EPR Properties (EPR) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Entertainment Properties Trust Earnings Conference Call. My name is Keith and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. David Brain, President and CEO. Please proceed, sir.

Thank you, Keith. Good afternoon, all, and thank you for being with us. This is David Brain. I'll start with the usual preface and as we begin this afternoon I will need to inform you that this conference call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 identified by such words as will be, intend, continue, belief, hope, may, expect, anticipate or other comparable terms. The Company's actual financial conditions, results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of these 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 on Form 10-K for the year ending December 31, 2009.

All right, with that said, let me say again, thank you for joining us. We understand this is a busy time for all and appreciate your investment of time and interest. With me to provide you all the Company news and updates are Greg Silvers, our COO.

Good afternoon.

And Mark Peterson, our Chief Financial Officer.

Good afternoon.

As we get under way, I'll remind you again we have a simultaneous webcast via our website at www.eprkc.com. We do have some slides there, so if you can you'll want to pick that up as well.

I'll start. Our first slide is as usual my headlines, and for the second quarter of 2010 for EPR they are as follows.

Number one, we undertook and achieved what for us is a seismic change in capital structure from secured to unsecured rated debt. Now notable points of this are; A. We debuted as an Investment Grade issuer; B. We accomplished a material refinancing of a third of our credit facilities or outstandings; C. We eliminated all maturities for the next two years; and D. We offset nearly all of the cost of moving to unsecured long-term bond debt by resetting our short-term credit costs.

Now, my second major headline for the quarter is that we also added substantially to our holdings with another theater portfolio acquisition and with this also continued our trend of deleveraging.

And third, our portfolio during the quarter continued to outperform the economy and peers.

Now, I'll elaborate on these headlines a bit, and then Greg, he will also add detail to our portfolio and transactions of the quarter. And of course, Mark will detail all the financial reporting. And after that, I'll join you all for questions.

Let me start by going back to the headlines with our first and largest news item, and that is our move to shift our credit market access from a secured asset-backed basis to an unsecured Company-credit basis. EPR has historically accessed the secured debt market, primarily the CMBS market for our long-dated debt financing. But as a result of amassing both a superlative long and short-term performance track record, a position of significantly reduced leverage and seeing clear indications of unreliability of the secured debt market, EPR undertook over the last several quarters, culminating in this most recent quarter, a reorientation.

EPR pursued the extensive planning, presentations and negotiation with the credit service rating agencies and others to become a rated credit and access the unsecured corporate debt market. Developing this optionality and the inherent flexibility that comes with unsecured debt is, for the Company, a very good thing. It enhances our ability to capitalize investment opportunities and to grow earnings. Now, several specific elements of our move to unsecured rated debt are notable.

A. We received an investment-grade rating of BAA3 or BBB- from a majority of the rating agencies on our debut offering of $250 million of 10-year bonds made during the quarter. Achievement of an initial investment grade rating is quite an endorsement of our business platform, fundamentals and strategies. It proves once again that upon close scrutiny our portfolio stands up and stands out.

B. The scale of refinancing achieved during the quarter was massive for us. Our $250 million bond issue proceeds used to repay secured credit elements and the renegotiation conversion of our revolving credit facility from a secured to an unsecured basis represents a third of our total credit outstandings. As a result of our restructuring, we are now positioned with $1.7 billion, or over 50% of our total assets unsecured.

C. The conversion and restructuring of all these credit arrangements leaves us in the great position of having no debt maturities for the next two years. This takes us through the vast majority of the "wall" of real estate credit maturities that has often been referenced as a trouble spot on the horizon.

D. By combining the increased cost of unsecured debt, particularly for a debut offeror, with the renewal and extension of our shorter-term revolving credit facility on substantially better terms, we created an offset especially with no material revision to FFO guidance is necessary. Our current guidance with the transactions completed in the second quarter is $3.30 to $3.40 of FFO, as adjusted, per diluted share for the year.

Now, my second major news headline for the quarter was that the completion of our investment in another portfolio of high quality theaters leased to a leading national operator. Greg has the details on this transaction, but it's important to note that the transaction was funded entirely with equity and another major step was taken along our path of deleveraging. EPR is now 500 basis points lower leverage on a gross asset basis than we were a year ago. Currently, we're now at 38% percent. This is right in line with our new policy guidance of maintaining leverage between 35% and 45%.

Then the last of my major headlines deals with portfolio performance. Our major property investment portfolio, overall we continued to outperform the economy in general and peers in terms of tenant fundamentals. Box office revenue, the primary barometer health of two-thirds of our portfolio, continues its positive trend and is up more than 4% over the prior year and year to date.

The other current noteworthy data point is that our ski properties, about another 10% of our investments, wrapped up their operating year recording a 6% increase in revenues and, importantly, more than a 20% increase in cash flow coverage of their obligation to us, moving it to over two times.

All these dynamics combine to make us optimistic about our prospects. Now, I'll turn it over to Greg for the portfolio and transaction color.

Thank you, David. As David discussed, the second quarter was very busy and productive for EPR. During the quarter we made significant capital investments; settled our litigation with Mr. Cappelli; transformed our capital structure to take advantage of the unsecured debt market; all while continuing to make improvements in the portfolio. Either Mark or I will discuss each of these points in detail, but I will begin with our significant capital investments for the quarter.

