is roughly on the west side of the Kansas City area in the intersection of I-70 and 435, there has been, the new casino has been authorized, and is proceeding forward at the racetrack site, plus there has been an announcement of a new, it will be probably the class of the industry soccer stadium that is going to be used by a major MLS for their National Championships. It is also going to be home of the Kansas City Wizards soccer franchise.

Additionally, the new corporate world headquarter for Cerner, which is a major healthcare software - - major corporate citizen in this marketplace is headquartering out there. So there has been a lot of additional economic activity announced out there. It is considered to be a fairly hot spot in a very dormant area, which would be hospitality development hotels, and otherwise. So we are in some discussions with some land users, because we have a very attractive land inventory at a very hot intersection generally, I would say.

Great. That is what I was looking for, thanks, guys.

Yes.

Your next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed.

Hey, guys. Good afternoon.

Hi Rich.

On the transaction costs as you look forward I mean it seems to be coming out about 2% to 3% of the gross asset value. You think that is a pretty reasonable amount to use as we think about the $100 million you are going to possibly do in the second half?

Yes. The good news is for triple net acquisitions you continue to capitalize. It is only what is called a business combination, which is more of the Toronto Dundas Square type asset, where there is a common area maintenance, there is more operational risk. It is just the way the rules have been interpreted. So for triple net acquisitions, which is probably more likely beyond Toronto Dundas Square, more likely what our acquisitions would be, there probably wouldn't be transaction costs running through the P&L.

Okay. Good, I got you. Good, thank you. That is helpful. Then on the unencumbered assets, the percentage that are unencumbered, it jumped pretty substantially to 17% in the quarter. What else was unencumbered?

Well, the main thing was we bought the theatres, $120 million with all of the equity proceeds. We also finished the development of a wine facility that came online, and we don't count things while they are under development. But we do count them when they are done. So those were two items off the top of my head, and see what else - - give me a second here.

I mentioned that is one of the developments of the year is really, typically the Company has not had a significant profile of unpledged assets. We really had that beginning to build in the Company at this time.

Yes. Really. Those are the two major ones. It went up by about - - call it $130 million. Well, $120 million of it was the Rave Theatre transaction, and then the little, about $12 million or $13 million for the wine facility we completed, really is the main driver between those quarter-over-quarter.

Okay. Good, Mark. Thank you. And then on the purchase of the charter schools, this is more Imagine, and I think one of the things you guys had talked about was the concept of trying to branch out away from Imagine and do some other like you did with the theatres ultimately. Do you see opportunities of that sort away from your traditional operator?

Yes, I think, Rich, we are definitely going to look at it, but if you think about that the original transaction was with Imagine was about a $200 million commitment right of first refusal that we had, this kind of fulfilled that. And so I think we are out talking with several operators, and we are aggressively trying to expand our diversity of operator.

I think we want to answer the question a little like we used to answer about AMC. People used to say, do you want to do transactions away from, the answer is yes, but we also want to do more with them. We like, when we find a quality operator we like to continue to do business with them, at the same time, yes, we are interested in continuing to build the profile of our customer base in the industry outside of that as well. So we are not going to necessarily shun any kind of potential opportunities with Imagine, but we are pursuing some with other operators as well.

Okay, Dave, I got you. Good. Thank you. And then help me out with Dundas a little bit, you guys had originally a $119 million first mortgage Canadian, and yours was I think $129 million as I recall your piece. And so if you have $100 million mortgage now, do we take the 248, do we put it on the books at 248, and with a $100 million mortgage?

Well, our balance in US dollars I guess we can talk Canadian or US. But US dollars - - .

Either way.

After the charge we took in the third quarter is about $91 million.

Because we took our position down some, Rich, if you remember.

That's right. Yes. Good point. Right.

So $91 million net and then we are going to have the new mortgage $100 million, plus what we have to pay for the difference between the old mortgage and the new mortgage, which is about $20 million.

That is $20 million or US or Canadian roughly?

$20 million US or Canadian the exchange rate is not too far off right now it think it is about .95 or so. So we are closer to 210 than it would to - - .

Yes. Yes. 212, something like that is what we effectively inherent in what we booked in the third quarter was a valuation of about 212 or 213, and we will assess that again as we go to book this asset upon purchase, but that is in the ballpark of what you are going to see.

Okay. Very good. Thanks. And then did I understand correctly on Schlitterbahn, I mean when you talked about rehabbing or making improvements at Schlitterbahn, was it just the parcels, or are you thinking beyond that?

Well, I think, Rich what we are talking about now is trying to take advantage of a huge amount of undeveloped land. We are not necessarily at this point talking about making investment in new capital, but there is a lot of pad sale/land sale opportunities, whether it is with a third party hotel, or anything like that that can enhance the project, but also create cash for us.

Right.

Okay. Greg, there's really no rehabing of Schlitterbahn?

I think we meant rehabbed, and David's point of that is rehab the return that we are - -.

Yes. We are not enjoying the return we originally targeted on the investment, because we ended up having to truncate the project. We have more land, so we have essentially a higher level of land investment for the income production out there than we originally anticipated. So what we need to do is either put other income producing entities out there, or sell down in our land. One or the other, and we will reach the eventual kind of target we are looking for.

Okay. Great. Good. Thank you, guys. Appreciate it.

Thanks, Rich.

Thanks, Rich.

Your next question comes from the line of Jon Braatz with Kansas City Capital. Please proceed.

Good afternoon, David.

Hi, Jon.

