EPR Properties (EPR) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 EPR Properties Earnings Conference Call. My name is Denise, and I'll be the operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. David Brain, CEO. Please proceed.

Thank you very much, and good afternoon to all. Thank you for joining us. This is David Brain, and I'll start with our usual preface, which is as follows.

As we begin this afternoon, let me inform you that this conference call may include forward-looking statements defined in the Private Securities Litigation Reform Act of 1995 identified by such words as will be, intent, continue, believe, expect, may, hope, anticipate or other comparable terms. The Company's actual financial condition 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 is contained in the Company's SEC filings, including the Company's report on Form 10-K for the year ending December 31, 2013.

With that said, again, I'll bid you a good afternoon, and thank you for joining us on this earnings call for the fourth quarter of 2013. This is David Brain, the Company's CEO. With me to go to the news of the quarter as usual are our Company's COO, Greg Silvers.

Good afternoon.

And the Company's CFO, Mark Peterson.

Good afternoon.

As many of you probably already know, there are slides to accompany this call that you can find those via our website at EPRKC.com. I'll start, as I usually do, with the headlines for the quarter, and they are for the fourth quarter of 2013: number one, the year finishes with earnings-per-share right in line with increased guidance; second, key tenant industries and portfolio performance remained strong; third, portfolio growth achieved also right in line with guidance; fourth, a strong balance sheet position supportive of further growth; fifth, dividend increased substantially; and sixth, 2014 guidance affirmed reflecting continued substantial portfolio and shareholder results increases.

Well it's good to join you this afternoon to report these headlines in our fourth-quarter and year-end results for 2013. These headlines reflect the results of steady material progress along our articulated course for the year, and they are highly repetitious of each of our prior quarters. But sometimes repetition can be a beautiful thing.

As indicated by her first headline this afternoon, the year finishes with earnings-per-share right in line with increased guidance. Our year-end reported FFO as adjusted per share of $3.90 was right in the middle of our guidance range as of our last call that had increased this midpoint by $0.02 per share. Thus, we finished the year with an increase of about 6% in this metric over the prior year.

We feel very good about this result. When combined with our dividend yield and our relative multiple stability, we delivered a total shareholder return of about 14% for the year. Very consistent with our historical record.

Our second headline this afternoon, key tenant industries and portfolio performance remained strong, is the same as I've been reporting to you repeatedly for quarters. 2013 box office and total theater receipts set another record for the year, making it the 8th out of the last 13 years since the turn-of-the-century to set a new all-time high. Year-to-date performance and expectations for 2014 are for another record year. Similarly, our ski port properties this season are running materially ahead of the prior year in attendance, and we expect to report to you another very good portfolio segment performance in our next quarterly call after the season concludes.

Our third headline this afternoon, portfolio growth achieved, also right in line with guidance, is once again highly repetitious of previous quarters. Our investment outlays for the fourth quarter took our total for the year to over $400 million into our guidance range. This represents more than one-third increase over our prior-year total.

As is clear from this, we are finding substantial opportunities and a good market reception to our approach of build-to-suit transactions in specialty categories where we have substantial knowledge and experience. Importantly, these transactions originate from relationships and not auctions. This provides us greater insulation from falling cap rates and the potential threat of rising interest rates.

And future portfolio expansion is expected, as indicated by our fourth headline, strong balance sheet position supportive of further growth. As announced to you on our last call, during the fourth quarter, we sold 3.6 million shares into the market raising net of offering costs $174 million in common equity.

Further, since the end of the year and during the first quarter. We have continued to raise equity through our direct share purchase program. Year-to-date, we have sold approximately an additional 1.3 million common shares, raising approximately $65 million in additional equity. We have continued to be active in this regard, because of the robust investment outlook we have for the year, and concerns about market stability given a number of macroeconomic issues, including the pace of tapering activity by the Federal Reserve.

Our next headline is nearly everyone's favorite, the dividend increased substantially. After the end of 2013, during this quarter, we announced an increase in our monthly common dividend per share for 2015 that equates to $3.42 on an annual basis.

This represents an increase in our dividend of more than 8% over the prior year. And based on our earnings guidance for 2014, reflects a payout ratio of about 80%, consistent with the payout ratio for 2013. Also of note, based on recent share prices, this dividend level represents a yield of greater than 6.5%.

