EPR Properties (EPR) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Entertainment Properties Trust earnings conference call. My name is Kendall 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)

I would now like to turn the conference over to your host for today, Mr. David Brain, CEO. Please proceed

Thank you Kendall and thank you everyone on the line for joining us. It's David Brain. I'll start with our usual preface. That is, this afternoon I need to inform you this conference call may include forward-looking statements defined by the Private Litigation Securities Reform Act of '95. Identified by 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, and factors that could cause results to differ materially from those forward-looking statements as contained in the company's SEC filings, including the Company's report on form 10-K for the year ending December 31, 2009 and soon 2010.

All right. With that done I'll say again this is David Brain, Company CEO and President. I thank you for your taking your time to join us. As we get underway please remember there is the simultaneous webcast available via link from our website at www.eprkc.com. We do have some slides so there will be a visual dimension there if you'd like to pick that up as well as this audio portion.

Now, there you will find that we will begin with the headlines for the fourth quarter of 2010 for Entertainment Properties Trust, and they are as follows.

First, 2010 was a year of achievement of important strategic and tactical goals. Two, recent tenant fundamentals are mixed, however those most meaningful are most positive. Third, a material dividend increase being announced for 2011. Fourth, significant performance is already underway on planned 2011 asset sales and acquisitions. And fifth and last, our guidance range for the year is being narrowed to the lower end of our previous range to reflect higher liquidity position and remaining non-strategic asset restructurings and dispositions.

All right. This afternoon as usual I will comment on these a bit, and with us and commenting also will be Greg Silvers, our Chief Operating Officer.

Good afternoon.

And Mark Peterson, our Chief Financial Officer.

Good afternoon.

They'll add detail and some other items, but -- and we'll take your questions after the three of us --.

First, though, I'll go to my first headline. And that is 2010 was a year achievement of important strategic and tactical goals. I would just like to recap for you a few of the highlights of 2010 as we close out that year with this call.

First, regarding portfolio growth, we delivered during the year over $300 million in accretive and attractive portfolio additions. Primarily in our theater and our charter school portfolios, just as we had given guidance.

Second, during the year we stabilized all of our large development project investments, again as we had expected. Now, uniformly they are at a lower yield than we normally target, and that is the subject of our next round of attention on these items.

Third, we continue to reduce company leverage, substantially during the year we moved it 200 basis points from about 39% to 37% on a book basis. This was in part as a result of funding our portfolio acquisitions materially with equity. Using this higher cost capital took some of the contribution FFO per share growth our of these acquisitions, but it did and still feels right to put stability ahead of growth.

Fourth, maybe most importantly, we achieved investment-grade ratings from two of three credit rating agencies. Not often thought of as investment-grade due to the non-investment-grade nature of out tenants, EPR proved the sum is greater than the parts. This really comes as a culmination of all that we have done over a dozen years. It reflects our adherence to rigorous underwriting and investing centered on key industry and property level cash flow criteria. It is a result of disciplined investing in a limited number of categories that require specialized knowledge. And as a result have limited competition and greater yield. It also endorses our transaction structuring and financial management. It is a real milestone for the enterprise, and worthy of special note.

And lastly about 2010, the market recognized all of our achievements of these points and our shareholders were rewarded with an 83% total shareholder return during the year on the VWAP or volume-weighted average price basis,

Now turning to my second major headline; recent tenant fundamentals are mixed. Those most meaningful are most positive. I am pleased to report to you that things are better in our portfolio fundamentals than one might think scanning recent headlines. Box office receipts, the primary index we report on for our largest area of investment, our theaters, has been a bit muted lately. We've been dealing with comping with "Avatar," the most successful film of all time.

The fourth quarter 2010 box office was a bit weaker than that of the prior year but still the year finished flat, which was as expected and a very good result, considering the growth of 10% for the prior year, and the long-term compounded average rate of growth of about 5%.Q1 2011 is off quite a bit compared to the "Avatar" quarter of last year, but as we always remind you, even when reporting in Q1, this is very small in terms of total annual receipts, and never really a great gauge for the year.

Now I can also report to you our ski portfolio, which is one of our larger and strategic areas of investment, is having another record year. Results through the end of January, which do account for the vast majority of the seasonal year, are showing substantial increases in revenues, cash flows and coverage of our rents. Greg will discuss this more later.

