EPR Properties (EPR) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2012 Entertainment Properties Trust third quarter earnings conference call. My name is Kim, and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to David Brain, President and Chief Executive Officer. Please proceed.

Thank you, Kim. Thank you all for joining us. This is David Brain.

I'll start with our usual preface, which is as we begin this afternoon I'll inform you that this conference call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of '95, identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate or other comparable terms. The Company's actual financial conditions and results of operations may vary materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause actual results to differ materially from those forward-looking statements is contained in the Company's SEC filings, including the Company's report on Form 10-K for the year ending 12/31/11.

Well, again, thank you for joining us. This is David Brain. This is our earnings call for the third quarter of 2012. Along with me to give you the news of the company are Greg Silvers, the Company's Chief Operating Officer.

Good afternoon.

And Mark Peterson, our Chief Financial Officer.

Good afternoon.

I'll just remind everybody who can, and I know there are some differences in power and access, but there -- we do have slides as usual through our website at EPRKC.com, and it's easiest to follow along that way if you can.

I'll start with our headlines for EPR for the third quarter of 2012, and first is our new name and marks reflect company evolution. Second, acquisitions progress in all primary investment categories. Third, quarter results ahead of plan leads to increased 2012 guidance and robust 2013 outlook. And fourth, recent capital formation activity demonstrates strengths and further improves the balance sheet.

Going back and beginning with our first headline, new name and marks reflect company evolution, I'll just take this opportunity to remind everybody that November is the 15th anniversary of the Company's IPO. A lot has happened in those 15 years, and the Company is still dynamic and evolving. At this time we've decided to adopt a new name and marks in order to reflect the progress of the Company and synchronize our identity with the reality that the scope of this enterprise, although still firmly embracing entertainment, has also moved beyond just that.

While our entertainment segment continues to be our largest focus, we have strategically expanded the types of specialty properties in which we will invest in order to drive long-term growth. The new name reflects the Company's strategic evolution and aligns our brand to our business strategy today. It reduces what friction we have found in developing our market position outside of entertainment.

Our new name will be EPR Properties, and our tagline will be "Return on Insight," effective November 12. Currently our primary investment segments are entertainment, recreation and education. Just like our market-dominant investment segment of entertainment, our newer focus areas of investment, recreation and education, are supported by research and unique industry knowledge. We believe this strategy of focused investment supported by research and knowledge, as opposed to investing in a variety of traditional commodity properties, offers the greatest potential for stable and attractive returns as an owner over the long term. This return premium is what we mean by return on insight. We look forward to discussing with each of you further as you like.

Our second headline this afternoon is very supportive of our initial -- that initial concept that I just went over with you, that the Company is progressing on multiple fronts. It is that acquisition progress is strong in all of our primary investment categories -- entertainment, recreation and education. Greg will add details in his report in just a moment, but I'll tell you that we had about $55 million in investment spending for the quarter and over $20 million since quarter end, with significant amounts in all three of our key focus investment categories. That progress brings us to appropriately $225 million of investment spending year to date, with about $110 million in entertainment, $70 million in education and $40 million in recreation.

Now, our quarterly and year-to-date investment results are one of the key factors leading to the third headline, and that is quarter results are ahead of plan and lead us to increased 2012 guidance and robust 2013 outlook. Today we're reporting $0.96 of FFO as adjusted per diluted common share for the third quarter, an increase of 12% over the same period last year. And this brings us to a year-to-date total of $2.74, which is an increase of 9% over the same time last year. This level of results, as well as our outlook for the final quarter, lead us to increase our guidance for FFO as adjusted per share to a range of $3.64 to $3.69, an increase of over $0.04 on the midpoint compared to our prior guidance range.

As is our custom, we are also at this time introducing our guidance for next calendar year, 2013. For next year we expect FFO per diluted share between $3.77 and $3.92, an increase of 5% over the midpoint of our guidance for the current year. This is based on an outlook of investment spending of about $300 million for the year, a level very comparable with the current year. No determination has been made about our dividend level for next year, but traditionally we look to increase it in the first calendar quarter at about the same rate of our expected FFO per share growth.

Now, my last headline this afternoon is that recent capital market activity demonstrates strength, further improves our balance sheet, and this all enhances our financial flexibility. In August, the Company floated $350 million of 10-year senior unsecured notes with a coupon of 5.75%. This was the Company's second offering of senior unsecured rated debt. We viewed it as highly successful, both for the demand demonstrated that brought us to increase the issue size from our initial indication by $100 million and that it resulted in a materially lower spread over comparable term Treasuries than our previous offering.

Subsequent to the quarter end we've executed what is essentially a refinancing of one of our preferred stock issues. We're redeeming our Series D $115 million preferred issue and replacing it with a new issue with a lower coupon by 0.75%. Both of these transactions demonstrate quality access to the capital markets and allow us to continue to manage our liabilities with durations consistent with our assets and with no maturity concentrations in any one year.