The last headline I have to offer you this afternoon as usual concerns our guidance, and it is 2014 guidance affirmed, reflecting continued substantial portfolio and shareholder results increases. We are confirming the initial 2014 guidance of our last quarterly call. As discussed on our last call, based on the significant volume of build-to-suit projects we have either underway or signed and the attractive set of in-place property acquisitions before us, we expect 2014 investments of $500 million to $550 million this calendar year, another nearly one-third increase and a range of FFO as adjusted per diluted share of $4.12 to $4.22 an increase of 7% over 2013 based on the midpoint.

With those comments, I'll turn it over to Greg for portfolio details, and I'll join you in a minute after he and Mark have given you more color on the quarter.

Thank you, David.

2013 continued the execution and validation of our stated strategy of focusing on specialty assets that deliver reliable and dependable results, as opposed to competing for commoditized assets with increasingly thinner spreads. In the fourth quarter of 2013, we continued the positive momentum of the year, with approximately $151 million of capital spending in the quarter. Bringing our year-end total to over $400 million, a 35% increase over the prior year.

The capital was deployed across our three investment segments. And with our spending guidance for 2014, you can see that we continue to see good opportunities to put capital to work in 2014, with a planned 30% increase in investment spending at the midpoint. 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 plan for 2014.

In the entertainment segment, our primary asset group of theater exhibition, continued to perform well. Once again, 2013 turned out to be a record box office year, as the fourth quarter of 2013 was up approximately 10% over 2012. [queagued] by the success of Hunger Games series, and the strong showing by Disney's Frozen. Early forecasts for 2014, tend to point a slightly up year-over-year comparison, and The Lego Movie has gotten us off to a very good start.

During the quarter, we funded approximately $25 million, primarily related to the purchase of the remaining interest of our German joint venture partner and two theaters located in Florida and Illinois, as well as the ongoing funding of eight build-to-suit theater projects. In 2013, we continued to see an increased focus by our tenant operators on the customer experience. This focus included the introduction of expanded food and beverage options, as well as the deployment of more spacious and comfortable seating options, including fully reclining seats. Early indications are very positive for these new developments, especially in the 35 plus demographic age group, a traditionally difficult market for exhibition.

Our strong capital spending guidance for 2014 reflects the advantage of our robust relationship-driven pipeline. Operators continued to see growth from these expanded offerings, along with traditional theaters, and EPR is well-positioned to be a partner in that growth.

In our recreation segment, the cold weather experienced by the Midwest and Northeast has been beneficial to our daily accessible ski portfolio. Through January, our attendance is up approximately 18% over the prior year. And with the continued cold weather patterns that we've experienced over the last few weeks, we are encouraged as we anticipate a continuation and strengthening of that trend.

Our TopGolf projects continued to perform and exceed our expectations, and contributed $1.2 million in percentage rent for 2013. During the fourth quarter, we had approximately $85 million of capital spending in our recreational segment, with approximately $70 million of the capital spent on the acquisition of the Camelback Mountain Resort in Tannersville, Pennsylvania.

In addition, we committed to fund approximately $110 million for the construction of an indoor water park hotel at the base of the resort, and the project is already underway. The impact of this construction may be muted in 2014, as our investment spending in the project will be weighted toward the latter half of 2014, given the significant amount of capital the operator is contributing to the project and our requirement that the operator capital be injected prior to the commencement of our funding. The remaining $15 million of investment spending in the quarter was primarily related to the continued expansion of our TopGolf portfolio, with investments in seven build-to-suit locations under our master lease arrangement.

We continue to benefit from the participation rents built into our leases in the recreation segment. And similar to the theater space, we believe that our strong partner relationships with these operators enhance our pipeline, which drives future growth.

With regard to our education portfolio, in 2013, we continued to take advantage of the explosive growth within the public charter school segment, as nationwide charter school enrollment increased 13% or 288,000 new students. Total public charter school enrollment now stands at approximately 2.5 million, and the number of schools increased 7% in 2013 and now stand at nearly 6,500 facilities.

An addition to our emphasis on public charter schools, in 2013, we continued to take advantage of our specialized knowledge within the education segment to extend our investments to include early education centers. And most recently, we made our first investments into private schools, with the commitment to fund two schools with BASIS Independent Schools, one of our premier public charter school operators. These private school investments represent another extension in the category, driven by the broad demand for quality education.