A third headline is that we are today announcing a material dividend increase. We have traditionally announced our Q1 dividend after our Q4 call in a separate announcement shortly after the call, but this has always been a bit awkward, and always seemed to be of interest to those on the call, so we have worked to be more responsive on this point. So today we are announcing our first quarter 2011 common dividend of $0.70 per share, up from $0.65, an increase of about 8%. Mark will go over this in our cash outlook, but broadly, this increase is enabled by the steady cash performance of our portfolio and our reduced debt amortization as we migrate away from secured debts that require substantial principal payments.

Our next headline is significant performance already on planned 2011 asset sales and acquisitions. This is indicative of continued process we are making on our objectives for 2011. Greg will have detail on this for you, but I will just note a couple of items. And that is, I am pleased to report our planned sale of our Entertainment Retail Center, or ERC as we often call them, asset in downtown Toronto called Toronto Dundas Square, is on track to close on very attractive terms.

As an accumulator and owner of assets rather than active trader, this is an important demonstration of the market value of our portfolio elements. Given the cap rate and value in this transaction, it's stunning to think about this asset being described by many as troubled and question as to value just one year ago.

Secondly on this topic, we have an announcement of another sizable theater portfolio acquisition, which keeps us on course for our planned portfolio expansion for 2011.

Now fifth, our final headline has to do with earnings guidance for the 2011. It is that our guidance range is being narrowed to the lower end of our previous range to reflect a higher liquidity position and remaining non-strategic asset restructurings and dispositions.

Overall, things are very much on track for the Company, but a couple of factors have led us to be a bit more conservative in our guidance. Prominently, they include the uncertain timing of deploying from out Toronto Dundas sale, and the timing of proceeds likely from restructuring, releasing, or sale of the majority of our vineyard and winery portfolio that is underway now.

As I said, the overall condition to report for the company is very positive, probably best indicated by our recent investment-grade ratings and now our significant dividend increase. However, we feel most comfortable with our guidance at the lower half of our previous guidance range.

With that now I'll turn it over to Greg and Mark and I look forward to joining you in a few minutes and taking your questions.

Thank you David. I would like to spend a minute discussing our achievements for 2010 and then discuss our portfolio performance and several significant events that have occurred after this reporting period. For 2010, we completed the year with approximately $325 million in capital spending. This number was slightly less than our revised plan issued at the end of the third quarter. However, the shortfall was a result of a transaction that moved into the first quarter of this year, which I will update you on shortly. Overall we're very pleased that in 2010 we continued to identify and execute on attractive theater and charter school transactions that delivered significant shareholder value.

With regard to our portfolio. For the year the box office ended about flat to 2009, which was an all-time record year that delivered double-digit growth. The beginning of 2011, however, has been a struggle. Industry insiders have predicted a very difficult first quarter due to the year-over-year comps that are mainly driven by "Avatar", coupled with a weak schedule of releases. And so far these projections have proved accurate. However, these same pundits, as well as our exhibitor clients, are also predicting a very strong balance of this year that should result in a flat to modest increase on a year-over-year basis.

Overall we are very happy with the performance of our portfolio and are pleased to announce that subsequent to year-end, we entered into agreement to acquire an additional four theaters located in the northeast region, for a total investment of approximately $37 million. These theater properties are located in New Hampshire and Maine and contained an aggregate of 56 screens and will be leased on a triple net basis to a new tenant in our portfolio, Cinemagic. This transaction is scheduled to close within the first quarter.

For most of the country, this winter has been harsh, however this cold weather has been much appreciated at our ski properties. While the season is not over yet, we do have numbers through January 31, and I'm pleased to report to you double-digit gains in both revenues and EBITDAR for our properties.

With regard to our public charter schools, I can confirm to you that the preliminary enrollment numbers have been certified and our overall enrollment has increased 8% over last year. This increase, coupled with an additional 5% increase in capacity, results in overall utilization improving to 89% from 86% last year.

Our entertainment retail centers continue to perform well, with overall occupancy at 92%, excluding the theaters. With regard to Toronto Dundas Square, we previously stated out intent to market this property, and I'm pleased to report to you that subsequent to year-end, we have entered into an agreement to sell this property.