As you will recall, we established a capital budget for 2010 of $300 million, and I'm happy to report to you that we've accomplished that goal with our recent 12-theater acquisition we completed in June. The theaters were acquired from a third party for approximately $124 million, or a 10.82 cap rate and are subject to triple net cross defaulted leases with Cinemark USA. The theaters are located in four states and have a total of 192 screens, and while I cannot give specific rent coverages for these theaters, I can tell you that the coverage on these theaters exceeds our overall theater portfolio rent coverage.

During the quarter we also invested approximately $15 million to pay off the existing first mortgage of our joint venture, Atlantic EPR 1, for which we own a 23% interest. This joint venture owns the Cantera 30 in Suburban Chicago. Per the partnership agreement we will earn a 15% return on this additional capital contribution until such time as our partner contributes its proportionate share, or 77% of the debt repayment. The current lease payment of the tenant results in an overall return to EPR of approximately 14% on our investment.

As I stated earlier, with these investments we have now exceeded our stated goal of $300 million of capital spending for 2010. However, given that we still have a significant portion of the year remaining, we are revising the plan upward to $350 million.

As previously announced on June 18, we entered into various settlement agreements with Louis Cappelli and entities controlled by him, whereby we released and settled all claims related to existing litigation between the parties. As we have stated, if we could accomplish the goals of the litigation without the necessary expense, then we would be open to settling the matter and we believe that we have accomplished these goals.

As part of the settlement, EPR received a deed in lieu on the property in Sullivan County, New York for which we had a first position mortgage. We exchanged our interest in the White Plains City Center project for Mr. Cappelli's interest in the New Rock City project. We now own 100% of the New Rock City project, which is anchored by an 18-screen Regal Theatre and is 80% occupied.

We granted Mr. Cappelli a two-year option to reacquire the Sullivan County property for a purchase price of $143 million, plus accrued interest from the settlement date. We committed to the Union Labor Life Insurance Company to be a participant in the construction loan for a casino development to be built on land controlled by Mr. Cappelli subject to certain conditions, including a requirement that a major gaming company contribute not less than $100 million of equity to the project. This commitment expires on December 31, 2010. And, EPR was granted the right to receive 50% of distributions received, up to $15 billion, from the Cappelli entity that would be the partner in the casino development.

I go over these details to reiterate the point that we could have continued the litigation. However, we were able to accomplish our goals of getting control of the Sullivan County investment; gaining 100% of the New Rock project; shedding the negatively-performing White Plains City Center project and eliminating the debt associated with it as well; and facilitating the development of a casino project in Sullivan County without the additional expense, both in terms of dollars and attention of litigation.

With regard to portfolio performance, the theater industry continues to outperform general retail categories. And while it is not exhibiting the torrid pace of last year's 10% growth, with the summer nearly complete we are still 4% ahead of last year's record box office.

During the quarter we also had an announcement regarding our first lease renewals in our theatre portfolio. As we discussed in our last conference call, we told you that our expectation was that three of the four theaters would be renewed pursuant to their contractual terms, and that the fourth theater located in Dallas, Texas would not be renewed. As you read, this is exactly what happened. We are pleased that these renewals occurred as we predicted.

Furthermore, I received several calls inquiring as to the effect of these renewals on our relationship with AMC. We have had, continue to have, and will have a very strong relationship with AMC and we continue to look at projects with them on a regular basis.

Turning to the fourth location, Dallas, the theater needed to be repositioned in the market to reflect its current consumption patterns, and I am happy to report to you that we have entered into a Letter of Intent to reposition the asset to a 14 to 16-screen theater from its current 24-screen size. As part of this reconfiguration, we will gain approximately 30,000 square feet of available retail space, as well as five to seven acres in the parking field for pad site development for which we have begun to identify interest from prospective tenants.

With regard to our public charter schools, as we are in the middle of summer break I do not have any further information to give you at this time regarding 2010-2011 enrollment, as these numbers should be available for our next quarterly call.

With regard to our metropolitan daily ski investments, I'm happy to report to you that the 2009-2010 ski season was very successful for our operator, with overall skier visits up 8% and total revenues up 6%. These outstanding metrics, when combined with additional expense controls, resulted in overall coverage improving from 1.8 to 2.2. Furthermore, including the additional payment requirement of the original $25 million development note that we moved to current pay in conjunction with extending the note for two years, will result in overall payment coverage of approximately 1.7 times.

With the removal of White Plains City Centre and additional leasing gains at our Toronto Dundas project, our overall retail occupancy improved to 90%. The Toronto Dundas project has improved its occupancy to 95% with the leasing of 23,000 square feet of additional space.

With the introduction of Clear Channel as the signage manager, we continue to make progress on increasing the signage revenue for the back half of 2010 and also for 2011.

As we previously discussed, our wine portfolio is our only asset class that continues to lag the performance of our other properties. While there are indicators that the consumer is returning to our price segment, we did execute a transaction whereby we completed the sale of our Havens property at a price of $6.5 million. While we are not pleased about recording a loss on the sale, we were able to recover approximately 87% of our basis, which combined with our carrying costs of the property and our redeployment opportunities made it the right time to exit the property.