During the fourth quarter, we invested approximately $39.5 million related to the build-to-suit construction of 15 public charter schools, 5 early education early childhood education centers, and 2 private schools. We continue to see very strong demand for real estate financing solutions within the education space, and believe that our build-to-suit program provides us a competitive advantage in sourcing transactions that strengthen both our portfolio quality and our investment returns. We believe this demand will continue to drive the robust and investment spending that we have demonstrated to date, and which is included in our 2014 spending guidance.

With regard to our Sullivan County New York investment, as we reported previously, Proposition 1 successfully gained voter approval, and we and our tenant operator are awaiting the publishing of the actual request for proposal for submission of applications. We continued to believe that the proposal involving our property meets or exceeds all of the requirements set forth in the legislation, and we are excited about the opportunity to get the process moving toward a decision. Our overall occupancy rate remains strong at 99%.

As we discussed in our last call, our current investment spending guidance is $500 million to $550 million, which at the midpoint represents a 30% increase over 2013 spending. This spending is this first fairly equally across each of our three asset categories.

The range of spending includes approximately $300 million, or 60% of the stated investment guidance at the midpoint, of carryover spending related to build-to-suit projects that began in 2013 and will carry over into 2014. Given this large amount of carryover, we are very confident about our ability to deliver this level of spending, and our strong balance sheet that supports our plan.

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. Also please note, page 20 is a new page in the supplemental that provides future investment spending estimates for build-to-suit projects in process as of 12/31. We hope investors find this information useful.

Now turning to the first slide, FFO for the fourth quarter increased to $63.3 million or $1.23 per share from $41 million or $0.87 per share in the prior year. FFO as adjusted per share was $0.97 versus $0.96 in the prior year, an increase of approximately 1%.

As you can see on the next slide, there were a number of gains in the quarter that are included in net income but have been excluded from FFO as adjusted. And I want to discuss these gains up front before reviewing the other variances versus the prior year.

First, as Greg mentioned, we completed the acquisition of the remaining ownership interests in two joint ventures for $18.6 million. We had previously held minority interest in both of these entities, and had made prior loans to them totaling $33.1 million. We recognized a gain on acquisition of $3.2 million, and a gain on previously held equity interests of $4.9 million related to the fair value adjustments required as a result of the changes in control.

Second, we recognized a deferred income tax benefit of $14.8 million during the quarter. This benefit was triggered by a Canadian tax law change effective January 1, 2014 that limits the deductibility of inter-company interest expense for our Canadian entity that holds our four entertainment retail centers in Ontario. Because we now expect to be a taxpayer going forward in Canada, we reversed the previous 100% allowance we had had against our deferred tax asset.

This non-cash benefit will reverse over time. But just as the non-cash benefit this quarter was excluded from FFO as adjusted, so too will the non-cash deferred tax expense going forward be excluded from this calculation.

Perhaps more importantly, the actual cash taxes that we expect to pay will be included in our calculation of FFO as adjusted, and we expect this number to be around $1.5 million in 2014. This amount has been considered in our 2014 guidance, which I will discuss later in my comments.

Third, we sold one vineyard and winery property for net proceeds of $3.3 million, which included a carry back note of $2.5 million, and we recognized a gain of approximately $500,000. We now have only $7.6 million remaining net book value of vineyards and wineries related to two properties, both of which are under lease.

Now with that, let me walk through the rest of the quarter's variances, and explain the key variances from the prior year. Our total revenue increased 8% compared to the prior year to $89.4 million. Within the revenue category, rental revenue increased by $5.8 million versus the prior year to $66 million, and resulted primarily from new investments, partially offset by net decreases in rental revenue on certain existing properties.

Percentage rents for the quarter included in rental revenue were approximately $372,000 versus $725,000 in the prior year. The decrease relates primarily to the timing of our percentage of rents earned on our TopGolf facilities. Due to the exceptional performance of these properties during 2013, we were able to recognize most of the percentage rent during the third quarter versus recognizing it during the fourth quarter in the prior year.

Mortgage and other financing income was $18.6 million for the quarter, up approximately $1.5 million from last year. This increase is primarily due to additional real estate lending activities.