The transaction should generate net sale proceeds in excess of $220 million. However, our actual cash proceeds may be less as there are certain adjustments to the sales price, including an escrow for unbilled property taxes, which should be approximately $10 million. As this purchase price represents approximately a 6 to 6-1/4 cap, we are very pleased with these results and are excited about the redeployment opportunities that these funds will provide.

As we discussed in our last call, our vineyard and winery portfolio continues to experience cash flow pressure. As a result, subsequent to year-end, we entered into a modification with our largest wine tenant, Ascentia Wine Estates. As part of this modification agreement, we agreed to take back one property and reduce our rents on the balance of the properties. Additionally, the tenant has agreed to put one of the properties on the market in order to position the existing portfolio to conform to their brand strategy. As we previously indicated, we are disappointed with these results and are continuing to explore ways to restructure and exit this business.

As you know, 2010 marked the first year for expiration of leases within our theater portfolio. We previously informed you that the existing tenant exercised their contractual option on three of the four expiring leases. I am pleased to report to you that we have entered into agreements for the repositioning of the fourth asset, and we are very excited with the results.

As we indicated, we are downsizing the theater and making the project a multi-tenant property. We will be announcing the tenants in the near term and are pleased that this property is expected to reopen to the public in the summer of 2011, with two exciting tenants, including an all-digital 14-screen theater.

For 2011, our capital plan remains the same at approximately $300 million. With the sale of the Toronto Dundas Square, we believe that we have a significant base of capital to fund these acquisitions, however our results will be impacted until we can redeploy these funds.

We do, however, believe that this strategy, along with continuing to explore ways to exit our wine portfolio, is the right strategy to deliver long-term stable results for our shareholders, even if the immediate results are impacted. With that I'll turn it over to Mark.

Thank you Greg. I would like to remind everyone on the call that our quarterly investor supplemental can be downloaded from our website.

As you can see on the bottom of the first slide, both our FFO per share and our FFO per share before charges for the fourth quarter were $0.86. This performance represents an increase of $0.06 per share, or 8% versus the prior year quarter before charges. Importantly, the results for the quarter as well as the fiscal year were achieved with significantly lower leverage versus a year ago. I will touch on that more later in my comments. Now let me walk through the quarter's results and explain the key variances from the prior year.

For the quarter, our net income available to common shareholders increased compared to last year from $6.7 million to $26.7 million. Our FFO also increased to $40.4 million, compared to last year's total of $17 million. FFO per share was $0.86, compared to $0.43 last year.

Now looking at some of the details of our fourth-quarter performance. Our total revenue increased 23% compared to the prior year to $81.6 million. Within the revenue category, rental revenue increased 21% to $61 million, an increase of $10.6 million versus last year, and resulted primarily from investment spending completed in 2009 and 2010, and based rent increases on existing properties. This was partially offset by a decline in rental revenue from our vineyard and winery tenants.

Percentage rents for the quarter, included in rental revenue, were $350,000 versus $236,000 in the prior year. Percentage rents included in rental revenue for the year were $2.1 million, up about 50% versus the prior year. Of the $700,000 increase for the year, $375,000 was from tenants at Toronto Dundas Square, which was acquired in the first quarter of the year, and the remaining increase relates primarily to theater tenants benefiting from strong box office performance.Tenant reimbursements increased by $3.3 million versus the prior year, due to primarily to our acquisition of Toronto Dundas Square, and increases at our other Canadian entertainment retail centers.

Mortgage and other financing income was $13.4 million for the quarter, up $1.8 million from last year. This increase is due to our public charter school investments in 2010 of approximately $52 million, as well as other smaller real estate lending activities.

On the expense side, our property operating expense increased about $3.7 million for the quarter versus last year due to our acquisition of Toronto Dundas Square and increases at our four other Canadian entertainment retail centers.

G&A expense increased $1.1 million versus last year to approximately $4.4 million for the quarter, due primarily to higher payroll and benefit related expenses, including stock grant amortization as well are increases in professional fees and travel and entertainment expenses.

