EPR Properties (EPR) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EPR Properties Q3 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. (Operator Instructions). As a reminder this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Brian Moriarty, Vice President, Corporate Communications. Sir, you may begin.

Okay. Thank you for joining us today. I'll start the call by informing you that this call may include forward-looking statements as defined by the Private Securities Litigation Act of 1995, identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate, or other comparable terms.

The Company's actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of these factors that could cause results to differ materially from those forward-looking statements are contained in the Company's SEC filings, including the Company's reports on Form 10-K and 10-Q.

Now I'll turn the call over to Company President and CEO, Gregory Silvers.

Thank you, Brian, and good afternoon to everyone. I'd like to remind everyone that slides are available to follow along via our website at www.EPRKC.com. With me on the call today are the company's CFO, Mark Peterson.

Good afternoon.

And CIO, Jerry Earnest.

Good afternoon.

I'll start with our quarterly headlines, and then pass the call to Jerry to discuss the business in greater derail.

Before I begin I want to acknowledge the similarity of the majority of these quarterly headlines to last quarter along with a positive update on the Adelaar project. These analogous headlines are by design as we strive to create a narrative of strong and repetitive performance that results in consistent growth and reliable outcomes that are valued by our shareholders.

The first headline today is strong quarterly results. In the third quarter we had record setting quarterly revenues and again delivered very solid FFO as adjusted versus same quarter previous year.

Second, investment segments continue robust performance. Our underlying tenant industries continue to demonstrate outstanding performance in the face of a lackluster economic recovery. Our education segment exhibited solid enrollment with nearly 37,000 students enrolled in our public charter schools, an increase of over 17%. And openings are ahead of expectations at most of the private and early education schools. Box office receipts remain on pace for a record year with the new Star Wars release generating enormous buzz and advanced ticket sales and TopGolf continues to perform very well.

Third, EPR planned investment spending in Adelaar is reduced. As we mentioned at our recent investor day, we have revised our arrangement with Empire Resorts which translates to lower investment spending on behalf of EPR.

Our fourth headline is increasing 2015 investment spending and earnings guidance. Our differentiated investment strategy and repeatable platform have provided very strong momentum. With our deep industry knowledge and relationships we continue to grow our pipeline even more than we had previously expected. Additionally, the strength of our tenant businesses is translating to increased opportunity to deploy additional capital in 2015. We're very pleased to be able to share this news and Jerry will follow with more detail.

Lastly, our final headline is introducing 2016 guidance. Given our results to date we are very well positioned as we move into 2016 with strong capital spending and earnings guidance. Jerry and Mark will have further detail on this topic also.

At this point I'll turn the call over to Jerry and then I will rejoin you for questions following Mark's presentation.

Thank you, Greg. We maintained strong capital deployment throughout the third quarter with $174.8 million of new investment spending, bringing year to date spending to $509.5 million. The quarter's strong spending reflected continued momentum within our primary invest segments. I'm particularly pleased that we anticipate this momentum will continue and we are raising the midpoint of our 2015 investment spending guidance by $75 million to a range of $575 million to $625 million.

In the entertainment segment, the theater exhibition business continued the strong growth that began in the first and second quarters. To the end of September on a year over year basis, box office revenues were up 6% over 2014 and with the strong holiday season slate, including the last installment of The Hunger Games, another James Bond film, and the restarting of the Star Wars franchise, we anticipate that box office revenues will set an all-time record surpassing the $11 billion mark.

As we have been communicating, we continue to partner with our exhibition operators in the deployment of the enhanced seating theaters with both conversions of existing theaters and new build to suit opportunities. The consumer acceptance of the enhanced seating format continues to drive increased revenue. While not every conversion is equal, our operating partners are reporting average revenue gains of 30% to 40% upon completion of a conversion.

For the quarter, the investment spending in our entertainment segment was approximately $29.9 million, consisting primarily of investments in two build to suit theaters, the redevelopment of three existing theaters, the development of one family entertainment center, and the acquisition of one theater. Both of the theater build to suits as well as the redevelopments involved construction of or conversion to enhanced seating theaters and EPR remains committed to being the preferred supplier of capital to the exhibition industry.

During the third quarter, the water park and TopGolf assets within our recreation segment continued to demonstrate the strong consumer preference and reliable performance. During the quarter we earned approximately $1.5 million of participating interest with our investment in Schlitterbahn and approximately 900,000 of percentage rent with our TopGolf assets. We delivered five new TopGolf properties during the quarter, further strengthening our mass release portfolio which has an overall coverage ratio exceeding 3.5 times year to date through June.