With regard to occupancy, our overall occupancy stands at 98%, with theaters being 100% occupied and our non-theater retail assets at 90%. As we discussed earlier, we are increasing our full-year capital guidance to $350 million. As you might expect, we are doing this because we continue to see acquisition opportunities that are attractive to us. The majority of these opportunities continue to be in theaters and public charter schools. We are very pleased with the performance of both of these asset classes and want to continue growing them.

As we've previously indicated, we are looking to increase our operator diversity, specifically in our public charter school space. As we've detailed before, much like our theater investments which began with AMC, we began our public charter school investment with a large, well-capitalized and established operator, Imagine Schools. With this solid foundation, as we did in theaters, we now look to expand and diversify the operator base as we become the preferred capital source for the industry.

With that, I'll 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 first important to help you understand the terms that impacted our results for the second quarter and six months ended June 30. I'll go through these with you up front so you can more clearly understand our operating results.

As illustrated by the first slide, during the second quarter we recorded $15.6 million or $0.35 per share in costs associated with loan refinancing, as we paid of $272 million of secured debt. I will further discuss our significant debt refinancing activity in the quarter a bit later in my comments on our capital markets activities.

Accordingly, FFO for the second quarter was $21.7 million or $0.48 per share. We add the $15.6 million of costs associated with loan refinancing and $0.1 million in transaction costs our FFO per share, as adjusted, was $0.83 for the second quarter. Our year-to-date FFO was $1.26 per share. If we subtract the $8.5 million gain on acquisition recognized in the first quarter related to our acquisition of Toronto Dundas Square and add back the combined charges of $23.9 million, our FFO per share, as adjusted, was $1.61 for the six months ended June 30.

I'll now walk through the quarter's results and explain the remaining 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 $20.2 million to $8 million. Our FFO also decreased compared to last year from $30.1 million to $21.7 million. FFO per share was $0.48, compared to $0.86 last year for a decrease of $0.38.

Now, looking at the details of our second quarter performance. Our total revenue increased 22% compared to the prior year to $77.6 million. Within the revenue category, rental revenue increased 20% to $58 million, an increase of $9.8 million versus last year, and resulted primarily from acquisitions completed in 2009 and 2010, and base rent increases on existing properties partially offset by a decline in rental revenue from our vineyard and winery tenants.

Percentage of rents included in rental revenue were $247,000 versus $191,000 in the prior year. Tenant reimbursements increased by $2.9 million versus the prior year, due primarily to our acquisition of Toronto Dundas Square in Q1 and increases in our Canadian entertainment retail centers.

Mortgage and other financing income was $13 million for the quarter, up $1.8 million from last year. This decrease is due to our January 2010 acquisition of five public charter schools, as well as other smaller real estate lending activities.

Other income was $0.1 million for the quarter, down $0.7 million from last year. The decrease is due primarily to a decrease in revenues from a Family Bowling Center in Westminster, Colorado, previously operated through a wholly-owned, taxable REIT subsidiary. The bowling center was converted to a third-party lease in February 2010.

This line item also contains the net impact of the settlement with Louis Cappelli that Greg outlined in his earlier comments. Our 10-Q will have an extensive discussion of the various components of the settlement and their individual contributions to our net gain of $4,000.00. I will take a moment here to emphasize that the accounting rules require us to consider the fair value of the consideration received, along with both the book value and the fair value of the consideration that was surrendered in calculating our net gain on the settlement transaction. In determining any estimated fair values, management utilized current appraisals for both the Concord Resort and New Rock.

The Concord Resort land was recorded at its estimated fair value of $180 million and the net carrying value of the mortgage note receivable of $131.2 million was extinguished. We also recorded a $27.8 million non-controlling interest credit in the equity section of our balance sheet to reflect the value of Cappelli's repurchase option, as well as the $9.2 million capital lease obligation for a portion of the resort property that is under ground lease. Thus, in effect, the net carrying value of the Concord resort land subsequent to the settlement is $143 million, which is the option amount for which Cappelli can purchase the property.

Another nuance worth pointing out is that $7.4 million had to be written off in conjunction with the disposition and the corresponding deconsolidation of our interests in the White Plains project. This amount related primarily to the debit balance we carried for the non-controlling interest in this project.

Other smaller elements of the settlement entry include the fair value of interest received in New Rock and the Concord casino that increased the gain, and amounts paid or accrued at closing, and the net carrying value of notes receivable forgiven that reduced the gain. Again, I encourage you to consult our 10-Q for further details on the settlement accounting.

On the expense side, our property operating expense increased approximately $4.3 million for the quarter, versus last year, due to our acquisition of Toronto Dundas Square as well as increases, as well as increases in bad debt expense associate with our vineyard and winery tenants and property operating expenses at our four other Canadian entertainment retail centers.

Other expense decreased $0.7 million for the quarter and is due to less expense recognized related to the previously-described bowling center, as well as less expense at certain of our vineyard and winery properties that are being operated through a wholly-owned taxable REIT subsidiary.

G&A expense increased $0.4 million versus last year, to approximately $4.6 million for the quarter. This increase is due primarily to an increase in payroll and benefit-related expenses as well as professional fees.