On the expense side, our property operating expense decreased by $500,000 versus the prior year, due primarily to lower bad debt expenses at our multi-tenant properties. G&A expense increased by $750,000 versus last year to $6.1 million for the quarter, due to primarily to higher payroll related expenses including higher incentive compensation and stock grant amortization, as we continue to support our growth, as well as higher professional fees.

Additionally, I want to note that our G&A expense for the fourth quarter of 2013 included a reclass of certain state income and foreign withholding tax expense from previous quarters, and these were reclassed for the new income tax line item on our income statement. And the total of that was approximately $470,000.

Our net interest expense for the quarter increased by $570,000 to $20.6 million. This increase resulted primarily from an increase on our outstanding borrowings during the quarter, and was partially offset by a decreased weighted-average interest rate on our outstanding borrowings.

As I mentioned previously, discontinued operations for the quarter includes a gain of approximately $500,000 related to the sale of the vineyard and winery property for total proceeds of $3.3 million. Finally, preferred dividends decreased by $552,000 to $6 million for the quarter, primarily due to the redemption of our series D preferred shares in November of 2012.

Now turning to our full year results on the next slide, our total revenue increased 8% versus the prior year to approximately $343 million, and net income and FFO were up 68% and 18% respectively, in part due to the gains I discussed earlier, as well as the growth of our portfolio. FFO as adjusted per share increased about 6% versus the prior year to $3.90 from $3.69.

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 multi-year summary, our coverage ratios have been consistently strong, and remained strong for the year with fixed charge coverage at 2.7 times, debt service coverage at 3 times, and interest coverage at 3.5 times. We increased our common dividend by 5% in 2013, and our FFO as adjusted payout ratio was consistent with the prior year at 81%.

Our debt to adjusted EBITDA was 4.8 times for the fourth quarter annualized, and our debt to gross assets ratio was 40% at December 31st. As you can tell by these metrics, our balance sheet continues to be in very good shape.

Let's turn to the next slide; I'll provide a capital markets and liquidity update. At quarter end, we had total outstanding debt of $1.5 billion. All but about $50 million of this debt is either fixed-rate debt or debt that has been fixed through interest rate swaps with a blending coupon of approximately 5.5%. We had no balance outstanding at quarter end on our line of credit, and we had $8 million of credit cash on hand.

We are in excellent shape with respect to debt maturities. As of December 31st, we have no scheduled looming maturities in 2014, and less than $100 million of such maturities in each of the next three years thereafter.

Turning to the next slide, as disclosed previously, during the fourth quarter, we issued $3.6 million common shares and a registered public offering for et proceeds of approximately $174 million. The offering went very well, allowing us to upsize it by 20%, and execute it at an all-in cost of slightly over 3%. The proceeds from this offering were primarily used to pay off our line of credit, which had a balance of $160 million at the time of the offering.

During the year, we also issued approximately 938,000 common shares under our dividend reinvestment and direct share purchase plan for net proceeds of approximately $46 million. Additionally under this plan, subsequent to year end, we have raised approximately $65 million in net proceeds. This plan works very well in raising common equity at low cost in monthly increments, and matches up nicely with funding our build-to-suit projects.

In looking back at the full year 2013, we raised $300 million of new unsecured debt, and approximately $220 million in common equity. We also paid off approximately $170 million of secure debt as we continued to move to an unsecured debt model while always being mindful of maintaining a conservative capital structure, and a well laddered debt maturity profile. With the full amount available under our $475 million line of credit at year end, and no near term debt balloon payments due, we are well-positioned from a balance sheet and liquidity perspective as we begin 2014.

Turning to the next slide, we are confirming guidance 2014 FFO as adjusted per share of $4.12 to $4.22, and guidance for investment spending of $500 million to $550 million, which is an expected increase of 30% at the midpoint versus 2013. As Greg mentioned, of this spending guidance, approximately 60% relates to spending on projects that have already commenced in 2013.

Because most of our expected investment spending in 2014 relates to build-to-suit projects that generally have 9 to 12 month build cycles, it is important to note that most of the earnings impact related to our investment spending is in the year following the actual spending we report. Therefore, much of our projected build-to-suit investment spending in 2014 will be realized in our 2015, as opposed to 2014 FFO per share results.

We think it is also helpful to investors to reiterate our key assumptions regarding G&A expense in our land in the Catskills contained in our 2014 guidance. First, we expect G&A expense to be approximately $28 million to $29 million for 2014.

