EPR Properties (EPR) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 EPR Properties earnings conference call. My name is Erica and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference 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 very much. Thank you all for joining us this afternoon. And I'll start with our preface, which is as follows.

As we begin this afternoon, I need to inform you that this conference call may include forward-looking statements 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, results of operations may vary materially from those contemplated by such forward-looking statements. A discussion of the factors, which 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, 2012.

That said, I'll thank you again for joining us. This is David Brain, the Company's CEO. You've joined us for the earnings call for the fourth quarter of 2012. And with me, to go through all the news of the quarter, of course, is Greg Silvers, the Company's Chief Operating Officer.

Good afternoon.

And Mark Peterson, our Chief Financial Officer.

Good afternoon.

I'll remind you also, as we start, that if you have available to you at eprkc.com, there are slides that amplify, illuminate some of the comments going on in this call.

I'll start with you, as I usually do, with the headlines for the Company, for EPR Properties, for the fourth quarter of 2012. Number one, the Company finishes the year at the high end of increased earnings guidance. Second, material (technical difficulty) [contributions] made in all primary investment categories. Third, strong outlook for 2013 leads to increased earnings guidance. And the fourth headline, dividend is increased and anticipated to be paid monthly.

I have to say I feel like this is a desirable set of headlines. It's always great to report that with the high end of expectations and our outlook is increasing, particularly when you can couple this with a strong balance sheet, and an attractive and sustainable dividend yield.

Turning to our first headline, Company finishes the year at high end of increased earnings guidance. We had a high-quality quarter in many respects, which capped a year where we performed better than we had expected, and led us to increase our FFO guidance several times throughout the year. The Company continues to execute well on all aspects of key operations, including growing our portfolio with accretive transactions and lowering our cost of capital.

We are also making good progress on redeploying and rejuvenating capital that's been tied up in lower yielding investments. Importantly, all this is complemented by a strong existing portfolio of performance at nearly 100% occupancy, with record participating rents and interest, as tenant industries perform at very strong levels.

Box office revenues set another record in 2012. Charter school enrollment surged upwards by double digits again for the current school year. And our ski portfolio is seeing double-digit revenue increases over a tough prior ski year.

Our second headline this afternoon highlights a specific aspect of our solid operations. It is that, in the quarter, we were able to execute on material acquisitions in all primary investment categories. Greg will have more detail on this, but I'll highlight to you that we had nearly $100 million in investment spending for the quarter, with significant amounts in all three of our key focused investment categories.

We made several acquisitions in our Entertainment category, and the scope of our holdings was expanded by virtue of a new, exciting music-anchored destination entertainment venue. In education, we added several new public charter schools, notably with several new operators; and likewise expanded our recreation investments with a new accessible ski area and a new client in that category.

In total, we achieved the upper end of our portfolio guidance range of $300 million for the total year 2012. Our strong quarterly and year-to-date investment results are one of the key factors leading to the third headline, and that is strong outlook for 2013 leads to increased earnings guidance. With nearly $100 million of carryover investment spending in 2013 from our 2012 transactions, we expect a total level of portfolio growth in the coming year of between $300 million and $350 million.

This, combined with our expectation of continued strong portfolio performance, and our declining cost of capital, bringing us to provide 2013 guidance for FFO per diluted share of $3.79 to $3.94 -- which is up $0.02 over our previous 2013 guidance, and 5% at the midpoint above our 2012 performance.

Our final headline this afternoon -- dividend is increased and anticipated to be paid monthly, follows directly from our robust outlook for 2013, and also reflects a new objective for the Company. Consistent with our history, we are increasing our common dividend at a rate comparable to the growth of our per-share cash flow. We are announcing an increase in our common dividend of just over 5% that is comparable to the growth in per-share cash flow in 2012, and expected for 2013 of 5%.

We are raising our dividend to an annual level of $3.16 per share, which will keep us at a payout level of about 80% of FFO per share. The dividend for the first quarter will, as usual, be paid in April; but beginning in March 2013 -- I'm sorry, May -- we'll begin paying our dividend on a monthly basis.

EPR has always had a healthy institutional following and ownership, but less retail holdings than many comparable triple net REITs -- and less we think is appropriate for the Company and the full value of our shares. In light of that, we are undertaking several initiatives to develop greater retail ownership, including converting our dividend payment to a monthly structure, which is something many retail income investors seek.