Loss from discontinued operations relates to operations at the White Plains Entertainment Retail Center, and the vineyard and winery property prior to their disposition. The loss on sale of real estate of approximately $900,000 for the quarter relates to the sale of the vineyard and winery property.

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 Supplemental summarizes these key ratios on page 16. We continue to report strong levels of interest coverage at 3.2 times, fixed charge coverage at 2.4 times, and debt service coverage at 2.5 times.

Our AFFO, or Adjusted Funds From Operations, per share for the quarter was $0.85. With our cash common dividend of $0.65 per share, we had an AFFO payout ratio of 76%, which continues to be a top notch metric compared to other REIT's.

Our debt to adjusted EBITDA ratio was a healthy 4.7 times for the quarter. Adjusted EBITDA in this calculation is defined as quarterly EBITDA annualized and adjusted for the gain on acquisition and charges and debt as the balance at June 30. Our debt to gross assets' ratio was 38% at June 30.

Let's turn to the next slide and I will discuss our capital markets' activities during Q2, as well as our liquidity position. We had a very busy and productive quarter in the capital markets. In May, we raised $140 million of net proceeds by selling 3.6 million shares of common stock at $41.00 per share. At the end of June, we closed on both our new unsecured line of credit and $250 million of unsecured notes.

The new $320 million unsecured line of credit replaces our previous $215 million secured facility. The new facility has a pricing grid based on the current ratings of our senior, unsecured obligations. At closing, the pricing was LIBOR plus 300 basis points, which represents a 50-basis point improvement in spread compared to our former secured credit facility. The new facility also does not have a LIBOR floor. This will create a savings in today's interest rate environment of approximately 165 basis points as compared to our former secured facility.

Thus, to sum it up, we went from secured to unsecured; increased our capacity by over $100 million; and reduced our current interest rate by 215 basis points.

Turning to the next slide, as David discussed, we also executed something new for EPR in Q2, an unsecured note offering. For the first time in the Company's history, we obtained corporate and senior unsecured credit ratings. Our $250 million 10-year notes were assigned investment grade ratings by two of three major rating agencies. The bonds have a 7.75% coupon and were sold at a slight discount to par.

Although unsecured debt is more costly than the secured debt it replaced, we feel that over the long term the cost of our secured versus unsecured debt should converge as the Company becomes a more seasoned issuer. Furthermore, the long-term benefits of being an unsecured issuer should translate to a lower overall cost of capital.

Turning to the next slide, as I mentioned earlier in my comments, we also retired $272 million of secured debt during the quarter. These retirements significantly improved our already strong debt maturity ladder and increased our unencumbered asset pool to $1.7 billion, which leaves us with a ratio of unencumbered assets to unsecured debt of over four times.

In conjunction with the debt retirements, we also recognized $15.6 million of expenses, as I mentioned earlier, $6 million of which was noncash.

Turning to the next slide, at quarter end we had total outstanding debt of $1.2 billion, of which approximately $1.0 billion was fixed rate, long-term debt with a blended coupon of approximately 6.4%. We had $154 million outstanding on our revolving credit facility at quarter end leaving approximately $106 million of availability and our unrestricted cash on hand was $20 million. Our debt-to-gross assets was 38%, as I previously mentioned, a 500 basis point reduction versus a year ago and in line with our new target for this important metric of 35% to 45%.

As we turn to the next slide, I will outline our debt maturity profile. We have no debt maturities in 2010 or 2011, and only $65 million in 2012. Excluding our line of credit, when we get to 2013 we level off at around $100 million per year. Now, the slide you're looking at stops in 2015, but the $100 million per year benchmark is true through 2018. We believe this is a very manageable and well-laddered maturity schedule.

The capital markets' transactions and the theater investments that we made during the quarter continued our trend of deleveraging the company and growing FFO. The new unsecured platform will further enhance our access to the capital markets and make us more flexible and efficient as we finance future real estate investments.

Turning to the next slide, the Company is increasing its 2010 investment spending guidance from $300 million to $350 million. The Company is also tightening its 2010 guidance for FFO, as adjusted, per share from $3.30 to $3.40 from the previous guidance of $3.30 to $3.45. This guidance reflects the Company's lower leverage as a result of the equity offering and settlement with Cappelli in the second quarter, as well as recent debt transactions and the expected investment spending for 2010 of $350 million.

The guidance for FFO per share is $2.95 to $3.05, which includes the charge of $0.35 per share for costs associated with loan refinancing in Q2 that I just discussed.

Now, I'll turn it back over to David for his closing remarks.

Thank you, Mark. Thank you, Greg. As both of those gentlemen referenced, it was a busy and action-packed quarter and, hopefully, you've noted in all the comments it was a very transformational quarter for the Company as well.

So, with all that's said, I think at this time rather than comment further we'll just go to your questions and see if there is anything we can address in particular.

(Operator Instructions) Your first question is from the line of Anthony Paoloni with JP Morgan. Please proceed.

Thanks, good afternoon.

Hi, Tony.

My first question is just on the land. When I looked at your balance sheet, it looked like the land went up $180 million sequentially. And I know, Mark, it sounded like there were a lot of different adjustments there. Can you just walk through very basically, like how it got to $180 from the $133?

You're talking about the Concord land?

I assume that's the only land that created the increase?