Impairment charges were $463,000 for the quarter. As you may recall, we had recorded an asset of this amount in conjunction with our settlement with Mr. Capelli and affiliates in June representing a minority interest in the cash flow of a potential casino development project. As it was determined that it was improbable that the company would receive future cash flows from this interest, this asset was written off at year-end.

Gain and acquisition was $555,000 for the quarter. The receivership process for Toronto Dundas Square was concluded during the fourth quarter. Because the former receiver paid out a lower level of claims than originally anticipated, escrowed funds were released to us, and therefore an additional gain on acquisition was recorded.

Now turning to our full-year results on the next slide. For the year our net income available to common shareholders increased compared to last year from a loss $22.2 million to income of $84.7 million, and this was on total revenue growth of 21%. Our FFO also increased $136.6 million compared to last year, up $4.9 million. FFO per share was $3.00, compared to $0.13 last year.

Each of these measures was impacted by charges, particularly in the prior year, that have been previously discussed. Excluding these charges, FFO per share as adjusted was essentially flat versus the prior year at $3.34 although again I point out that this year's performance was achieved with much lower leverage.

Turning to the next slide, I would now like to turn to our discussion of some of the Company's key ratios. Please note that our supplemental summarizes these key ratios on page 16.

We continue to report strong and improving levels for the quarter of interest coverage at 3.5 times, fixed charge coverage at 2.5 times, and debt service coverage at 2.6 times. Our AFFO or adjusted funds from operations per share for the quarter was $0.82. With our cash common dividend of $0.65 per share, we had a well-covered AFFO payout ratio of 79%.

As I mentioned earlier our operating results were achieved with lower leverage. Our debt to adjusted EBITDA ratio was 4.5 times for the quarter versus 5.1 times in the prior year. Adjusted EBITDA in these calculations is defined as quarterly adjusted EBITDA annualized, and debt is the balance at December 31.

Our debt to gross assets ratio was 37% at December 31, a 200 base reduction versus a year ago, and a 700 basis point reduction versus the level at two years ago.This ratio is toward the lower end of our previously stated target range of 35% to 45% for this important metric, and provides us great flexibility as we move into 2011.

Let's turn to next slide, I'll provide a capital markets and liquidity update. At quarter end we had total outstanding debt of $1.2 billion, of which approximately $1 billion was fixed-rate, long-term debt with a blended coupon of approximately 6.4%. We had $142 million outstanding under our revolving credit facility at quarter end, leaving approximately $178 million of availability and our unrestricted cash on hand was $12 million.

Subsequent to year-end, in February we paid in full the eight term loans outstanding under our vineyard and winery facility, totaling $86.2 million. The related interest rate swaps were terminated at a cost of $4.6 million, and net deferred financing costs of $1.8 million were written off as part of this loan prepayment. We elected to prepay this debt primarily to provide us additional flexibility as we go forward with our vineyard and winery assets. This payoff is also consistent with our move away from secure debt.

As Greg mentioned, subsequent to year and we entered into an agreement to sell Toronto Dundas Square. In addition, in order to hedge the foreign currency exposure related to the proceeds from the anticipated sale of this property, we had entered into a forward contract to sell CAD200 million for $201.5 million, with the settlement date of April 15, 2011. Including the impact of foreign currency, we expect to record a gain in excess of $17 million upon closing. Immediate use of proceeds from the sale will be to pay down our revolving line of credit, which will leave us with significant capacity to execute our remaining 2011 planned investments.

As we turn to the next slide, we have no debt maturities in 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 through 2017, with our largest maturity being the $250 million in unsecured notes due in 2020.

As David mentioned, 2011 was truly a transformational year for the Company as we implemented our strategy of migrating to an unsecured debt structure. We replaced our secured line of credit with a larger, unsecured line that carries a much lower rate. We successfully raised in excess of $140 million in common equity and paid off certain secured debt. We became a rated company and issued $250 million of unsecured notes. Having enhanced our liquidity position, strengthened our balance sheet and obtained access to the unsecured debt markets, we believe we are better positioned to profitably grow the company going forward.