Our G&A expense is expected to be approximately $600,000 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. This fact and other timing differences often make our Q1 FFO as adjusted per share results lower than the fourth quarter of the prior-year.

Second, our FFO as adjusted per share in investment spending guidance includes the Catskills project and its status quo. We believe this is prudent given the contingencies which remain for this project to move forward, and they expect the timing of this project as we have previously outlined.

Also, as I mentioned last quarter, the non refundable option payments we expect to continue to receive from Empire while they seek approval for a full-scale gaming license will be initially deferred and recognized as income at a future date, likely beyond FY14. Therefore, our guidance for 2014 includes no income recognition related to such payments.

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

Thank you, Mark, thank you, Greg. As we go to your questions, I just hope you'll join me in recognizing the quarter and the year as on plan and on guidance. We have and we expect to continue to reliably deliver attractive returns with strong investment safety fundamentals.

Now with that wrap-up, let's go to questions. Operator, are you there?

Yes.

(Operator instructions)

Our first question comes from Craig Melman with KeyBanc Capital Markets.

Hello, guys. Mark, on the taxes, the $1.5 million that's going to flow through FFO in 2014, should we assume that that's ratable, or is that going to be kind of chunkier?

You can assume that's ratable, because our earnings for those centrums are fairly ratable. So that would be a fair assumption.

Okay. Then on TopGolf, on the percent rents, the $1.2 million in 2013, I think the majority of that was in 3Q and 4Q. Is that the way we should think about it going forward, and how high do you think that can get given the new project schedule going out? I know you changed the arrangement at some point.

Yes, and -- Craig, it's Greg. I think yes, third and fourth quarter is generally when that's going to hit. I think that the issue of where can go is really going to be dependent -- we're adding more facilities, and it's going to be dependent upon how those perform. So, it will be interesting to see if they could -- we've had some that have greatly exceeded our expectations.

If they move back toward the areas where they're just meeting our expectations, then that will be a little more less immediate. It will have to grow into it. So right now, I would say the way we model it is kind of what we did last year, and then any additional to that is bonus dollars.

And can you remind us the breakout between 3Q and 4Q of the dollars?

Mark, do you have that?

Sure. Let me grab it for you real quick. So Q3, the actual percentage rents as a whole was $1.3 million. Or are you talking about just for TopGolf?

For TopGolf.

So it's $900,000 in Q3 and $200,000 in Q4. But, do you want it year-over-year, or -- that was versus last quarter. Year-over-year last year it was $550,000 roughly, and this year was the $200,000.

Okay. And then just lastly on the education segment, can you go into a little bit more of what the private schools actually represent, and maybe get some thoughts behind them? I always understood the rationality on the charge goal, because it's public. It's public dollars behind it, and there's a captive audience. Can you go through what the investment piece is, on moving into the private school segment?

Sure, Craig, it's Greg again. I think again, as we said in our comments, that the increasing demand for quality education, if you look at how BASIS has been able to deliver and public charter schools, they're top 10 rated schools in the country. And Dr. Block, the Founder of those, approached us that there isn't a market for in some areas of the country, call them generally Gateway cities, that there is demand, and not enough supply for quality private education.

And really, in some ways, not some openings for charter schools. So it creates a unique opportunity, we think. It's not necessarily as big as public charter schools, that's call it, for the masses, but they're all certain targeted, like I said Gateway cities, where we think there is a growing appreciation and demand by middle and upper middle class demographics that are looking to deliver that kind of quality education for their kids.

And there is a need for it, and we have the operators that we think can deliver that at a reasonable price, and at the quality that we think that will be valued by parents, and have demonstrated that they could do that before. So we're very excited about that opportunity.

These are all long transactions for known operators. And, Craig, as is often the case, our experience in the space has led us to greater insight about the whole dynamics in space and knowledge of really great operators, and this opportunity that there is to continue to fill an unmet need. So we're very excited about it. It is an expansion, but it's based on a lot of experience in the space.

What would be the type of price point for tuition?

Generally, I think you're talking about the low to mid $20,000s. So if you look in, and you saw in the picture that we talked about, we've got one of the first facilities going in with BASIS that is going in Brooklyn -- Brooklyn, New York, where there's a lot of demand for quality private education but not -- it's a very difficult, difficult market for people to crack.