Yes, right. So the $180 we had an appraisal done at the time, an independent appraisal done at the time of the transaction. That was the fair value. However, effectively with the credit we have in non-controlling interest for the option value that Cappelli has and the capital lease obligation we recorded, effectively we have it on the books for $143 million, which is the option price that Cappelli can purchase the property. So while the fair value was higher we effectively booked it at the option value of $143 on a net basis.

Okay.

$143 million net as far as that asset's concerned when you cut through it all.

Okay, and on the appraisal, can you give us just a sense of the executive summary on how the appraisers got to the $180 million; like, what went into that? I can't imagine there are a lot of comps for casino land and just how they approached that.

Well, there's not a lot of comps and they're basically using a highest and best use of the property, and so it's basically on a developed basis.

With and without a casino.

Yes, with and without a casino that's correct, next to it.

But this is without.

Right. We booked the number without the casino, so actually the lower number of the two. But they're looking at the different uses of the property and discounting it back at heavy discount rates and with a fairly conservative timeline in terms of development. So that's basically how they come to the value.

How's that work? If you wanted to sell it, what happens to the option that Cappelli has?

He has a right of first refusal during the two-year period, that if we want to sell it he can match that bid and take it. But if he does not, his option expires with regard to that property that we would sell.

Okay and then with your commitment to fund the casino if something's put together by the end of the year, what do you peg as the probability that that happens?

You know, Tony, I think he's been trying to put this together for years and what we said and what we talked about is a willingness to be a participant if we could get a casino going. But we were unwilling to have that sit out there forever. As far as probability, candidly, I don't know. I mean I know he's trying desperately to put this together, but we needed a timeframe to where we knew that we could take control of our own destiny and we wouldn't have something out there and we could begin to shop and market our property for its various uses.

Okay and then, Mark, can you give us maybe some run rates for some line items for the balance of the year, like G&A, property operating expenses and some of those items? Because I think, for instance in G&A, like last quarter you'd mentioned that in guidance I think for the full year there was maybe million bucks of legal fees throughout the year. But since that's all settled, I would imagine that comes out for the second half. And just some of those things, because it seems like they've moved around a little bit.

Sure. As far as G&A, you're right, we had about $250,000 a quarter in there for G&A, so you could expect our run rate from Q2 to drop by that amount anyway for the legal expenses. So, I think you're right on with respect to G&A. And then the other question was what?

Property operating.

Property operating expenses, let me think about that. We have a slight increase. We have an increase projected in Q3 and Q4 for property operating expenses and that would be for our maintenance of the Concord. We have some Concord carrying costs that we have projected. Of course, on the flipside, overall we lose the White Plains asset as well. So a slight increase in property operating expenses over the remainder of the year, but not significant from what we had in the second quarter.

Okay, thanks.

Sure.

Thanks, Tony.

Your next question is from the line of Gregory Schweitzer with Citigroup. Please proceed.

It's actually, it's Michael Bilerman with Greg Schweitzer. Just sticking with Concord for a second, so I guess if that project is through and Cappelli is able to get it, your forward commitment is limited at $30 million or is there other capital?

No, that's it. And our commitment's not to Cappelli. It's to (inaudible) to participate in their loan.

In the mortgage loan? Well, I guess stepping back and obviously settling up with Cappelli and stopping cross lawsuits and just settling this is a positive, especially considering you rode everything down and you weren't receiving any cash. You've now got 5% to 6% of your asset base tied up in what really is non-income producing. I guess, would you try to sell this commitment before December 31 and just get out of it, or would we have to wait until after December 31 to [monetize]this land?

I think we have the latitude to begin to sell the asset. We're not going to sell really the commitment. I don't think that's a saleable item, at least we don't see it that way, but we can delay it. We can work the land. We now have the latitude, as Greg pointed out before, to control our own destiny and that's what we wanted. So, we're not waiting anymore on the casino project. If it goes, that's great. It'll be good for the -- it'll be a positive for the land value development. What we talked about is the higher value with the casino in place of the land appraisal, but we're not waiting for that. We're moving forward to develop or deploy this asset as we can find opportunity to do so.

Mike, I think we looked at it and, you guys on a holistic approach if you think about it, if we had gone through the litigation and been successful on all of these points, and even if we'd taken the next point -- and had taken Mr. Cappelli into insolvency, I mean we wouldn't have done any better than getting our property back there; getting our property back in New Rock; shedding White Plains; and potentially getting an interest in any sort of go-forward that he might have in that development. So we looked at it as getting ourselves into this position and then having that incentive to see if the casino can happen and drive additional realization opportunities for us on our land.

I guess, how long are you going to wait for that realization knowing that you've got $140 million of --

Michael, let's be clear. If you've got somebody that wants to buy it, you tell them to call us right now.

Well I'm saying, are you marketing? I mean, if you're going to sell it, you put together a package, you enlist a broker, and you cut your losses and you go for it. You take that money and you invest in theaters and you invest in charter schools and you start earning a return that will eventually lead to cash flow and lead to dividend growth. Or, you made the decision, look, I want to be in the casino business and I want to own the ground underneath it and I want to participate. So, I'm just trying to figure out where your mindset is.

We're not waiting, okay? You said, how long are we going to wait? We're not waiting.