With that I'll turn it over to Greg, you'll hear from Mark, and I'll be back to join you at questions.

Thank you, David.

Along with an update on our capital spending, I will also discuss several updates across the various segments of our business. In the third quarter we continued to successfully execute our strategy of making additional investments in each of our asset classes, with new investments in our entertainment, recreation and education segments. During the quarter we deployed approximately $55 million of capital, and we will continue to see additional outlays in the coming months related to these projects, as most of these investments were build-to-suit projects.

First in terms of operating performance in our key theatrical portfolio, the box office remains ahead of last year, with revenues up 4% to 4.5%, and the forecast is for a solid holiday season. Currently we project that overall box office revenues will finish the year up approximately 5%.

Our investment pipeline in our theater business remains robust, even better than we had previously anticipated. At the beginning of the year we discussed the opportunity to introduce eight to 10 theater investments for the year. However, we now expect 12 to 14 theater projects to get underway in 2012. As most of these projects are of the build-to-suit variety, a significant amount of capital associated with these projects will be deployed in 2013. As we spoke last quarter, we are pleased that more operators are getting back to expansion and growing their asset base and are looking to EPR as a capital partner in that endeavor. As we've stated previously, these build-to-suit projects have an initial expected cap rate in the 9% to 10% range.

Also with the recent announcement of Carmike Cinemas' intent to acquire 16 cinemas from Rave Review Cinemas, we will further strengthen our relationship with this national operator. EPR owns five of the 16 theaters in this transaction, and, as reported, we anticipate the transaction should close by year end. In addition to the announced Rave acquisition, we have also entered into two additional build-to-suit projects with Carmike and anticipate more opportunities as we grow this relationship.

During the quarter we also expanded the breadth of our entertainment platform with the completion and opening of our latest Pinstripes investment at Oakbrook Mall in Chicago. The newly constructed 32,000-square-foot facility introduces the latest in entertainment and family fun into one of the most dynamic retail settings in the country. We anticipate the completion of our other previously announced family entertainment projects in the fourth quarter.

Subsequent to the quarter end we also closed on the financing of a dynamic live performance anchored entertainment retail center in Charlotte, North Carolina, known as the North Carolina Music Factory. The property is an entertainment destination that recently played host to 15,000 guests at a media welcome event at the Democratic National Convention. The project is anchored by two live-performance venues leased to Live Nation pursuant to long-term leases and includes additional dining and entertainment tenants located in a 183,000-square-foot setting. Our total investment in this project is $22 million, and the rate is commensurate with our other entertainment properties.

Within our recreation segment our properties continue to perform at outstanding levels. Our Schlitterbahn water parks benefited from the exceptionally dry and hot summer season and delivered participating interests of approximately 800,000, doubling last year's total. Our TopGolf investments are performing above projections and have exceeded our expectations. Additionally, we are currently under construction on a new TopGolf facility in Houston, Texas, which is expected to open in the fourth quarter, and we anticipate additional investments in the coming months.

In our education segment we increased our asset base during the quarter with investments of approximately $28 million related to 12 projects or expansions. We remain excited about the charter school opportunity and our ability to build a diverse platform of assets, both in terms of geography and operator. Our total investment in this category for the year should be approximately $90 million to $100 million, and we anticipate additional growth as we move forward.

We have also received the preliminary enrollment numbers for our schools, and I'm pleased to report to you that within our active properties we increased our student capacity by over 5,000 students and also increased our capacity utilization from 89% to 91%. These numbers speak to the continued strength of the sector and the increasing demand for school choice by the public.

We continue to make progress on dealing with our leased but vacant Imagine schools, as we have been recently informed that the lender on Imagine's credit facility has given the necessary approvals to complete the next group of substitutions. The delay was a result of the lender requiring all new third-party reports, including environmental, property condition and appraisals. However, we've now been told that we can proceed with approximately $15 million of additional substitutions. The net effect will be of the original $72 million of affected properties we have now delivered solutions for approximately $50 million of that total, or 70% of the affected assets. We anticipate additional subleases or sales will further reduce this number throughout the balance of the academic year.

During the quarter we also sold one Imagine asset. This facility was not one of the schools that lost its charter. However, the independent board of the school made an offer to acquire the asset, and we elected to accept this offer as we manage our Imagine concentration. The transaction generated proceeds above our original purchase price of approximately $400,000. However, we booked no gain or loss because part of the proceeds were used to reduce accrued interest recognized utilizing the effective interest method under our direct financing lease with Imagine.

In our Catskills project we continue our pursuit of the necessary environmental and land use approvals for the proposed development, and we anticipate being able to provide additional details by year end.