With investment grade ratings, 15 years of history, an attractive dividend yield, and a thoroughly understandable portfolio and business model with sustainable growth, we believe we can approach and find success in greater retail ownership, which should increase the demand for and value of our shares. We have analyzed the potential benefits of increasing the retail ownership, and believe the added interest and stability of this investor base could help the longer-term valuation of EPR.

With that, I'll turn it over to Greg, and join you all as we go to questions.

Thank you, David. In the fourth quarter of 2012, we continue the positive momentum of the year with approximately $96 million of capital spending in the quarter, bringing our year-end total to approximately $300 million, which was at the top end of our range on capital spending. The capital was deployed across all of our business segments, and we continue to see good opportunities to put capital to work in 2013.

On today's call, I would like to spend a minute highlighting not only the fourth-quarter achievements, but also the total-year performance of our portfolio, along with discussing our plans for 2013. In the entertainment vertical, our primary asset group, theater exhibition continued to perform well. As we had forecasted, 2012 turned out to be a record year, with box office revenues up approximately 6% for the full year, and with tickets sold or attendance up approximately 4%, demonstrating the ongoing resilience of the sector.

Early indications are for box office growth of 2% to 5% in 2013. However, this prediction will become clearer as we get further into the film calendar.

With regard to lease (technical difficulty) through exercise of option or new extension or, in some cases, we've introduced a new operator. Furthermore, our current FFO guidance includes the impact of these transactions. Also, please note that we have no expiring theater leases in 2014.

During the quarter, we funded approximately $13 million on eight build-to-suit theater projects and five family entertainment projects. Additionally, we provided $22 million of financing for an exciting venue known as the North Carolina Music Factory. This entertainment retail property located in Charlotte, North Carolina is comprised of 183,000 square feet, and is anchored by two live performance venues along with restaurant and other entertainment uses.

For the year we deployed approximately $120 million on entertainment investments, including theaters with expanded offerings as well as exciting new categories of family entertainment. As these investments indicate, we continue to see good opportunities for our theater build-to-suit business, as well as other components of our entertainment vertical, which are reflected in the capital spending guidance.

In our recreational vertical, we are pleased to see a return to normal weather patterns and corresponding return to normalcy in the performance of our daily ski portfolio. Through President's weekend, our performance is up approximately 20% over the comparable period last year. And with the continued snowy weather patterns that we experienced over the last few weeks, we are encouraged about a continuation, and in fact, strengthening of this trend.

In December, we acquired the Wisp Ski Resort in McHenry, Maryland, and leased the property on a triple net basis to Pacific Group, a new operator to our family. We continue to believe that investing -- increasing both our geographic and operator diversity provides a significant risk mitigate, and increases the stability of our portfolio. And while we are glad the cold weather returned this year, we were pleased that our portfolio could withstand an aberrational 35 or 40-year weather year without interruption of payment.

Our top golf investments continue to exceed our expectations for performance, with the investment contributing percentage rent in its first full year in our portfolio. During the fourth quarter, we also continued to fund three build-to-suit golf entertainment complexes with Top Golf, a relationship that will continue in 2013. For the year, we invested approximately $84 million of capital in our recreation vertical, including $42 million in the fourth quarter.

With regard to our education portfolio, we continue to be very positive on the public charter school opportunity, as the movement sets new records for success. In 2012, we crossed the 6000-school mark, serving over 2.3 million students. For the 2012/2013 school year, charter school enrollment increased by 275,000. And for the five-year period, enrollment has increased almost 50%.

These are powerful statistics and demonstrate that the public charter school movement continues to expand, as parents are demanding choice in the education of their children.

We continue to make significant progress toward our goal of lowering our tenant concentration, with the introduction of four new operators in 2012. We have -- as we've previously discussed, we have identified solutions for approximately 70% of the Imagine assets that lost their charter. Given the amount of time before the next school year, we remain confident that we will solve the remaining vacancies as well.

During the period, Imagine has remained current on all of their rent obligations and we do not anticipate any disruption of payments. During the fourth quarter, we invested approximately $13 million related to build-to-suit construction of nine public charter schools, and we anticipate investing over $100 million of capital in the educational space during 2013. For the year, we invested approximately $80 million of capital in the education vertical.

With regard to our Sullivan County, New York investment, we have nearly completed the development approvals related to the project. The only significant contingency that remains is Empire raising the necessary capital to fund the construction of the casino complex.

We're also excited about other tenancies that are interested in becoming part of the project as it builds momentum and enters the construction phase. However, as all of these are contingent upon the anchor casino project, we do not want to get too far in front of that project, and will provide more details as the contingencies are removed.