Okay, I think Greg has a couple.

Yes, okay, go ahead Greg.

Guys, just if you can provide us with more detail on Dundas Square. What has Clear Channel been able to do on the signage leasing? How much NOI is coming off now and your expectations?

I think on Toronto, do you just want the signage aspect or do you want the property leasing as well, Greg?

Both.

Okay, on the property leasing, what we talked about is during the quarter we signed leases for 23,000 additional square feet, with what we think are some real quality tenants in the sense that we expanded our Google space in a lease to them. A new lease with Ryerson, with the Toronto Film Commission for use of the seventh floor; so some really, what we think are some great tenants.

With regard to signage, sequentially we're making great progress. We've really got control. They got control of this at the end of the first quarter, and second quarter results compared to first quarter results are significantly better. They continue to book signage contracts for 2010 and 2010, so we're feeling very good about the progress that they're making and they're jumping in and getting us in front of people to use the asset and actually closing on those transactions. So, I would say that we're very happy. From a percentage basis, I would say it's probably up 20% from first quarter; second quarter from first quarter.

Is that just the signage?

That's just the signage.

So, pro forma with the increase in signage and the Google expansion rights and what is that NOI?

The NOI because of some of these leases, there are still doubt periods for the tenants and everything, I think the pro forma is probably going to be more into 2011. But we think it's talking about falling to the bottom line of $1 million plus.

From the 15?

In addition.

In addition, in an incremental.

Okay. And then, you still have two more spaces left?

We do.

Right?

That's correct.

Thanks very much.

Thank you.

(Operator Instructions) Your next question is from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed.

Thanks, good afternoon.

Hello, Jordan.

I just want to clarify on the guidance a little bit. I know lower leverage is a cause of sort of the tweak on the top end there, as well as the financing, but can you maybe just talk a little bit about the expectations from additional acquisitions? Were there timing expectations on the incremental piece?

I think currently, Jordan, we're looking at that as part of the later part of the year, so not measurably contributing to this year.

I think that, yes, as Greg's indicating the general lift of any further acquisitions during the year I think would comes toward 2011. The point of leverage where we are now, as we talked about, is 38% on a gross assets' basis. We don't really expect to de-lever a lot more given our range of 35% to 44%. We're already in the kind of lower portion of that. So, given the low cost of our kind of short-term line of credit that we might use for some incremental transactions, we think the lift could be pretty good, but it probably will come in 2011 fundamental.

Just to be clear in terms of leverage, so to the extent that you were to see significant incremental investment opportunity, where do you want sort of target leverage just to maintain, or maybe you want to continue to ratchet it up on the investment-grade spectrum? But what's sort of the target?

I think the target we talked about now is 35% to 45% on a gross asset basis, and we're 38% measured on that basis right now.

Is that the EBITDA of four times or four and a half?

The EBITDA this quarter was 4.7 times. Actually, it'll probably come down a little bit. But well, 4.7 times let's just say was the number for the quarter and we feel comfortable that's a solid number. Anything under 5 is a solid metric.

Okay, and when you guys have sort of laid out acquisitions typically you've had your eye on something, or maybe something under contract. And you're indicating charter schools and diversifying there. It seems to make sense. So one, do you expect -- should we continue to expect 10% type returns on charter schools? And two, is it the case that you kind of have something under contract or your eye on it?

I think it's your cap rates are rates and I think it's -- we may not have something under contract, but we constantly have our eye on stuff, Jordan, and we're constantly talking with people. As you know, we kind of don't try to go out on a limb and throw a number out there that we don't have confidence that we can't hit. So, it just needs to work its way through the process.

Are you still continuing to see theater deals out there?

Yes.

What does the pipe look like there?

I mean, there are still people that we're talking to with portfolios. There are still deals that as we said earlier in the year, we do think that we're going to get back into the build-to-suit for some of our theater operators and we're looking at sites with those groups now. So, but theater build-to-suits generally only start in the fall and in the spring, because they want to open into the holiday season or the summer season. So, we continue to work with those groups as well and, even if we started some of those, there wouldn't be a lot of money going out on those in 2010.

Okay. Lastly, I didn't hear much about this, but your largest tenant filed for an IPO. There's some interesting color in the S1, but I was just curious about your take in terms of what that might do to your relationship with them going forward; meaning, do you think they would look to own a greater proportion of their real estate going forward given their likely coming lower cost of capital or vice versa.

I don't think so. That's not necessarily their stated intent. We continue to talk to them. I mean, they've been a public debt -- in the public debt markets for years, and so now I think this is the public equity markets. I think they're owned by -- I know they're owned by several large private equity firms that are looking for an exit. So I think as I said before, we have and will continue to do business with them and we don't really see any major changes from that.

Okay. One specific thing they mentioned and I don't know if you are a party to this, but one of their sort of, I guess, objectives is to continue to achieve operating efficiencies including lowering occupancy costs in many of their facilities through negotiations with rental agreements and landlords. Any thoughts about sort of strictly enforcing co-tenancy provisions, auditing cam, things of that nature? Have you guys been subject to any of that? They said they've seen some savings and do you feel like there's any risk associated with that?