In other developments, we've recently made additional progress in the planned disposition of our vineyard and winery assets. During and subsequent to quarter end we've entered into two sale contracts involved the remaining portion of our unleased Buena Vista winery and vineyards. The transactions are scheduled to close in the fourth quarter and will result in proceeds of approximately $21 million. As this property was not leased, elimination of the property-level carrying costs coupled with the redeployment of the capital should result in a very positive impact to EPR's performance. Following completion of these transactions, the Company's remaining investment in the vineyard and winery space will sit at approximately $75 million, and we continue to market the balance of the assets as we progress to our stated goal of exiting this asset class.

As I said earlier, our total spend within the quarter was approximately $55 million, and, combined with the capital associated with the North Carolina Music Factory investment, this brings our total year-to-date capital spend number to approximately $225 million. As I said earlier, our pipeline of opportunities remains strong, and we are tightening our capital spend guidance from our previously announced $250 million to $300 million to $275 million to $300 million of investment spending.

Our overall occupancy remains strong, at 98%.

In connection with the introduction of next year's guidance, we are also introducing a capital spending target range for 2013 of $275 million to $325 million. This number contains a significant number of build-to-suit projects, including approximately $100 million of carryover projects that were initiated in 2012. As I indicated previously, our pipeline of investment opportunities continues to be strong across all of our segments, and we anticipate making investments in each of these categories in 2013.

With that, I will turn it over to Mark.

Thank you, Greg.

I'd like to remind everyone on the call that our quarterly investor supplemental can be downloaded from our website.

Now turning to the first slide, I'm very pleased to report another solid quarter for EPR. FFO for the third quarter increased to $44.4 million, or $0.94 per share, from $37.6 million, or $0.80 per share, in the prior year. Excluding charges for transaction and refinancing costs, FFO as adjusted per share increased to $0.96, versus $0.86 in the prior year, an increase of approximately 12%. For the first nine months of the year FFO as adjusted per share was $2.74 versus $2.52 in the prior year, an increase of approximately 9%.

Before I walk through the key variances, I want to discuss a couple of items that are excluded from FFO calculations this quarter.

First, as Greg mentioned, we have entered into two separate sales contracts to sell the remaining assets at one of our unleased vineyard and winery properties. As a result, we evaluated the carrying value of this property relative to the value of these sales contracts totaling approximately $21 million, and an impairment charge of $3.1 million was recorded. We are pleased that we continue to make progress on our strategy of selling our remaining vineyard and winery assets, particularly with respect to unleased properties, given the opportunities such sales provide to effectively redeploy capital.

Second, during the quarter we used part of the proceeds from our recent $350 million bond offering to prepay in full certain secured mortgage loans totaling approximately $186 million and incurred $477,000 in costs associated with these payoffs. Most of this expense relates to the write-off of the remaining unamortized debt fees. I will further discuss our recent financing activities later in my remarks.

Now I want to walk through the rest of the quarter's results and explain the key variances from the prior year.

Our total revenue increased 9% compared to the prior year, to $82.8 million. Within the revenue category, rental revenue increased by $4.2 million versus the prior year, to $61 million, and resulted primarily from new investments as well as base rent increases on existing properties. Percentage rents for the quarter included in rental revenue were $0.5 million for both periods. Mortgage and other financing income was $17 million for the quarter, up approximately $2.5 million from last year. This increase is primarily due to additional real estate lending activities. In addition, as Greg mentioned, we recognized approximately $800,000 of participating interest income this quarter related to our investment in the Schlitterbahn water parks due to their strong revenue performance this season. This is approximately $400,000 more than we recognized in the prior year.

On the expense side, G&A expense increased approximately $900,000 versus last year, to approximately $5.5 million for the quarter, due primarily to higher payroll-related expenses as we continue to support our growth as well as higher professional fees and travel expenses. Our net interest expense for the quarter increased by approximately $2.1 million, to $20 million. This increase resulted primarily from an increase in our outstanding borrowings during the quarter, partially offset by the impact of a lower weighted average interest rate on our outstanding debt.

Equity and income from joint ventures decreased approximately $300,000, to $342,000 for the quarter. This decrease was primarily due to the conversion of our preferred equity investment in Atlantic-EPR I to a mortgage note receivable earlier this year.

Finally, preferred dividends decreased by $1 million, to $6 million for the quarter, due to the redemption of our Series B preferred shares on August 31 of last year.

Turning to the next slide, I would now like to review some of the Company's key credit ratios. As you can see from this multiyear summary, our coverage ratios have been consistently strong and remained strong for the first nine months of this year, with interest coverage at 3.6 times and both fixed-charge coverage and debt service coverage at 2.7 times. FFO as adjusted payout ratio for the first nine months of this year was 82%. Our debt-to-adjusted EBITDA ratio was 4.7 times for the third quarter annualized, and our debt-to-gross assets ratio was 41% at September 30. As you can tell by these metrics, our balance sheet continues to be in great shape.