Additionally, the Company continues to execute on its strategy of exiting the vineyard and winery business. During the quarter, we completed the disposition of the remaining properties related to the Buena Vista Winery and Vineyard assets, as well as the sale of the Carneros Custom Crush facility for total proceeds of $32 million. During the fourth quarter, we also entered into two agreements to sell an additional leased winery as well as three other unleased vineyard and winery properties.

We are pleased to be making meaningful progress on the execution of our stated strategy of exiting this space and redeploying the capital into alternative investments. While there can be no assurances that the above transactions will close, we do believe they will, and subsequently, we will only have approximately $28 million remaining investments in the vineyard and winery space.

Our overall occupancy remains at a strong 98%. For 2013, due to the strength of our investment pipeline, we are raising the spending guidance range that we discussed in our last call. We are increasing our guidance range from $275 million to $325 million to $300 million to $350 million of investment spending. This range of spending includes approximately $100 million of carryover spending related to build-to-suit projects that began in 2012 and will be completed in 2013. As we've discussed today, we continue to see quality opportunities across all of our business verticals and expect to grow each of them this year.

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, FFO for the fourth quarter decreased to $41 million or $0.87 per share from $42.6 million or $0.91 per share in the prior year. FFO as adjusted per share was $0.96 versus $0.90 in the prior year, an increase of approximately 7%.

Before I walk through the key variances, I want to discuss a few of the items that are added back to net income to come to FFO as adjusted for the quarter. First, as Greg mentioned, we completed the sale of two vineyard and winery properties during the quarter for total proceeds of approximately $32 million, and recognized a combined net loss of $700,000.

We have also entered into two separate sales contracts to sell a leased winery, as well as three other unleased vineyard and winery properties. While there is no assurance these sales will close, we evaluate the carrying value of these assets relative to the value of the sales contracts, and impairment charges totaling $8 million were recorded.

We are pleased that we continue to make progress on our strategy of selling our remaining vineyard and winery assets, and redeploying the capital to more productive investments. As of year-end, the carrying value of vineyard and winery assets was approximately $55 million. And if the additional transactions that I just mentioned close as anticipated, we will be down to a carrying value of about $28 million.

Second, as previously announced, we completed the redemption of all our 7 3/8% Series D preferred shares at par plus accrued dividends, totaling approximately $116 million, and recorded a charge of $3.9 million in the fourth quarter, representing original issuance and redemption costs. Finally, we incurred $150,000 of costs associated with the early payoff of a $4 million secured loan related to our New Roc Entertainment Retail Center.

Now let me walk through the rest of the quarter's results and explain the key variances from the prior year. Our total revenue increased about 11% compared to the prior year to $83.4 million. Within the revenue category, rental revenue increased by $4 million versus the prior year to $61 million, resulted primarily from new investments as well as base rent increases on existing properties.

Percentage rents for the quarter included in rental revenue were $0.7 million versus $0.1 million in the prior year, and related primarily to the strong performance of our Top Golf entertainment complexes. Percentage rents included rental revenue for the year of $1.8 million versus $1.2 million in the prior year.

Mortgage and other financing income was $17.1 million for the quarter, up approximately $3.2 million from last year. This increase is primarily due to additional real estate lending activities. This line item also includes participating interest, which, for the full year, was $0.9 million versus $0.5 million in the prior year, and relates to strong performance at the three Schlitterbahn Waterparks.

(technical difficulty) side, our property operating expense increased by approximately $1.3 million versus the prior year, due to higher operating costs, as well as higher bad debt expense at our multi-tenant properties. A portion of the increase in property operating expense was offset by higher tenant reimbursements for the quarter. G&A expense increased $350,000 versus last year to $5.4 million for the quarter, due primarily to higher payroll-related expenses, as we continue to support our growth, offset by lower professional fees.

Our net interest expense for the quarter increased by approximately $2.4 million to $20.1 million. This increase resulted primarily from an increase in our offsetting 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 by approximately $250,000 to $358,000 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 $0.5 million to $6.5 million for the quarter, due to the issuance of our Series F preferred shares in October, partially offset by the redemption of our Series D preferred shares in November.

Now, turning to our full-year results in the next slide. For the year, our FFO increased to $168 million, compared to last year, to $150.3 million. FFO per share was $3.59 compared to $3.20 last year. Excluding charges, FFO as adjusted per share increased about 8% versus the prior year, to $3.69 from $3.43.