So if you can deliver an education model that allows children and kids to advance to good quality colleges and deliver on the educational results, that price point is very attractive to people who are closed out of some of the premier private schools in the area.

Great. Thank you.

Our next question comes from Anthony Paolone with JPMorgan.

Thanks, good afternoon. You guys have talked about your relationships, and really your niche over time driving higher returns than maybe going into the auction market. But if I look across the net lease REIT landscape, a lot of the other companies have spent a lot of time trying to drive down there capital costs through size, and in some instances it seems to be working.

So I'm just wondering how you think about the risk of seeing some of these other players entering into your space, potentially making it more competitive, particularly as it relates to the build-to-suit stuff, which seems to be coming up more often in conversations with others?

Well, Tony, I think we've been driving down some of our capital costs as well, as we've climbed the credit curve and we continue to expand the portfolio as well. So we're not out of that -- we may not be increasing the size, and maybe as fast. But just remarking on Mark talking about the 5.5% average debt [rate],at used to be 6% for a long time.

So we continue to do that. Each offering we tend to make in the debt market tends to be better in both spread rate than we did before, so we're out of that game, number one.

Number two, is really I still think that in the areas we play in with the relationships that we have, the depth of knowledge and experience, that will still be -- we're certainly understanding there may be competition. But we think we're ready to meet that and ready to sustain our growth and our performance of the Company.

And as is indicated like the private schools, we continue to expand marginally the catchment of investments, so that we're prepared to have even greater opportunities that we can bring in. And competitively, if some people enter our space, I think we're prepared to meet that and still succeed

And, Tony, it's Greg. I think the other thing that I would point to, especially as you pointed out in the build-to-suit market, is the equation of: are you just money or are you a value added partner? And I think most of the theater exhibition partners that we have see us as understanding exhibition, and understanding what makes it a good theater location, and do we agree with that, and do we come in. And often as we do, there are times when we're coming into a market, and we're actually working with the operator to decide the site, what it should look like, how many auditoriums, things of that nature, to where we are much more value-added partner than just simply a cost of capital.

Okay, thank you. On a follow-up on the theaters, you guys had this portfolio transaction, I think, getting in the crosshairs for while. Any update there?

Yes, it is still in -- we still anticipate that we will close that transaction. It's in at the servicer now; as you know, those things have a defined time. And generally speaking, our history is they take as much time as they can, because they're getting credit for assets under management during that period of time. So I think our anticipation is it could be mid-to-late second quarter.

Okay. And then, Mark, any prepayment ability, or does it make any sense to go after any debt that comes up in 2015 and 2016 now or in the next few quarters?

Well, when you're this far out, the prepayment penalties are pretty high, and so it probably doesn't make sense. We've taken things out six-months in advance, but when you go two to three years you're probably looking at a pretty severe penalty, and it probably doesn't make sense. And those debt rates aren't that bad today, so we probably wouldn't be doing that in 2014.

Okay. And then just last question on Concorde, just remind us, I know you guys were signing up for some infrastructure spend there. But is that all after, and if the license is awarded, or is there anything you have to spend in the meantime?

Other than -- we're doing some planning dollars. It's kind of the dollars that you've said in that, in the sense of getting the plans and everything ready for those. But the actual hard dollars for construction would occur after the award of a license.

Award of an enhanced license, remember they're already licensed. It's just a matter of whether they get a license upgrade.

Okay, thank you.

Our next question comes from Dan Altscher with FBR.

Thanks, good afternoon. Appreciate the time. Mark, I apologize if I missed it, but as I was going through the numbers, there seemed to be some new things going on with the series C preferred, and I guess FFO, and then diluted FFO, and share count, and FFO and AFFO being different. Can you maybe just help, and I apologize again if I missed it, can you just help explain some of the nuances there?

Yes. There's a calculation when you have these convertibles to whether they're in the money or not in the money, and it's interesting we get a different answer among net income, FFO per share, and FFO as adjusted per share, because we're at the cross-point with respect to the 575C convertible preferred.

So that's the reason for the share counts for the difference, and I think two of them are it's not in the money, two of those measures, and one of those it is in the money. So that's why you have the difference in share count.