Let's turn to the next slide and I'll provide a capital markets and liquidity update. At quarter end we had total outstanding debt of $1.3 billion. All but $10.6 million of this debt is either fixed-rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 5.7%. We had nothing outstanding at quarter end under our $400 million line of credit, and we had about $25 million of cash on hand. We are in excellent shape with respect to debt maturities. As of September 30, we have no maturities for the remainder of 2012 or in 2013. Our next debt maturities are not until 2014, and the aggregate amount due in that year is less than $150 million.

Turning to the next slide, we continue to meaningfully reduce our cost of capital. We issued $350 million of 10-year senior unsecured notes at 5.75% during the quarter. This issuance represented our second 10-year unsecured notes offering, and in comparing it to our inaugural deal we were pleased to reduce the spread on this transaction by 65 basis points and reduce the actual yield by 225 basis points. As I referenced earlier, we used part of the proceeds from this issuance to prepay in full mortgage notes payable totaling approximately $168 million that had a weighted average interest rate of 6.25%.

Additionally, earlier this month we issued $5 million Series F preferred shares at 6-5/8%, for net proceeds of approximately $120.7 million. In conjunction with this offering, we also announced the planned redemption of all of our 7-3/8% Series D preferred shares at par plus accrued dividends, totaling approximately $115.8 million. This redemption is expected to close November 5, and we anticipate recording a charge of $3.9 million in the fourth quarter, representing the original issuance cost of the Series D shares plus costs associated with the redemption. This charge will be excluded from our calculation of FFO as adjusted.

To summarize, with the full amount available under our $400 million line of credit plus $25 million of cash on hand at quarter end, no debt maturities until 2014 and our lower cost of capital, we are well positioned to take advantage of opportunities as we move into 2013 and beyond.

Now, turning to the next slide, based on our results to date and our expectations for the remainder of the year, we are increasing our guidance for FFO as adjusted per share to $3.64 to $3.69 from the previous guidance range of $3.57 to $3.67. This increased guidance reflects the expectation that in the fourth quarter we will incur a $0.01 decrease to per share results due to the dilution of carrying both the Series D and the new Series F preferred shares for about a month prior to the actual redemption of the Series D preferred shares on November 5.

Secondly, note that combined participating interest and percentage rents will be lower in the fourth quarter versus the third quarter by about $1.1 million, or about $0.025 per share, due to the additional Schlitterbahn payment received in the third quarter I discussed earlier as well as the fact that percentage rents from our movie theater tenants are typically lower in the fourth quarter than the third quarter by about $350,000.

In addition, as Greg mentioned, we are tightening our 2012 investment spending guidance to the upper end of the previous range, at $275 million to $300 million.

Turning to the next slide, we are also providing guidance for 2013 FFO as adjusted per share of $3.77 to $3.92 and guidance for investment spending of $275 million to $325 million. Again, as Greg mentioned, roughly one-third of our investment spending for 2013 is expected to be carryover spending on build-to-suit projects initiated in 2012, and our new investment pipeline continues to be robust.

We think it is also helpful to investors to share key assumptions regarding G&A expense and our land in the Catskills contained in our 2013 guidance.

First, we expect G&A expense to be approximately $24 million for 2013. Our G&A expense is expected to be approximately $500,000 higher in the first quarter than the full year number divided by four, primarily due to certain employee benefit expenses that are recognized in Q1, as in prior years.

Second, the midpoint of our FFO per share guidance includes the Catskills project at its status quo. Accordingly, activation of the earnings potential of this land investment could help drive us toward the higher end of our FFO per share guidance range.

With that I'll turn it back over to David for his closing remarks.

All right. Thank you, Mark. Thank you, Greg.

A few thoughts as we go to questions. Overall I think a very strong performance relative to guidance. We've delivered deal flow and growth, as demonstrated in all three of our primary investment areas. It continues -- we continue to see opportunities. Cost of capital is declining with recent financings, and we're not doing that by shortening term or going -- we're staying at the unsecured model. And overall, then, table is set including a balance sheet in great shape for a very attractive 2013, as our guidance indicates. But of course we will look for opportunities for performance even beyond our guidance range.

Now, introducing the Company new name to you, there's one other new name I'll introduce -- I'd like to introduce to you, and that is of a new add to our senior management team. Neil Sprague is joining us, and I invite you all to contact and get in touch and meet Neil. Neil's joined us as General Counsel. He comes to us most recently from Applebee's IHOP organization but has experience with a number of public companies and also in private practice. He will be covering the general counsel role that Greg has also covered as Greg continues to have -- we have abundant opportunities to spend time with regard to the development of portfolio for Greg.

So, with that, we'll go to questions now. Kim, are you there?

Yes, sir.

(Operator Instructions)

Your first question comes from the line of Dan Dolan, with Janney Capital Markets. Please proceed.