Turn to the next slide, I would now like to review some of the Company's key credit ratios. As you can see from this multi-year summary, our coverage ratios have been consistently strong, and remained strong for the year, with interest coverage at 3.6 times, fixed charge coverage at 2.7 times, and debt service coverage at 2.8 times.

We increased our common dividend by 8% in 2012, and our FFO as adjusted payout ratio for the year was 81%. Our debt to adjusted EBITDA ratio was 4.8 times for the fourth quarter annualized, and our debt to gross assets ratio was 41% at December 31. 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 $1.4 billion. All but about $50 million of this debt is fixed -- either fixed rate debt or debt that has been fixed through interest rate swaps, with a blended coupon of approximately 5.7%. This compares to a blended coupon a year ago of 6.6%. We had $39 million outstanding at quarter-end under our $400 million line of credit, and we had $10.7 million of cash on-hand.

We are in excellent shape with respect to debt maturities. As of December 31, we have no scheduled balloon maturities in 2013, and what should be a very manageable amount of such maturities in each year thereafter. As previously discussed, during the quarter, we also issued approximately $121 million of Series F preferred shares at 6 5/8%. This issuance represented a 75 basis point savings versus the Series D preferred shares that were redeemed during the quarter.

In looking back at the full-year 2012, we raised over $700 million of new unsecured debt and equity, and in doing so, significantly reduced our cost of capital. We also continue to make significant strides in our move to an unsecured debt model, while always being mindful of maintaining a conservative capital structure and a well-laddered debt maturity profile. With excellent liquidity, lower cost of capital, and a robust investment pipeline that David and Greg referenced, we are well-positioned to take advantage of opportunities in 2013 and beyond.

Now, turning to the next slide, we are increasing our guidance for FFOs adjusted per share to $3.79 to $3.94 from the previous guidance of $3.77 to $3.92. This increase in guidance reflects our latest expectations in terms of investment and financing activities. In addition, as Greg mentioned, we are increasing our 2013 investment spending guidance to a range of $300 million to $350 million from $275 million to $325 million, with roughly one-third of this spending expected to be carryover spending on build-to-suit projects initiated in 2012.

As we have done previously, we think it is also helpful to investors to share certain key assumptions 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, our FFO per share and investment spending guidance includes the Catskills project at its status quo. We believe this is prudent, given the contingencies which remain for this project to move forward. And we will provide the financial details of this project once such contingencies are removed and timing is better-known.

And finally, as David mentioned, we are announcing our dividend for the first quarter of 2013 of $0.79 per common share to shareholders of record as of March 28, 2013. This amount represents an annualized dividend of $3.16 per common share, an increase of over 5% from the prior year.

Furthermore, as David also mentioned, we will begin paying our common dividend on a monthly basis beginning in May for holders of record at the end of April. Thus, it is anticipated that investors will actually receive 14 months of dividends on a cash basis during calendar year 2013. No changes are being made to the timing of our preferred dividends.

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

Well, as we go to questions, I just will point out the strong characteristics at all level reported to you this afternoon of the tenant industries, the Company's, our financial structure, as well as the outlook for the development of our portfolio. With all that said, I just hope everybody recognizes it's pretty strong at all levels, and we're very pleased with the situation of the Company currently.

With that, I'll turn it over -- open it up to questions. Operator, are you there?

(Operator Instructions) Joshua Barber, Stifel Nicolaus.

Thanks very much and congratulations. Can you guys talk a little bit about the returns that you were getting on the acquisitions in the fourth quarter? And what the sort of going-in rates that you expect on your capital deployments in 2013?

Yes, I'll let Greg take that. It tend to be very strong still in the upper-single digits. Greg, why don't you give that.

Yes, I would say our build-to-suit projects are generally running from the, call it, 9% to 9.5% -- upwards to 9.75% range, that I would say, overall, are running somewhere 8.75% to 9.75%, is the range of cap rates that we're doing.

Okay. When it comes to Concorde, I know that you mentioned there's a number of contingencies that are still there. Can you give us, I guess, in broad strokes what would be the capital deployment potentially from your end? And what the timing would be on that? And also, how you guys are thinking about the return profile of those particular assets.

Yes, this is -- it's complicated by a number of -- our one primary partner there, Empire Resorts, and also other people we're talking to. I will just tell you we're not prepared at this time to give a discussion to capital deployment.

We have talked about, because of the announcements of the potential immediacy of this, that we do think that it will be probably something on the order of a two-year build period starting in the spring of this year 2013. But -- and probably will, as we see it today, be impactful to something on the order of $0.10 per share.