Turning to the next slide, we are maintaining guidance for 2011 spending of approximately $300 million. We are revising our 2011 guidance for FFO as adjusted per share to $3.40 to $3.50 from the previous guidance of $3.40 to $3.60. Including expected charges of $0.14 per diluted share for costs associated with the payoff of the vineyard and winery loan facility, the guidance for FFO per share is $3.26 to $3.36. This guidance includes the restructuring of the essential lease agreement, the payoff of the vineyard and wine facility, the anticipated sale of Toronto Dundas Square, as well as the expected timing of investment spending.

As I mentioned on the last call, while we generally do not provide guidance on specific line items, we think it is helpful to share our forecast for G&A expense. We expect this line item to be approximately $20 million for 2011. Please note once again that our G&A is typically about $600,000 higher in the first quarter than the full year divided by four, primarily due to certain employee benefit expenses that are recognized in Q1.

As David mentioned, I'm also pleased to report that the company is announcing a dividend for the first quarter of 2011 of $0.70 per common share. This dividend represents an annualized dividend of $2.80 per common share, an 8% increase over the prior year.

As David also mentioned, this dividend level is well supported by the expected cash flow of our portfolio, as well as the reduction in principal payments associated with paying off secure debt. Now I will turn it over to David for his closing remarks.

Thank you Mark, Greg. As we go to your questions I'll just want to reinforce what I hope is the clear message of the outstanding position of the Company. We hold a great position of stability and liquidity, with record strength in key financial ratios as Mark outlined.

We performed on recent named objectives and guidance, and albeit 2011 guidance is being lowered -- more focused on the lower end of our prior range, the prospects for growth and shareholder returns in the near term are robust.

With that said we'll open it up to questions. Kendall, are you there?

(Operator Instructions)

Your first question comes from the line of Anthony Paolone with JPMorgan.

Thanks. Good evening. On the vineyards, the EBITDA in the fourth quarter, I think, was about $2.8 million. What is in guidance for 2011? Is it the similar type run rate or something less?

It's less. If you take that $2.7 million, multiplied by four, you're going to get about $11 million. The Ascentia impact is about $0.10 to our run rate for the wine portfolio, roughly. So we would expect a, and we've reduced guidance, by that amount in our expectation for next year. So it's lower by about, on an annualized basis by about $0.10 from the run rate in Q4.

Okay, so that's -- okay, got it. So then if I look at then, at that basis then, I guess your yield would become something like, I don't know, 3% or something on depreciated cost.

Yes, that's correct. But we do have some opportunities going forward to lease up properties and/or sell properties.

So I guess my question is, how does that work? What does a sale of, I guess, unoccupied vineyard, for lack of a better term, look like? Is there a risk that an impairment needs to be taken there? How do you see it all playing out?

Tony, it's Greg. Clearly it's -- when you're looking at selling these assets, you are probably at selling them to a strategic buyer, someone who's in the wine industry who wants to take those for their productive value of the assets as opposed an income buyer who is looking to just run a cap rate on the stated lease rate. As far as an impairment, we have ran our analysis. Mark, you may want to comment on that. And I think we feel comfortable where we are at.

Yes, and the one we're selling we're in good shape on. And then the rest of the properties, we have looked at that. There were appraisals done on several of the properties during the year. And we also, on some of the other properties, undiscounted cash flow approach, until you make the decision to sell. In certain cases we have leases out there, so no, they passed the test to -- at this point in time, to not have any impairments.

Okay. And what's the -- at the reduced rent for Ascentia, what does their coverage look like? How comfortable do you feel about where you put guidance at for 2011 on this line? Is it the worst that could happen, or is there more that we should be worried about?

Tony, when we were structured it, I mean I think we tried to restructure it to a level that we think is sustainable by that group. And we think is something that they can continue to pay this comfortably. Given our history with wine I can't give you any assurances that we won't have to revisit this. I think we looked at where the run rate was and kind of adjusted it accordingly.But I think you see that in us taking back the property, getting a property sold as part of that portfolio. We worked with our tenant to do a comprehensive look at their assets and where they could be repositioned and at what rate. And I think at this time we feel comfortable with where they are at.

Okay. Thanks. The other question I have on the theater business. If I look at your 2011, '12 and '13 theater expirations, it is about 12% of revenue, about $31 million. What do you think the market is today for that, or the likelihood if all of those were coming due right now. How much of that do you think just carries forward and folks just renew versus having to do some sort of a restructuring like you did in Texas.