Thank you. Just wanted to go towards the timing of the acquisitions development. What should we assume for modeling purposes? Is it going to be weighted more towards the first half of the year, the back half? And then what type of cap rate assumptions should we be looking at?

Dan, it's Greg. I would say it's not as much -- if you think about projects that start, generally theater projects are a nine- to 11-month cycle, so things that you see that we start here in the fall will deliver next fall. Things that we started in the spring of this year, this previous year, will deliver in the spring of this previous year.

With regard to our education -- and those are generally in the 9% to 10% range. I think in our charter school world that's a little shorter build cycle. You'll see those start generally at the beginning of January, February, March area, to deliver in August with the start of the new academic year. And those have likewise been kind of 9% to 9.5% cap rates.

Our recreation properties, other than our TopGolf that we're building, which, again, is kind of a six-month build, most of those are standing properties if we acquire those, so those are immediately accretive when we deploy them.

Okay. And as far as going to the vineyard sales, was there any -- is there any NOI associated with those sales that you guys are anticipating to close in the fourth quarter?

Well, really, the carrying costs associated with the vineyard and winery that we plan on selling here in the fourth quarter was about $130,000 a quarter, so there's quite a bit of carrying cost that we lose as a result of selling, plus we get to redeploy the $21 million of proceeds.

Yes, so it's a reduction in carrying cost as well as a potential to add NOI as we redeploy that money.

Okay. And then kind of a little bit different topic, just looking at the mortgage and other financing income that you guys, or, excuse me, on the balance sheet, the mortgage notes receivable for entertainment and recreation, what is the weighted average interest rate on the entertainment and what is it on the recreation?

I mean, all of our -- our mortgage notes --

Mostly recreation because of our ski portfolio.

Yes, and those are going to be around 10% -- uppers 9s to 10%.

Yes, those are going to be in the upper 9s to 10% on that.

I think that's the --

Or entertainment's going to be --

It's going to be about the same.

The same or similar, yes.

Okay.

In fact, there's a good listing. Our mortgage notes, of course, are in our -- in the supplemental. You can see them all. But you'll see they all range around that (multiple speakers) --

Yes, 9.5% to 10%.

-- besides maybe Schlitterbahn.

Yes.

Okay. And then just moving on to Imagine, based upon the build to suits that you guys have coming online, and I guess towards next year, what percentage of Imagine will be part of your overall portfolio?

Of the education investments, Imagine --

Of the education as well as the overall portfolio.

I think the -- if you look at how we've been moving that down, I think it used to be upwards at one point in time of our education portfolio, I think you'll see that where it was this last year, 60%, 70%, it'll be moving down into the 40% and continuing to decrease.

I mean, as a percentage of overall revenue it was 9% for the quarter and for the nine months, and most of the growth is coming non-Imagine, so that would, as a percentage of revenue, Imagine will go down.

Yes, Imagine at 9% of our total and education is around 12% or so, so it's at that three-quarter point right now. It used to be 100% even just a year and a half ago, and it's been coming down, as Greg says, with the number of additions we have. It's headed towards the half or less position I think within a year or a year and a half.

And it will continue to reduce given time.

Okay. And then I think recently I saw some news that Imagine's going to move to not-for-profit status. Do you know when that takes effect? And how does that -- is that a positive to the coverage ratios? Is there some type of taxes they won't have to pay on a going-forward basis that'll allow them to redeploy more cash to you guys? Or any thoughts there would be helpful.

Sure. Actually, Dan, they went to not-for-profit status in August of this year, so that actually was granted earlier this year. It's a positive from our standpoint for two things. One, I think you hit one of those. In several jurisdictions being a not for profit will allow them to not pay property taxes, which is clearly a positive impact to coverage. But, secondly, in the education market, a not-for-profit is generally viewed more favorably than a for-profit entity, at least within some of the detractors of the segment. And therefore we think it will, again, will maybe take some of the heat off of them that we -- that they've dealt with recently. But, so we think it'll be both positively economically and perception as well.

Okay. Thank you. I'll move back in the queue.

Thank you, Dan.

And your next question comes from the line of Joshua Barber, with Stifel Nicolaus. Please proceed.

Hi. Good afternoon.

Hi, Josh.

I'm wondering would you -- I'm wondering if you could talk a little about your -- the same-store rents that you guys have gotten on the feeder leases that have expired this year and where that's been trending, I guess, over the last nine to 12 months.

Yes, if you look at it on a -- what -- it's -- if we look at it on a square-foot basis it's been at or very similar to what we've -- what's been coming rolling off. I mean, in some of those situations we've downsized the theater, so it's on a smaller base, but the --

So the nominal rent went down.

Nominal rent went down, but the per-square-foot rent was at or similar to what we've been seeing.

Now, that's for things that are renewing. I mean, for things that are changed. If you look at those where they're exercising their options, those have been -- which generally that's been either half or three-fourths of those that have rolled forward, those are escalating because they're on fixed options and they're going up generally 2% a year. So it's bouncing up 2% above what we saw before.