I know, I think they've talked to everybody. I think, all I can say is we just had renewals and, as we said they would, they renewed three out of four pursuant to their contractual terms. Ours are generally triple net, Jordan, so we don't have the exposure that you're talking about with co-tenancy or with cam audits and things of that nature. We just don't have that exposure that they have in other places. So, our dealings have been pretty straight forward with them and haven't really been exposed to that.

Okay, thank you.

Thank you.

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

Hi. Good afternoon, guys.

How are you doing, Andrew?

Just a quick question, you talked about repaying the Cantera loan and EPR 1. We've seen property being marketed for sale a few months back. Is it still for sale, or was that more in lieu of having to work out the loan?

It's owned in a German joint -- our venture partner is a German fund that sells out individual shares to German investors. And as we got down to the period of time for the loan to be refinanced, they wanted to go out and establish value, and so they marketed that to see the price that they could garner if they went for a sale on that. They elected not to sell it and now -- but they have to get their -- have to go back to their individual investors to step up and fund this proportionate share and/or we have to locate and look at getting new debt for the property.

Okay, thanks. And then, secondly, I saw you added the disclosure on the very small China investment you have. Can you give us any update just on how that's working?

Well, it's really been open only about one month and so we don't really have a lot of data to give you that's really illustrative of anything. But it's open, we're happy with it, but no, there's not a lot of information to give you.

Okay, that's all for me. Thanks.

Thanks, Andrew.

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

Hello, guys. Good afternoon.

Hi, Rich.

On the theater front, who are the sellers these days of theaters? I mean is it -- has that changed over time and do you still see a pipeline, I guess, of theater-type sellers out there?

Yes. I mean, there are various private groups that have, like the Cinemark transaction that we closed here recently, is a third-party kind of private real estate organization that was looking to raise cash for reasons other where in their portfolio. So, there are still those that are out there. There's still, we think, very good opportunities, Rich, that we continue to talk to people about. As I said previously, we see better opportunities as well with our build-to-suit opportunities with our theater tenants. We're out visiting sites with them on a regular basis now. So, we're seeing opportunities on both those fronts.

Okay, so is there, David, the notion of distress sellers out there of theaters, you think, at this point or can they get debt to refinance at a simple rate.

You know, I think, Rich, we've come to frown on the words "distress sellers" because nobody wants to be characterized as a distressed seller. There are still sellers out there who are opportunistically looking to raise capital. And so, we are talking to people who fit that definition and we still think there are pockets of those out there that can and will provide us opportunities.

It's consistent with what I talked about for the background of us moving to go to the unsecured debt markets. The secured debt markets are still challenged, and so there are people who have maturities maybe in theater ownership or otherwise, and they still are looking for points of liquidity. So, there still are those opportunities we're in discussions about.

Okay, thanks, and then staying on theaters for a second, is the whole 3D movement is that as exciting as you thought it was going to be? I mean, obviously, it's still early in the whole 3D thing. But do you think you'll be hitting percentage rent thresholds quicker and is that evolving kind of the way you had seen it?

I think it still is very much a positive trend and will be a contribution to us moving towards more percentage rent realization. However, there have been some -- there was a rush to the 3D. We've talked to a number of parties about the fact there were some films this year that kind of cheapened 3D effect by going back and programming some 3D effects on movies that were already shot in 2D. So, but overall, I still think it's a very positive part of the landscape and the consumer is still paying a premium and appears to be comfortable in doing so; a sizable premium to enjoy a 3D presentation.

Okay, good. Thanks, and then just turning to charter schools for a second, obviously the opportunity is gigantic out there in charter schools. I mean, how do you feel about charter schools at this point. I mean, do you think that is going to grow as quickly as you thought it might for you guys?

Right now, we're still very strong on our outlook for charter skills. The growth in the category, the political environment supportive of that growth is still very strong, and that is a category that we've targeted for significant investment over the near-term and we hope to talk to you about some specific transaction opportunities in the very near future. But we really don't have anything today.

Okay. Is there competition coming into that, or are you guys kind of by yourselves out there?

We've talked about the fact that we did see one other, Inland, in a charter school transaction. But no, it's still a fairly thin competitive set. So, there are others that are out there, but I think we're still in a leadership position.

Okay. Okay, good. Thanks. And then on the Dallas theater is that -- are you planning to turn that into like a center atmosphere, or are these going to be various pads that you're going to sell?

They'll be various pads that we sell or ground leased, kind of restaurant-type pad sites. No, it won't be a center.

Okay, good. Thanks, and then the last thing, and I realize you can't necessarily make the decision on the call, but what do you guys think about the dividend and the potential for a dividend increase?

Well, Rich, we don't really -- as you say, we're not in a position to make a call or give any guidance on that. But as we alluded to in earlier comments, probably the incremental investment opportunities for us are, we think as we've now gotten to the leverage point we're comfortable with, may be a greater contributor to our capacity for a dividend increase than the last couple of acquisitions we've made. So, I think this is something we're going to continue to watch. We have been fairly static and flat in our dividend and we'd like to increase that, so we will be looking at the issue closely as we move towards the first quarter of 2011 as we traditionally look in the first quarter to reset our dividend.

Okay, great. Thank you, guys.

Thank you, Rich.

(Operator Instructions) We have a follow-up question from the line of Gregory Schweitzer. Please proceed.