But beyond that, with regard to investment levels and so forth, we're not prepared to really lay that all out. And we will do so, though. There is a number -- there are some information available from Empire -- they're a public company -- vis-a-vis their press releases and announcements and so forth. And they've announced a $300 million spend level at the site, but -- and that is their money.

But we'll discuss the rest of the details of this when they clear their contingencies, most notably, we think of raising the capital for that spend level.

Okay, but it's fair to say that there's some of that in your capital spend guidance?

No. There is not. We tried to make that abundantly clear several times over that it's not -- at this time.

Nor is the earnings.

The earnings, none of that. We'll bolt that on when we think the contingencies are clear enough that it's more highly reliable. We think it's reliable; we just don't think it's gone to the highly reliable stage at this time. And we'll wait until then to do that.

Got it. And lastly, can you talk a little bit about Imagine? I know there have been some stories in the news -- in Indiana and Florida, to be specific -- on a few of those schools losing their charters. I don't believe any of them, with maybe one exception, are actually owned by EPR.

Can you talk about, I guess, the review process going into the springtime on some of those schools? And how some of those schools potentially losing their charter could impact the master lease, Imagine credits, and some of your owned assets?

Sure. Every year, Joshua, we do a review of our properties and see where they're standing. And we'll complete that review. As it relates to the master lease, if someone lost their charter, as what we saw in St. Louis, we really have no impact to the master lease. We have the ability to either substitute properties or sublease those out two new operators.

To the extent that we have a lot more visibility to a property, I think it gives us a lot more flexibility in our ability to move a new operator in there. And I guess one of the positives that you will take away from the St. Louis experience is, we have much greater experience in knowing how to deal with that issue and getting in front of that issue.

We don't see any impact with regard to Imagine's ability to pay nor do we anticipate any sort of payment issues. To the extent that we are impacted from a charter standpoint, we think we have plans in place to keep those schools either occupied or swapped out to an occupied school.

You know, broadly speaking, Josh, just say the statistics Greg gave for the industry are very strong with regard to its growth, and it is drawing some attention of increased scrutiny maybe on state-regulated basis. But this is going to be a good thing.

There are, as we saw in St. Louis, there's going to be some shakeout in some places. But fundamentally, we believe the crossed and unitary lease nature of what we have with Imagine will hold up for any issues that we know of. And we expect to work through this and be in fine shape, and the industry to be better for it.

All right, great. Thanks very much. I appreciate it. Good luck.

Okay, Josh.

Craig Melman, KeyBanc Capital Markets.

Just curious. The improved pace of investment spending, obviously, very much a positive. Just curious, Greg, what is it you think that's driving it here? Is it just a steadily improving economy? People feel more comfortable putting out money? The theater operators obviously feeling better about the box office? Or is it more you guys kind of casting the net a little bit wider on the investment kind of spectrum that you'd be looking at? Just curious if you could point to anything.

Sure. Sure, Craig. Actually, I'd go to the first two points of that. If you recall two years ago now, we were coming out of a period where the industry was kind of down. We were coming off of a down year. And we had several build-to-suit projects that kind of got throttled back a little and delayed.

Whereas now -- I mean it is somewhat mercurial in the sense that people are seen coming off of a very strong year in what appears to be a very strong film calendar that, you know, the resilience of the consumer actual attendance showing, picking up the wide acceptance of some of these enhanced food and beverage offering theaters, and the performance that they really started to gain, I think has really got some theater chains being on the offensive. I mean, we've seen several recent transactions in this space, you know, through chains acquiring other groups.

So there is a recognition of wanting to grow and get back on a growth path. So, it really is kind of, I think, about a recognition that we've kind of -- we've got a strong consumer base that continues to value the movies, and that we are offering new and enhanced product types and people are responding to it.

Can you give us an update maybe on the projects you've identified kind of year-to-date that would kind of flow through 2013?

Well, we've got -- I can tell you we've got eight theater build-to-suit projects that are currently under construction right now. I mean so, if you think about, as we've talked about before, Craig, that theaters generally try to open either in the spring or in the holiday season. So, we'll have projects -- several that will open this spring. We have several more that will open in the fall. And we'll also commence other projects that will begin opening in 2014.

And that's just kind of the cycle that we see. So, will we commence another six to eight projects? That's our expectation. So that we'll have this rolling kind of 12 to 14 projects that are in some stage of build-to-suit at all times for our theater platform.

The eight, though, that are under construction, that was stuff that was identified in '12, right?