Okay. Great. That's helpful. One other question, when it comes to the sales market today on the feeder side, I guess where are you guys seeing deals, and you're obviously in the market on the buying side of that, where are you seeing deals I guess (inaudible) on the selling side of that.

Yes, generally I would say it's a function, Joshua, of term and kind of success of the theater, but I would tell you good theaters that have term are selling probably somewhere in the 7.5 to 8.5 range, probably closer around that 7.5 to 8. As we -- as you move up more with less term that goes up. I think it's also a matter of kind of being able to identify those operators who you have a relationship with and that you can execute on. But I would say that generally good theaters are in that -- in and around 8.

Great. Last question also, I guess I'm asking this question slightly different than Dan before, but after the collateral substitution on Imagine, what percentage of the assets that you have owned, that you will own or have owned before, how much of Imagine's total assets is that going to be?

Well, I mean, we are -- we're 26 now properties of 75 or 76, so we're about one-third of their assets, but it makes up about 55% to 60% currently of our educational assets.

Yes, but us as a landlord to them, we're about 30% to a third of their world, landlord world.

And as a percentage, Josh, as we indicated this last year, we said we're going to execute $90 million to $100 million of charter schools. None of that's with Imagine. So as those come online, we are further reducing that percentage of Imagine. And we anticipate next year that we will be doing that number or larger. And, again, we think it will further reduce that concentration.

Your next question comes from the line of Emmanuel Korchman, with Citi. Please proceed.

Hey, guys, good afternoon. David, in your prepared remarks when you were talking about the name change you had commented that the current property types are education, entertainment, recreation, etc.

Yes.

And I felt like you had an emphasis on current. Were you going anywhere with that, or is that just kind of the way you think about the Company now, and if so what other types could we see you going into as of right now?

No, I'm not trying to hint at anything now. We don't have anything to announce or -- we're focusing on those three. I think the basis of the Company is such that certainly we could expand that base with other focused areas of investment, but at this time I don't have anything to lead you to. We've had some modest incremental expansion of things where people thought of entertainment as all theaters and we're doing some things outside of theaters. But our focus is within those three -- under those three banners at his time. And it's possible we will look at things beyond that at times, but if we do we expect them to be focused specialty areas of property. But at this time it's really focused on those.

Perfect. And then any ideas on the investment breakdown for next year? I know you just commented that you'll probably do over $90 million of charter schools, higher than this year. What would the breakout look like compared to this year overall?

Yes -- it's Greg -- I think right now the entertainment segment as we did our budget would be about 40%. The other two would be roughly 30% apiece, so a little more focused in our entertainment segment. But, as you can see, it was kind of what we talked about this year. I mean, it's not perfectly a third, a third, a third, but we're growing all the segments. But next year it looks to be a little more heavy in our entertainment area.

And that comes back to a question we often get about the kind of the development of the portfolio, and a lot of people ask if it's moving away from entertainment. As you can just tell from what we delivered to you here today and what Greg's talking about for next year, still very entertainment heavy. We're still very focused there. We're not deemphasizing that in any way. We're growing some of these others. It's hard to say exactly how fast they come on. But it's our expectation that entertainment is still going to be the main event around here for -- as far as we can see.

And then one last question, on the Catskills, in guidance next year you assume no income coming in from that? Did I understand that correctly?

At this time, yes, we prepared the guidance with no income coming --

It's at the midpoint, yes.

Yes.

Perfect. Thank you very much, guys.

Thanks.

Sure.

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

Hey, good afternoon, guys.

Hey, Rich.

Next, or this year, rather, you have, I think, two more theater complexes coming, the leases coming due, and then next year you have three. What's the status, I guess, of especially the two this year, but even the three next year at this point?

Yes, originally, remember, we had four this year. I think we've dealt with three of the four either through renewals or reworked leases, and those are reflected in the guidance. We've got one more that we're trying to see if -- how that resolves. But that's not yet determined. As far as next year, we've already -- one of our -- AMC has already exercised one of their options. We think there is another one that we should receive here shortly for a renewal. And then we'll have two of our larger theaters that we think we're going to have to think about looking at as far as resizing or dealing with as being too large.

So, again, I think what you see for next year, we've dealt with all of the issues for what would be going out this year, and it's reflected in that guidance, Rich. And then next year we think 50% of it already have been -- that we already are -- dealt with, and we've got two that we'll need to deal with throughout the year.

Okay, great. So the two this year, one is already extended, is that right? Is that what you're saying?

That's correct. Yes.

And then the other you're still working on.

Of the four -- of the four --

Yes.

-- we've dealt with three of the four and have come to terms with extensions on or new provisions on three of the four. We have one remaining that we've not dealt with.