Hi, it's Michael Bilerman. We'll have to do this call and your presentation in 3D next time, right?

Michael, we will. I think that'll really contribute to these slides.

Exactly, it'll make them that much more enticing. The $3 million loan, that's the one, the Sapphire, the wine loan that's past due?

Yes.

Is there any resolution there?

No, actually -- well, Sapphire, as we talked about on our last call, the Eos Winery was taken into receivership. We're taking it in there and gaining control of the asset and we brought suit against the note maker of that note and are pursuing that litigation.

We have that loan fully reserved and we're not booking any current interest income on it as well.

Right.

And then what if on the [amortization]reconciliation, the $1.3 million of the noncash portion of the mortgage and other financing income, what balance does that represent and does that burn off at all?

What do you mean what balance?

I mean, what debt balance or what loan balance does that represent?

$15.6 million.

No, the $1.3.

The $1.257 noncash portion of mortgage and other financing income.

Yes, that's the charter school primarily accrual that we accrue at a 12, but it's cash paying at 10.

Yes, it's like straight-line rent, except it's in accordance with the effective interest method. But it's an equivalent of a straight-line rent that reverses over time.

And there are no other loans that you are accruing GAAP, but only getting cash, other than that?

That's really the primary one.

That's not a loan, remember. It is owned property and lease that has to be characterized on the effective interest method, per accounting rules, because it's a capital lease.

Right. And then, just lastly just thinking about sequentially knowing that Cappelli closed, I guess it was late towards the end of the quarter, what is the income statement effects of New Rock and White Plain and the transactions that you did?

Well, let's handle White Plains first. We were booking about a $500,000 decrease in FFO per quarter, was kind of the run rate of White Plains so that'll be removed and help the back six months. With respect to New Rock, because of the status of the project, we were booking most of the income. We have a preferred return there and we were booking in the preferred return. Now, as that further leases up it's at about what, 75%?

80%

At 80% lease level; as that lease is up that income will become all ours but will not have an incremental income statement effect over the last six months.

And does anything move geography-wise on the income statement from those transactions?

Geography-wise?

White Plains, in the second quarter keep in mind, is down and discontinued operations, so you do have kind of a clean run rate with respect to the quarter just because the operations have been reclassed. As far as geography, again New Rock has no impact. White Plains certainly affects the balance sheet. It will remove the debt, remove the asset in nearly equal amounts.

It goes away, but it moves around.

No profit, just removed.

And New Rock doesn't really move around. We just upside now and we have 100% of the upside. We've been pretty much accounting for all the returns because we were in a pressed position that essentially swept all returns up to this point that an incremental leasing is ours.

Okay, and then just a last thing on China. I know it's small, but what other sort of capital commitments do you have for that venture and sort of more broadly how you're thinking about expanding internationally?

It's an important point. I want to be clear. I tried to be clear before. We do not have any commitments. There is no callable commitment in China. We do have relationships where we're looking at investment opportunities. So, there aren't any commitments. Our expectation is we're looking at really half a dozen projects now and I think our investment size is going to be small relative to those, again, on the $3 million to $5 million range on a per-location basis. So, but we don't have any commitments at this time and we've not entered into any further specific site commitments.

The $1.7 million, that's between two different sites, right?

The $1.7 million now is a single site.

Is a single site, and then that's your equity. Is there any -- is there debt on the project at all?

No.

And this what, a freestanding theater or what?

No, it's a leasehold improvement in a vertical mall.

And who are your partners?

Shanghai Film Group we've talked about is our primary partner. And then further, we've taken a site-specific partner, which is the Nimbo -- I can't remember exactly what the --

Economic Development.

Yes, it's kind of the Nimbo, which is a local --

City Government.

It's the local city government, which is not unusual in these arrangements.

You give another six or seven that you're targeting, but nothing that you've committed to?

That's correct.

Okay, thank you.

Thank you.

(Operator Instructions) We have a follow-up from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed.

Hi, it's Craig Melman with Jordan. Mark, just a quick follow up on the AMC expirations and the renewals and the LOI that's out. I'm just trying to get to the potential net impact on rental revenues from that, assuming the LOI comes in. Kind of how much would you lose with the contraction in the theaters?

Well, I mean, three of the four renewed, so we're talking about the one.

Right.

So, if you -- I would say that until we get the 30,000 square feet leased up and we get some of the pad sites sold, that it's about $700,000 to $800,000 for the year until we get that other space leased up.

For the impact this year we're going to lose, what, a month of rent, which is about $200,000 in December; because November is when the lease expires and we will not take time to lease it. There'll be a little bit interim time where there'll be a lag.

Well, we think it'll be about 90 days or so before we get it transitioned over.

Right, so that's the impact for this year anyway, and then it should ramp back up.

Okay, so about $800,000 or $780,000. Right, great.

For an annual basis.

For an annual basis, right, but only $200,000 in 4Q is going to come down. Great.

There are no other questions at this time. I'd like to turn the call back over to Mr. David Brain.

All right, thank you. Thank you all for joining us again. We always do, as I say, appreciate you tuning in and taking the time and we're, as I usually say, very receptive to entertaining questions also if you'd like to call the Company further. But thank you again and we'll see you next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Everyone have a great day.