I think it will be about the same that we saw. We will have one or two annually that we may need to take a look at. I think, like I said, overall we're going to be very pleased with what we're doing in Texas, where the overall per square foot rent rate is going up for that multi-tenant property from what we had before.

We talked about this as we came into 2010, and for the 2010, '11 and '12. We have some expirations which are new for us, but by and large, we see the vast majority just as we saw in 2010, renewing. And so there will be selected items that we do rework just because the financial evolution of 15 years.

Okay, and then just one last question of the charter schools. Can you comment on what happens, or how you think about the risk of municipal budget cuts, and if they start to cut into school budgets, how that flows through to the charter school business and what it does to maybe coverage, or just how you're thinking about that business line.

It is, well, Tony it's less municipal than it is state. And there are state pressures. The states under the greatest pressure are where we tend to have the least exposure, it's all the same. It is possible, given the fairly broad-based pressure throughout, that --. I just caution everybody -- there can be no assurance exactly what gets cut, but traditionally primary education, which is the point of exposure here, is one of the last things, or -- that gets cut, or one of the things that does not get cut traditionally. It's viewed as one of the real core functions of the state government.

So you've seen, usually California is the best illustration of this, where you've had double-digit cuts in higher ed, and you get headlines about education cuts in double-digits. That's not true for primary, where generally reductions have been very low single digits, 1% and 2%.

So there is the possibility. Now the other thing we've pointed out chronically, Greg has, not necessarily in this call, but we have, what we think is very high cash flow coverage of our rent obligations in that area, in the order of 1.9 to 2 times and therein we feel like that there's great capability for the customers to absorb the type of cuts we would be talking about, and still make their obligations. Although it's not the best thing, it's certainly -- we don't see it as endangering our investments.

Okay, thank you.

Your next question comes from Greg Schweitzer with Citi. Please proceed.

Thank you. I have Michael Bilerman on with me as well. Can we expect any delay in timing from the repatriation of capital from Canada, assuming Dundas Square still closes in the next few weeks?

Actually no. We've -- did some work with our Canadian advisers and lawyers and we think we can solve the, what was an anticipated delay with the Canadian tax authorities. We think we've solved that issue and we will be able to repatriate those funds immediately.

Okay, and then any updates on potential ski deals with Peak, or any other ski operators?

We are -- Greg, we are looking at some ski transactions that fit within our model. Nothing to report right now. But that industry is, as I said, in the areas that we concentrate on, those cash flows continue to be very attractive to us, and we're talking to several people right now.

Greg, I would just mention that during this ski season is a tough time to make a lot of progress on transactions. People on industries, they are very occupied with their operations. It tends to be toward the end and after the season as we get into Q2 that most of those dialogues really progress.

Got it. Thanks. And then just lastly, the theaters that you acquired in Maine and New Hampshire. Similar cap rate in coverage to your recent deals?

Yes. Well, not to the most recent. When we had the 12 cap deals, that was, as we said, kind of an anomaly. These are still double-digit cap rate deals and coverage at or above where our other portfolio's at, so very attractive relative to the portfolio.

Okay. Thanks very much.

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

Hi. It's Craig Melman here with Jordan. Cold you guys just maybe give us a bit of color on what the investment pipeline looks like now? You guys did about 10% of it, but it sounds like maybe ski could be in the mix now, beyond just theaters and charter schools. Maybe color on what you guys have in the backlog and sort of what the mix could be.

Is still think it's going to be -- it's Greg -- I still think it's going to be dominated by theaters. We're still talking with several groups about some portfolio acquisitions. Likewise, we're -- you'll see us this year kind of gear up and some theater development. We've got several that we're working through to begin that process. I think, again, our charter school opportunity is continuing. It's been slower than we would have liked, but it is beginning to gain traction, and we're beginning to look at several deals there.I think the ski is a component. I don't think it will be a huge component of this year's acquisition, but it will have a place in that relative to the other two.

And all the opportunities that you guys are looking at, still the same cap rate and everything range?

There's still some cap rate pressure out there. But I think, when we talked about traditionally theaters and this product of the nine to 10 cap range, we are very comfortable that that's what we're looking at.