So there are more -- there are four this year --

So 75% have been dealt with, and the numbers reflect those, the guidance reflects those. And then next year two of the four have already been dealt with for '13, and we've got to deal with -- or we think two of the -- one is already dealt with, one we think we'll hear the renewal shortly, and then we have two to deal with. And then if you look out into '14, we have no expirations.

Right. Okay. And so this last one for this year, I mean, the theater's still going to be there, I assume, right? It's just a question of the negotiation around the extension.

Yes. Well, the -- yes. No, it's -- candidly, Rich, what we have is a situation where it has a CMBS mortgage on it that's for -- that probably exceeds what we think the value of the theater is, and we're trying to negotiate with the CMBS lender to see if there's a way that we can make it a viable option for us of if we're going to deliver it back to them.

Okay. Good. Got you. Thank you, Greg. Then on the vineyards and wineries, is there -- beyond the progress this quarter, is there any additional going on at this point, or are you still kind of back to square one on it?

No, we still have some additional possible transactions that we're looking at that can be delivered in the fourth quarter. As we indicated, we are actively marketing these properties and continue to be. We have one additional thing in the fourth quarter that we think right now has a possibility. However, it's not of a certainty that we wanted to announce it on this call. But if it does we think it can be another positive impact to our furtherance of our exiting of that asset class.

And, Rich, the other thing I might add, as Greg mentioned, we'll be down to around $75 million of carrying value after the $21 million of sales we talked about in the -- in our call, in our remarks, and we'll be -- with that $76 million about a little over 90% of that is leased assets. We're only -- we're down to about 9%, or about $7 million, of unleased assets. We're getting to a pretty small number that's not productive.

Yes, the vast majority of the unleased that have carrying costs associated with them and don't have any NOI contribution we've dealt with.

Okay. Good point. Yes, very good point. Thanks, guys. Then on, Mark, on the debt side of things, S&P is still your lone non-investment grade rater. Are you planning to go back to them any time soon? Is there any progress on the going to investment grade front with S&P?

Well, we always welcome the opportunity to talk to those folks to improve that rating. I mean, if we keep delivering quarters like this and keep delivering results and improving our metrics, we think we'll get there. I can't predict when. But the metrics are certainly moving in the right direction, and I think the -- even the concentrations, when you think about AMC or Imagine or any particular customer concentrations, those are certainly declining. So I think things are moving in the right direction.

Okay. Good. Good, thank you. And then last thing, I think you have mostly mortgage notes coming due in 2014, so is the idea to unencumber as mortgage notes come due and switch those to bonds, to unsecured notes?

Mortgage notes in 2014, yes, we'll continue to do -- continually -- continue to be committed to the unsecured financing vehicle, and as those roll over we would likely hit the unsecured market. I will say that one of those loans in 2014 is a Canadian loan. It supports our Canadian entertainment retail centers. And there is some thought that we might want to have that as a hedge, a natural hedge against the NOI of that -- those ERCs and keep that debt up there --

On a currency hedge.

-- on a secured -- yes, on a currency hedge on a secured basis. But we'll kind of cross that bridge as we get closer.

Right. As Mark's pointed out, we're moving largely, as we've indicated, we're moving to an unsecured model, Rich, where this is progress. So our game plan is to redeem that secured debt with unsecured as time progresses, but particularly the Canadian situation we may be a -- we've said there may be instances where we keep some secured debt, and that as a natural currency hedge may make a lot of sense for us there.

Okay. Very good, guys. Thank you.

All right.

Thanks.

Your next question comes from the line of Michael Bilerman, with Citi. Please proceed.

Yes, good afternoon. David, just want to get your thoughts as you do enter potential new asset types. I guess have you sort of set a (inaudible) limited at least initially in terms of the size of that investment? And the reason I ask is you've made a big point about research and industry knowledge in this sort of new name change and the focus of your investments, but if you -- a number of those new investments have had a little bit of probably more hair than you wanted.

Clearly on the Imagine situation I think you've acknowledged that it would've been better and you could've done a little bit more research to understand, and the concentration that you had in one market. The vineyards have obviously gone the wrong way. You've still got $187 million in a land parcel in the Catskills. Schlitterbahn had some delays to it. The New Rock City retail you ended up having to sell and give back. So, as I think about all these new areas that you've got into, I'm just saying, as you enter new ones are you going to take maybe a different research approach?

No, Michael, I don't think we are. I think the research demonstrate -- the track record demonstrates that largely it's a very successful formula. And you went through a litany of issues there. Some of those were theater projects. And in fact largely a lot of those we consider to be very successful investments. The Imagine investments have been 100% current on 100% of months. So there are things we structure differently, but [does structuring really help there]? And I think that our focus in specific specialty areas is how this company will continue to be guided in the future. We don't have a ceiling, necessarily, except to say we don't expect to kind of over-focus the Company in a new investment area initially. And so on an overall balance sheet of $3.25 billion or so, there's a -- there's probably a limit to what you'd put in a new category. But it's fundamentally going to be the same approach we've had that we find has been very successful.