No. No, no, no. That was stuff that was -- oh, yes, I'm sorry. Yes. Excuse the date -- yes. (multiple speakers)

(multiple speakers) And anything new that you guys have identified or kind of what the current pipeline is (multiple speakers) --

Absolutely.

-- as we -- because we want to get to $200 million, that's not going to carry? (multiple speakers)

(multiple speakers) No, no. I'm sorry, Craig, I misinterpreted your question. Yes, we probably have got somewhere between eight and 15 projects we're looking at right now to evaluate if we're going to do. So we think there's a substantial number of opportunities that we will be able to lock onto. We've already had several that have gone through our Investment Committee and gained approval for. So we're well on our way to getting those projects underway.

(multiple speakers) And Craig, in addition -- in addition to the carryover, most of that additional spending that makes up the $200 million has names behind it.

Absolutely. We don't -- they're not speculative. We have named projects.

Okay. That's what I was trying to get at.

I'm sorry. Sorry about that.

Oh, no, no problem. And just curious, is it my memory just being a little fuzzy or do the yields that you guys quote on the build-to-suits and overall seem like it's maybe coming down a little bit from where you used to be?

No, it's really not. I would say those yields are kind of -- you know, in the kind of 9.25% and sometimes with new operators will be double digits. We also have some existing properties that we're looking at, where we may be a little below that, in kind of that higher 8's number, that -- the kind of market pressure is going to put that there. But that range, that 9% to 10% cap range, is still solidly where we're at.

Craig, we've done a lot in the 10% cap over the years, that's probably come down a little bit, given the low environment we're in. But we're still in the very solid upper-single digits. So, it's maybe come in a little, but it's still, we think, real attractive.

I think the beauty of it is that the cost of cap rates haven't come down nearly as much as the cost of capital has come down for us.

That's right.

So, the spreads have actually improved.

And remember, what we're talking about is initial cash on cash yields. Those are going to grow. All of ours have escalators. And as we've seen in this quarter, (technical difficulty) can substantially drive those numbers higher.

That's helpful. And then just one last quick one for Mark. The $700,000 of percentage rents, should we assume that goes closer to zero in 1Q?

Let's see. Yes (multiple speakers) --

Q1 is our lower -- definitely our lower period for percentage rents. 3Q is our highest.

Yes, as Greg indicated, most theaters, which tends to be the bulk of the portfolio, open in that spring for spring season. And we calculate those. And we true-up and get those percentage rents, like in that Q3.

That's why it's second and third. (multiple speakers)

(multiple speakers) It tends to be the highest. And it tends to be -- we have some now that comes over from Q1 from holiday openings, but Mark will have that (multiple speakers) --.

Yes. (multiple speakers) It's not zero. We do have some theater percentage rents that we generally get in March. So, that (multiple speakers) --

Really percentage rents is never zero for an entire quarter. But in the first quarter, it's certainly lower than some of the other quarters like third and fourth.

Yes, it's not a ratable number.

And the new one, the big one this quarter was Top Golf, which was like $550,000. And that's going to happen the same time of year -- later in the year than early in the year, so that won't repeat. And same with Schlitterbahn -- generally happens third and fourth quarter as opposed to (multiple speakers) middle of the year.

(multiple speakers) That's true.

And those (multiple speakers) are two big ones that are kind of non-theater guys that really contribute to participating interest and rents.

Yes.

Great, thank you.

Thanks, Craig.

Emmanuel Korchman, Citi.

Just looking at the 2013 investment spend again, could you help us think about how much of that might be build-to-suit or kind of asset activity versus debt or financing investments?

Well, I think the majority of that is going to be build-to-suit activity. I think probably 70%, 80% of that. We sometimes structure some of our ski activity in a mortgage structure. And sometimes, in our charter schools, we have -- where we have certain structures in certain states that, either for property tax issues or for some sort of regulatory issues, that we do it in a mortgage fashion. But the vast majority of that spending is going to be build-to-suit or fee acquisition deals.

Great. And looking at your revenue schedule, it looks like Rave's contribution or Rave's revenues paid came down significantly quarter-over-quarter?

Yes, Manny. Rave actually sold -- their chain actually changed hands. And several pieces -- there's one piece that's been announced, and that's reflective of our property and the fact that they sold a significant number of theaters to Carmike. They also sold another group of theaters to another theater chain, and that will probably be reflected next quarter in ours.

And they have another group that they sold to, yet a third group. The last two of those transactions have not been -- they've not come out of Hart-Scott-Rodino review, but the one with Carmike has, and that's reflective of these numbers.