Got it. Okay, thanks for explaining that. And then, maybe just a little bit more higher level, I guess is a question probably for David. You guys have done I think a really good job on the execution front, and delivered every thing you said you were going to do. But I imagine probably as you wrap up this year, you may not be as thrilled on the multiple as maybe the execution might suggest. So what do you think going forward is going to help to get the multiple to look maybe more like the execution actually shows?

Well, I appreciate that, Dan. It's definitely a -- seems like a lagging series, and we hope that lag is just about exhausted and that multiple is coming our way. It seems and feels that way. We're putting these together quarter after quarter and now year after year, so it's hard to say.

I wish I had the exact answer for you. It is an inexact science, but it does feel like it is coming our way, and we're increasingly getting more reflections of the like you just gave.

All right. Well, we'll see what 2014 brings I guess.

Thank you.

The next question comes form Emmanuel Korchman with Citi.

Good afternoon, guys. Correct me if I'm wrong, but I think you guys mentioned that 60% of the investment spending would be build-to-suit in 2014. Was that right?

That's correct. No, I'm sorry, 60% of this spending that we have listed has already commenced and began construction. So the actual number of build-to-suit projects I think that we believe is closer to 70%.

So of this, just help me. So of the acquisition guidance, 70% is maybe build-to-suits?

Yes.

And then $115 million of that's going to be this theater acquisition?

Correct. Well, more like $120 million of cash.

So essentially, there's probably not a lot of room there for an existing property acquisitions?

Yes, that's what we see right now. Now that doesn't mean, as always, that number can't grow throughout the year as we have more clarity on certain things.

But if it didn't grow, then it would mostly built-to suits?

That's correct.

And that acquisition that we already know about.

That's correct.

And then Mark, maybe you can help follow-up on a similar build-to-suit comment. the build-to-suits completed in 2013, how much income hasn't been reflected and should we think about hitting in 2014 that hasn't hit in 2013? And so the stump --

So here's the thing. So we have a new schedule that helps you out with that, which is on page 20 the supplemental. And what it details is two things, number one, everything we have in process that's commenced as of December 31, so it starts with our developments in process. And then it shows you at the top of the schedule, we do this for both owned build-to-suits and those that we're financing via mortgage.

And we show how the spending is going to take place, and that second part of the schedule shows for those owned build-to-suits, when those go in service. So when those go in service, that's when the full cap rate kicks in.

That we're capitalizing interest as we are building, as we spending the money, and then the in-service segments are shown in the middle of the page. As far as what those rates are, we've indicated ranges of those cap rates reach these segments. They tend to fall around a [$9 million] cap or so. The ranges on education get a little higher than that on a GAAP basis, than the other two sectors, because those tend to be more straight-lined.

But you can get a sense of with the projects that are were in process at the end of the year, how those roll into service by looking at that schedule. On the mortgage front, which is at the bottom of the schedule, those in effect earn the full cap rate as we spend it. So there's no in-service, it's just the spending estimates and that would correlate with the interest earnings that you were going to get on those projects.

And is there similar number to, and thank you for that schedule, is there similar number for 4Q 2013 that we need to think about for the in-service either mid-2013 or end of 4Q 2013 that's not being fully reflected in the 4Q 2013 result?

Well, I'm not sure I fully understand. This starts with everything in-service as of December 3, 2013, not everything in-service -- sorry, everything in-process as of as of December 31, 2013.

No, I got that. I'm saying stuff that was delivered, so it's no longer under development. So it was in-service, but was in service for the entire 4Q.

Yes, you'll get an annualization affect.

We he's saying is we haven't broken out what started mid-fourth quarter, developed what the annualization -- (multiple speakers)

None of these have started any earnings in 2013, because they're still in process. They're all being capitalized.

No. But what I hear you saying is mainly is do we have a chart for saying what is the things that came on in fourth quarter that will have an annualization -- (multiple speakers)

No. We don't have that

Do you have some sort of -- what that NOI would be?

No, I don't have that handy. It's inherent in our guidance

We could talk off-line.

As time goes along, you'll have that as this continues.

Sure, yes. I'm just wondering if there's some amount that we're not giving you credit for in 1Q 2014, because we had -- (multiple speakers)

Let us take a look at that, and we'll get back with you.

Thanks, guys.

(Operator Instructions)

Our next question comes from Rich Moore with RBC Capital Markets.