Everyone. David, I think you mentioned that 10% of the theatre properties are generating percentage rents, and 10% getting closer. Last month I think, I can't remember who it was raised $800 million for the transition to digital, to help fund that transition. How quickly can that money be invested in digital equipment, and so on, and get the ball rolling? And my question is really, the other question is, as those investments are made, how does that change the percentage rents as you look ahead? Do we get more theatres generating percentage rents, or do we start seeing greater percentage rents?

Well, the DCIP announcement of raising over $600 million, is they said they can convert 14,000 screens with that. That is probably a little aggressive, but let's say, and the idea was is they think 7,000 to 10,000 of them in 2010. So that will be good. That once you get the digital, that is the digital conversion. Then the 3D overlay, if you do the 3D overlay it is fairly minor. It tends not to be 80,000 a screen, it tends to be more like 8,000 a screen.

And the digital overlay at this time seems to be the place, Jon, where you can upcharge the most, so you want to do that extra, because the digital seems to be getting you about a $3.00 premium, which is a 40% premium. That is a big, big number in the market. And there are 20 3D releases scheduled for this year already, so and it has felt like that there is more 3D capacity coming out of Hollywood than there is 3D capacity in the screen.

So right now there are only about 3,000, they are only about 10% of the marketplace. There are only - - of digital screens out, so about 3,000 to 3,500 screens. And so that will - - the opportunity is to triple those. And if you begin to get that kind of lift of the number of digital and 3D capable screens that can charge those kind of price premiums, that moves along our break points. We don't make any additional investment, we don't get any more base rent, but as the revenues go up, they will cross over their percentage rent hurdles in a faster - - I don't really have any math to apply, to give you on that, except those elements.

And certainly on the 10% in percentage rents you would expect the lift to be immediate in terms of impact on EPR.

Right.

Would you anticipate all of your theatres to be digital by - - in two years?

I do.

All of our theatres have digital components now.

Yes, but I think they are going to - - the compliment will largely be that they will all be digital, there is digital at each location, and the question in a couple of years it will be all digital auditoriums. Yes.

Okay. Okay. All right. Thank you very much.

All right. Thanks.

Your next question comes from the line of Anthony Paolone with JPMorgan. Please proceed.

Thanks. I don't think you mentioned this but in talking about the $100 million of potential deals in the second half of the year, what is your expectation for cap rates and the economics on those?

I mean I think we will be, I don't think we will see as much as we have. I think we will be back into the 10 to 11 range, closer to 11.

We were getting a little better than even the 11 [cash], Tony. But it cools off maybe in the 10 to 11 as Greg indicates. I mean our budgeting is not going to be quite as rich as transactions we close.

Okay. And then just last question, you gave some occupancy statistics for the charter schools. Can you give us a sense if there are any just underperforming schools that you are watching?

Yes. As we talked about last time I mean the only one that is kind of on our list right now is the Las Vegas school we'd spoke about last year. It is in around 60% occupancy, which is at that kind of breakeven point for us.

It is closer to a 1 0 cover.

But it is a master lease but that is the only one, beyond that there are pretty consistent in their occupancy.

Okay. Thank you.

Thank you, Tony.

Your next question comes from the line of Greg Schweitzer with Citigroup. Please proceed.

Thanks. My question has already been answered.

Thanks, Greg.

Okay. That was asked and answered. Jasmine, anybody else?

Yes. Your next question comes from the line of Andrew DiZio with Janney Scott. Please proceed.

Thanks. Just one quick follow-up. On the Charter Schools we noticed that one of your public non-traded competitors also recently entered into a deal with Imagine, do you see any more competition in that space to obtain the schools?

I mean clearly, Andrew, there is a growing awareness of the success of Public Charter Schools, and the stability that that opportunity can offer. So I think we are starting to see more people come into the market and at least explore it. I mean it's very similar to what we saw with theatres, in the sense of when we started that, and kind of defined it other people started to kind of weigh in. So I think we will see more of that. I think part of our initiative is to kind of like what we did in theatres, to get and build the relationships within the industry where we can maintain our competitive advantage.

Yes. Andrew, we hope to. We hope, we have seen other people dabble in theatres, but nobody seems to dedicate themselves the way we have, and we kind of hope that is the same situation here, but we will see.

It is interesting, the bad news is we created a competitor, the good news is we had someone significant really validate the space, and how well, how good of an investment it is. So kind of a good news/bad news scenario when you have a major competitor come in, or a major firm anyway come in the space.

Thank you.

Your next question comes from the line of [Mitchell Leeds] with Morgan Stanley Smith Barney. Please proceed.

Good afternoon, gentlemen.

Hello.

Can you hear me?

Yes, I can. Yes, sir.

All right. I did not comprehend the very beginning, the words reduction of $0.75 per share. To what does that apply?

That applied to the dividend. Our dividend payout in 2009 was about $0.75 per share lower than it was in 2008. That was one of the things I was recounting as one of the events of the year, as I was recapping the year.

Does that affect the dividend?

That is a past history. We took from 2008 dividend pay-out level to 2009 down about $0.75.

Got you. Got you. Okay.

But that is not to say that we ever expect to replicate that at all. No, our pay - - we don't have a dividend announcement today. Our dividend level is pretty consistent on a payout basis with our expected cash flow per share level for the year. I don't have - - so any dividend adjustment at this time, I don't think we expect to be very material at all for 2010 versus 2009. But I don't have a dividend announcement to make today.

Thank you very much.

Okay. Thank you.

And that is our time for the call. I would now like to turn the call back over to David Brains for closing remarks.

Well, I just again thank everybody that is still on for attending the call, and your questions. And we always look forward to hearing from you, and talking to you. And we will look forward likewise to next quarter. Thank you very much.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect. Have a great day.