But they won't have any impact on leasing? It just won't hit (multiple speakers) --?

(multiple speakers) No, no, no. They just -- you'll see a new name. A new name will take over (multiple speakers) --

(multiple speakers) The ink has shifted from one client over to another, as they just moved around, but no change.

Yes. We're just not seeing it because it's not part of the top 10?

That's correct.

Right.

And that name is, on ours, would be Carmike.

So far.

So far.

Yes.

Yes.

Got it. And then have you guys seen any significant changes sort of in the competitive landscape for the types of projects that you're looking at? Or maybe as Top Golf becomes more successful, does that impact (technical difficulty) most of the yields and other people that are sort of approaching that in the same theaters?

Well, I mean, there's no doubt -- I mean, that there's always -- you know, as we demonstrate the success of these that we have competitive pressures. However, as we've said consistently, with our -- with how we approach it that we've got -- we think that we develop these relationships to where we can be value-added to our tenants, that we think we do a great job with theaters. People want to understand our thoughts.

We're not simply just providing financing, but we'll provide our input on what we think works and what doesn't work. I think we're trying to do that again with Top Golf. We're doing a lot of support with respect to kind of analysis of locations and things of that nature. So we do think that we're providing simply -- not just simply money but more value. But no doubt that, as anything is successful, competition will be there.

Yes. I mean our capability that we've developed over the years to support our clients in the entire development process through supporting them in a build-to-suit deal, and construction financing and all the way through final, is pretty unique. There are still people that like the theater world that still don't do that or don't underwrite new theaters and support the build-to-suit. That's really a distinguishing point for us and also in our other categories as well.

So I think that's still a service well, there are increased competitive pressures, as we have more success in the industries and have more successful with our clients. But we think that will continue to distinguish us and allow us to do business on a value-add basis with our customers.

And the final one from me. David, earlier you had said that a part of Concorde is contingent on Empire funding for their portion. Any chance that EPR provides any funding for them? Or is that not on the table?

We do not expect to provide any funding for the development of their project, no -- other than land infrastructure spending to support utilities to the site and so forth. That's it.

Thank you.

Rich Moore, RBC Capital Markets.

On the theater leases that you have done for this year for 2013, as I recall from the last conference call -- and I'm not sure if I got this right -- there was at least one you were looking at that might have some shrinkage of size possibly. Is that true? And if so, is that -- have you figured out what you're doing there?

Actually we don't -- I mean, we actually ended up working it out with a tenant where they're going to keep the whole space. So, as David has talked about before, with some new things, there's been some thought that, as you expand to these new food and beverage concepts, that they actually may want to keep those spaces, because they actually take out seats and create a greater amount of options for the operator.

And in that case, with regard to these expiring leases that we've renegotiated or we've exercised options on, we're not actually taking back any physical space. Now what we may do, Rich, so you understand, is what we've talked about before -- that if they do remove seats to go to a kind of a more food and beverage option theater, that we will reclaim part of the parking lot, that we can then use and either ground lease or sell for pad sites.

Okay, good. Great. Thank you. I didn't realize all that. Great. Thank you. And then on the wineries, if I could shift over to that for a second. Is all that's left what you identified in the press release is the other properties that you have taken a small impairment on in the quarter, and those are the ones that you're thinking you're close to selling?

Yes, we took an impairment on a few properties that we expect to sell in the first or second quarter. And then, after that, we're down to $28 million of carrying value, which really consists of three properties that are --

All are leased.

-- leased and generating -- actually, the return on that, $28 million, is about 11% cap going forward, because it is leased and we've written it down to a low value. So it should be in pretty good shape thereafter. And we'll continue to look at even selling those to get down to ultimately zero.

Okay, none of those, though, Mark, are in the planned sale bucket -- are in the sale bucket at the moment, where you have agreements, that kind of thing?

The $28 million? No.

Yes. Yes, okay. Great. And then, on the Mount Snow loan, the $43 million that's coming due in April, what happens there?

Yes, our anticipation is that we will extend that number probably for several years. It's -- they're starting, they've gotten all the development approvals. We'll see how they go from there. Part of their issue -- they've got some opportunities, whether that be raising outside capital through a variety of ideas and programs. And we'll see, but rather than deal with this on an immediate year-to-year pressure, we're probably going to extend that for three years.

Okay. And Greg, is that at the same rate, the same 10%?

Yes. Yes, yes, that's correct.