Good afternoon. The occupancy on the entertainment portfolio was down very slightly, but it was down, 98% versus 99%, and the theaters are 100% leased. I'm curious what is down exactly?

We also -- in our entertainment segment is where our REIT ERC retail centers are, so we have some small shop space and some other things that we still either have had some vacancy or is becoming -- had some rollover and we're not leased up yet, but it's generally in those retail type centers.

Okay. And progress on that, Greg, I guess -- or you just, it's normal type stuff?

It's normal kind of normal. That's kind of where if you look -- we used to break it out and generally our ERCs were running 95%, 96%. This is consistent with that, and so this is not out of line with what we've seen historically

I got you. Good, thanks. Then on the theaters, I was looking at your expirations on the theaters, and you're all done for this year. And then you have a handful in each of the next three years, and then you've got a big chunk, I think it's 18, something like that, in 2018. And I'm curious about the whole dynamic around these theater expirations. First of all, do they all just sort of exercise their options, or are you trying to re-lease them ahead of time? In other words -- go ahead.

Sure. They had options. And so historically, what we've seen it's about a 75% that just exercise their options and we go on. And sometimes if we're downsizing or some of the things that you see that we've been talking about, if they're wanting to change the amenity package and the convert these to a luxury format or an enhanced format, then we're generally involved in some level of the discussion.

Do they want additional capital, how we're going to expect to be paid on that capital as we go in there. So we're talking about renegotiating the lease, and generally you've seen that in some of those that instead of a 5-year renewal, we bump them out 10 or longer years. That's' when we're re-cutting and generally remodeling or enhancing -- doing an amenity enhancement package.

Okay. So they do that at the end of the lease typically, is when they'll start asking for the changes for the upgrade and the --?

Yes, typically -- it's good or bad. What we've seen is, this enhanced amenity packages have really come over the last couple of years. What we've seen, and I'll use AMC as an example, AMC, if they're wanting to change a package on an existing theater, chances are they'll spend their own money and do it, and just go ahead and create the conversion, ask for approval and spend their own money on it. If we're toward the end, they'll want to talk about additional capital from us, and what the right sizing of the theater should be

Okay. The reason I ask all this is, is I'm curious, it doesn't sound like you would expect as you get out into these heavier lease maturity sort of years that you're going to have a big spend or a big strategic sort of initiative that you've got to address a whole bunch of theaters wanting to do different things.

No, and in fact, that 18 year, one of those is a 10theater master lease. So it looks bulky in that, but it's generally our expectation with those that those will roll as a group. So it's not as -- it looks more cumbersome than it is bulky in that year. But, no, we don't expect that there's -- and generally when we're doing these even these amenities changes, we're talking somewhere $2 million to $4 million. So it's not a huge capital investment, and we're getting paid on that money.

And we're getting paid -- yes.

Yes. Okay, good. I got you guys. Then on the page 20, thank you guys very much, that's very extremely helpful. Do you have, by the way, the coverage ratios or can you give us rough coverage metrics for the different property types?

Sure. We could go over -- I think our theater portfolio, as we've said, has been around the 1.7. It may trend up a little bit this year because it was slightly up overall. If you recall, our ski portfolio was last year returned to a normalization, about 1.7. I will tell you that number is going and appears to be trending higher, maybe a nice pot, maybe closer back to the 2.0 level, we'll see how February and early March plays out.

Our school portfolio is in line with what we've said before, about a 1.5 to a 1.7, and our other recreation aspect, our TopGolf is high 2s or over 3. So overall, real, real consistent in how these how they've been performing year after year.

Okay, good, thank you. And then the last thing, the mortgages, Mark, that went away, those were the two -- it looked like there were two, and those were the two I'm guessing that were associated with the buyout of the joint venture?

Yes. We had loaned some money to those projects because of debt maturities, and somewhat in anticipation of the fact that we'd be taking out these interests and then we took out the remaining interests this quarter.

Very good. Thank you, guys.

We have no further questions. I would now like to turn the conference back over to David Brain, for closing remarks. Please proceed.

Thank you very much. Again, I want thank you all for joining us this quarter. We always look forward to reporting to you, and we look forward to entertaining your questions and speaking with you if you'd like to contact the Company directly. Thank you again, we'll see you next quarter.

Thank you.

This concludes today's conference. You may now disconnect. Have a great day.