Correct.

Is that more for the stabilized, or do you feel better about build-to-suit yields at this point?

That's more for stabilized. The cap rates would be a little bit higher than for a -- on a build-to-suit deal.

High end of that range, 50 basis points, or more plus over what normally we'd get if we were going to go into a development deal.

All right, great. I think Jordan's got a question for you as well.

And then just on the -- hi, guys -- on the leverage, you're down to about 4.5 times debt-to-EBITDA, which is strong. I'm curious -- Two ways of approaching that. One, what is sort of your goal as it relates to debt ratings or credit ratings? I know it would be nice probably to have that notch up from S&P, if that is feasible, and is that something you're targeting? And then second, what ultimately is your leverage target?

Well, Jordan, we've got a leverage target we talked about on the last call where we undertook this kind of migration over to the rated credit that we're going to look at debt. We look at it more on a percentage of our capital on a book basis to 35% to 45% as being a target, which from 40% to 50%. So that puts the midpoint around 40%. We're low kind of relative to that right now. We think that there's capacity use to use debt. We expect to do that, unlike, we haven't used much of that capacity in the last couple of years. But that's probably, although we'll still be gearing towards a little bit lower target of midpoint of 40%, than we did traditionally. So we think that's still very consistent with what S&P can find very acceptable to notch us up, so we're very hopeful for that.

That's helpful. And just lastly, I'm curious on the guidance. You guys put some color to it, but just maybe a little bit more. It's basically a $0.05 reduction, if you look at midpoint to midpoint. And if you would sort of frame that up between the timing on Dundas Square versus Ascentia. How does it break down of the five pennies?

Well, I have got to tell you. The wine portfolio changes are the majority of that, Jordan. There's no doubt about it. The timing is an uncertainty, inasmuch as we pointed out in this call. The transaction we hoped to close in Q4 last year moved into Q1 this year. Timing is just less certain it seems, of late.So just providing for all that. But the majority of the reduction is associated with what we're doing in terms of working out of the wine portfolio.

Helpful. Thank you.

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

Yes, hi, guys. Good afternoon.

To follow up on Jordan's question just real quick if I could. None of that -- or to say little to none of that reduction, then David, is due to lower yield expectations or the ability to source acquisitions, you think?

No. We're still maintaining our target. We think the transactions are still available to us. We just think they're going to -- as I said, the timing just seems to be a little bit harder to tell. The yields are still consistent with what we have been planning on, I'd say, overall.

Okay good. Thank you. And then on the Dundas sale, when you guys are done with that will you have no interest at all in that asset?

That's correct. It is a complete sale.

So it will be a very clean break on that one.

Yes. Only the hold-backs as Greg referenced associated with transaction. That's it. Otherwise, we're out.

Right, okay. I got you. And then looking at the operating expense for this quarter versus the third quarter, 3Q '10, that seemed higher relative to what revenues were doing. Is there anything special that was going on in the fourth quarter that we should think about as we go into the next few quarters?

Talking about property expense or G&A?

Yes, exactly.

Which one?

I don't have it in front of me right at the moment, Mark, but I think it was property operating expenses.

Quarter-over-quarter?

Yes. Quarter-over-quarter, for 4Q to 3Q. Revenues seem to stay flat -- base rate revenues stayed flat, but operating expenses jumped. Tendered reimbursements caught some of that, but it seemed like --

That's also the line we put bad debt expense to, so there could have been some fluctuation there. I guess -- what it went from $9.6 million to $10 million, so not too much of an increase., in terms of --

Okay. I can give you a buzz.

There's nothing that jumps out at us to point you -- as a major fluctuation in the quarter. I'd tell you.

Okay. Good. Thank you guys.

Thanks, Rich.

And this concludes the question-and-answer session of today's call. I would now like to turn the call over to Mr. David Brain for closing remarks.

Well, great. I want to thank everybody for joining us again. We always appreciate these opportunities to go through things with you. And, of course, we appreciate -- we always welcome the opportunity if you'd like to call us and talk about anything in particular. Otherwise, we will look forward to talking to you next quarter. Thank you very much.

Thank you.

Thank you.

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