Okay. All right. And then, I did have one more on the theaters. Are more of these with the strong -- you guys talked about percentage rents and the timing, but with the strong box office receipts, do you think more of the theaters will get into the above-breakpoint range and get into the percentage range category.

Well, it's -- we're hopeful no doubt. And especially as we go to and we start to see the mix, and we start to see things where we're -- you know, with some of the food and beverage options and you're going from a [3.25%] per cap concession spend to something that's $7, $8 of concession spend, you know we're very bullish on that.

And so we've got more and more properties that are approaching that. So we're -- we clearly are positive on the industry, remain positive on the industry, and are hopeful that that will bear fruit. However, I think what you see in our plan, historically, we try to be pretty conservative with our percentage rent plans, and let that be just added bonuses that we have.

And Mark, you may have a comment on kind of what you think the plan was.

Yes, we were fairly conservative. For example, this year, Schlitterbahn, on the participating interest side, had a record year. And we're reducing that number to more of an average type year. So we're not counting on another record performance. We're generally fairly conservative with respect to percentage rents. I think -- and interest.

I think the other thing to point out is, remember, on theaters, as the rent goes up, the base rent, so does the threshold --

The breakpoint.

-- the breakpoint for you to get percentage rents. So, some of that kind of shifts from percentage rent to base rent, which is good for the Company, but keeps percentage rents tame in terms of growth.

Right.

Right. Okay, I got you. And then -- thank you. And then the last thing for me is, so when does S&P upgrade you guys? I mean, I look at the covenants and you're fine on all the covenants. The other two guys have you at investment grade. And so what -- what is their deal?

Let me give you the address to write to, Rich. (laughter)

Yes, okay.

No, I'm just kidding. (laughter)

But they're probably listening right now, so it's okay.

Well, we -- I appreciate your comments in that regard. We think we're fully qualified and we're fully supported by our performance relative to peers that are ranked that way. But we -- we're doing what we can, but we're not in control of that. We're working on it.

And as David indicates, Rich, we have an ongoing dialogue with that group. We keep continue -- what we can continue to do is control what we can control, continue to knock on the door and show them the performance, the reliability, the sustainability of our portfolio. And at some point, that door will open.

Okay. And is that something that you regularly review, like once a quarter sort of thing? Or is it longer than that? Like once every six months or a year?

You have a -- kind of a semiannual call. But -- and if there's some big event, we're talking more often than that. And certainly on an annual basis, you're doing an in-depth review.

We're trying to work it more on a semiannual basis right now, and really speed it up from what would otherwise be an annual process.

Okay, very good. Thank you, guys.

(Operator Instructions) Yasmine Kamaruddin, JPMorgan.

Just a question on the timing of investments in 2013. And can you also comment a little bit on how you plan to fund the investments?

Yes, Mark, you can go over the plan.

I can do the first one. (multiple speakers) The investments -- because there are kind of -- there's a lot of build-to-suit. I would just plan for your plans just to be rather ratably across -- throughout the year.

On a quarterly basis, I think that's a reasonable reflection of what we expect.

Right. And then on the financing side, if you think of the midpoint of the CapEx at $325 million, we kind of finished the year around 40% leveraged, which is where we expect to kind of stay. So, if you think of that $325 million, really think of it as 60% equity/sales of wine properties, and 40% debt. So, $200 million roughly of equity/wine sales and roughly $125 million of new debt.

Now, the good news on the debt is we have quite a few options in terms of how we do that. We could -- opening existing debt, existing issuance for that size. We could -- we have a term loan we have accordion features on. And I guess the third option that's kind of out there, we have some maturities in '14 that we could decide to pull forward and do a larger bond transaction. And we're particularly enthused about that, given the -- how far spreads have come down in the bond that we just did this year.

So, we have quite a few options. That last option would provide a little bit longer-term in terms of financing it, and reset our mark in terms of the spreads that we issue at. I'm excited about that option potentially.

Okay, that sounds good. And in terms of how much -- for the winery sales, how much do you plan to get from that for 2013?

Well, we got -- we said our carrying value was going from $55 million to $28 million, so that's about $27 million of sales that we know of right now. We'll continue to market the other properties, but around $27 million to $30 million is what we're planning on in the budget.

Okay. All right, got it. All right, thank you.

We have no further questions at this time. I will now turn the call back over to David Brain for any closing remarks.

Okay, thank you. Thank you all for (technical difficulty) -- as usual, we always appreciate the opportunity to share the results with you. And that's it for now. And we'll look forward to talking to you next quarter, and more good things to come. Thank you very much.

Thank you.

Thank you.

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