Thinking about the $187 million up in the Catskills, that had gone up $2.6 million. Is that just the carry costs that you're accruing there, or what sort of expenses was that sequentially quarter to quarter?

Michael, that's -- as we talked about, we're involved in planning and land planning and going through the approval process for our SECRA and our land use development, and therefore it's cost consultants and other things related to that, not interest capital.

Yes, we're not capitalizing interest on that.

Not capitalized interest.

So, how much more money should we expect to be spent prior to an outcome?

We don't -- we haven't given specific guidance to that. I think the track record we have demonstrates that we're spending some money there. I don't think it's sizable relative to the balance sheet in total or relative to that asset to get it in a productive state. And, as Greg indicated in his comments, we do expect to have announcements on that on a fuller extent before the year end.

And then just to make sure, I want to make sure I'm crystal clear on the guidance, so you're saying at the midpoint there's no income for the full year on $187 million or so, because I guess you're going to still spend money, of capital. But at the high end, which would be an incremental $3.5 million relative to the midpoint, that $3.5 million is being generated off the $187 million at some point during the year?

No, that would (multiple speaker).

I think we've -- we've set a $0.15 range excluding Concord all together. That's not to suggest what Concord could be on the upside. The point is you could move beyond the midpoint to the extent that Concord contributes. It doesn't mean that there's a limiter at the top end, or that's not what we're trying to suggest there.

Okay. So you have zero income for the entire year, whether you're at the low end, the midpoint or the high end of the guidance?

Correct. And we (multiple speakers) -- sorry, we've got carrying costs, of course, associated with it, of around $1 million inherent in that guidance.

Right. But if you're able to successfully have some resolution, either selling your -- selling a majority of the land or half of the land or whichever way you may do it, the investment of that capital, either just debt repayment or new investment, will drive accretion relative -- I mean, $187 million, I mean, at 7% is a lot of money and a lot of ability to pay dividends and increase earnings.

Sure.

That is correct.

Okay. And then just lastly, in terms of the asset that you said was -- it was under CMBS, I had thought everything was pooled in your CMBS --

No, no.

-- that you didn't have individual asset securitizations. Or is this asset part of a larger securitization?

No, it's an individual loan, Michael. No, ours aren't necessarily pooled. They're the individual loans.

We've had pooled asset loans and we've had individual asset loans in the history of the Company, a pretty considerable variety.

Right.

Our individual asset may get pooled, but our asset is a single-asset loan as far as we're concerned.

Yes.

And what's the size of the loan and when was it originated?

It was originated in '07, and it -- the loan was -- original loan was $14.7 million.

And what sort of yield was it at that point, a debt yield?

It's about -- I think the current rate is like 5.8%, a little under 6%.

Yes, the original asset value --

Oh, that -- (multiple speakers).

I know, I know, but I'm going to -- the original asset value was about -- at that time it was about $14.5 million, so it was a major loan on a property.

Right.

Oh, so you took out $14.7 million on a $14.5 million asset value?

On our book value, not necessarily -- it may have appraised at a higher number at that time, but our book value.

Right. So what was the appraisal yield at that point? I'm just trying to understand -- arguably '07 was a -- probably you picked the peak of the market. I'm just trying to understand --

Well, I think what you have is cap rate compression, too. We probably did the deal around a 10 cap, and it was probably valued in those days probably in the seven cap range. So a lot of it was --

Right. It would've probably had an appraised value at that time of about probably $16.5 million to $17 million. So it was probably a 75% loan to value on appraised value.

Right. And it's now on our books for around -- I think it's around $12.5 million.

Right, because you paid down -- so I'm just trying to understand how the asset would be underwater. Is it primarily driven by the fact that the new lease rate and the ability to renew would result in substantially less income? Because I would assume cap rates are probably close enough relative to especially the fact that you've paid down principal.

Right. The principal hasn't paid down that much, and so really it's a situation where the cap rate and the rate if you rework the deal would result in a coverage level that we're not necessarily happy with on the asset. So therefore we've approached the CMBS lender about a transaction that would reposition that asset to the coverage level that we would like it to be, and they're evaluating that now.

Should we be mindful of any of (inaudible) within the portfolio?

The only one we're aware of, this one. It's also a very unique situation in the fact that it's on a ground lease and we own the ground underneath it, but it's not part of the debt.

Interesting. Okay. Thank you.

You have no further questions at this time. I would now like to turn the call over to David Brain for closing remarks.

All right. Well, we thank you. We know there's a lot of distraction and a little bit of confusion, at least on the Eastern Seaboard, and we appreciate everybody taking the time and tuning in, and we always look forward to hearing from you if you might have further questions, and we'll look forward to reporting to you following next quarter. Thank you.

Thank you.

Thank you.

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