Prior to quarter end we converted the mortgage loan on our Camelback Mountain Resort to a mass release including the ski mountain, outdoor water park, and adventure center. Recreation spending totaled $71.7 million during the quarter which consists primarily of the final construction funding of the water park hotel at the Camelback Mountain Resort and the build to suit construction of 15 TopGolf entertainment facilities.

Further, the Camelback Resort and indoor water park were selected by USA Today as the Reader's Choice best indoor water park during the third quarter. Our Schlitterbahn New Braunfels property also was voted a Ten Best USA Today Reader's Choice outdoor water park as well.

As we discussed during our recent investor day highlighting our education business, there are significant and growing opportunities in education facilities. Our performance during the third quarter demonstrates these opportunities across our education platform, consisting of public charter schools, early education facilities, and private schools.

We continue to see strong and growing demand for real estate financing solutions within the education space. Further, we believe that our extensive operator relationships combined with our build to suit program provides us with a competitive advantage in building a high quality portfolio of education facilities.

We want to thank everyone that attended our investor day and joined us on the tour of our newest private school in Brooklyn, New York. As we discussed with the participants, the demand for education facilities is growing and EPR has a unique team of professionals that understand how to identify, underwrite, and secure these opportunities. During the third quarter we invested $70.5 million with the acquisition or build to suit construction or expansion of 21 public charter schools, four private schools, and 26 early education centers.

The Adelaar?Casino and Resort project located in Sullivan County, New York achieved a milestone at the end of the third quarter with the issuance of the gaming regulations by the New York State Gaming Commission. The approval of the gaming regulations paves the way for the issuance of a gaming license for the Adelaar Casino and Resort project sometime during the fourth quarter of 2015.

As we discussed during our investor day, we have an update on the plan capital spending for Adelaar. As you may recall, we previously described five distinct elements of the project. Those elements were the infrastructure, roads and utilities, casino, golf course, retail village, and the water park hotel. Previously we had told you that we anticipated providing some level of capital for each of these elements other than the casino with a total spend of $180 million to $240 million.

I'm pleased to report to you today that we have accomplished two objectives during the quarter which substantially lowers that number. First we secured approval for investor of development bond financing for the infrastructure. We anticipate that bonds will be issued for these elements with the various end users of the property, pending a special assessment to fund the bond payments. Additionally, we have worked with Empire Gaming to modify our agreement whereby they will be responsible for the capital to fund the improvements related to the golf course and the retail village.

As a result we will have a ground lease on the casino parcel, the golf course, and the retail village. We will continue to fund the improvements related to the hotel as we see these assets as part of our core recreation platform. The end result is that our additional capital spending related to Adelaar should be approximately $100 million to $120 million with EPR receiving a return of 9% on new capital.

As the remaining parcels will be leased to the gaming operator, we cannot speak to the exact terms of the ground lease until the award of the gaming license. However we believe that we have significantly lowered our capital commitment and our risk associated with this project and anticipate that upon the award of the license we'll have a call to discuss all of the particulars of our lease with the gaming operator.

Additionally, our plan for 2016 specifically provides for approximately $75 million to $175 million of asset dispositions and capital recycling. We anticipate that $35 million to $40 million of these dispositions will come from the exercise of options on three or four of our charter schools that allow the tenant to purchase the schools and terminate the leases early in exchange for a fee. The option is only exercisable at certain predefined windows during the lease term, the first of which is usually five years after the school has opened.

As our portfolio matures we anticipate that the exercise of these options will become part of our ordinary portfolio rotation. We provided guidance as to when these option periods open and their related asset value in our 10-K. Mark will provide guidance as to the level of termination fees we anticipate in 2016.

The balance of the plan dispositions relate to either derisking the portfolio or opportunistically capital recycling. We have stated that we are desirous of reducing our Imagine exposure and as mentioned earlier, we continue to look for opportunities to do so and our current plan provides for an anticipated sale midyear of approximately $50 million of Imagine schools.

Additionally we believe that current market conditions provide the opportunity to dispose of assets at cap rates that are below our cost of capital and will also provide price awareness as to the value of these assets. We believe that both of these endeavors are supportive of enhancing shareholder value.

Our overall occupancy rate remains strong at 99%. As today's update demonstrates, the underlying operator business that supports our properties has never been stronger. As a result, we continue to benefit from that strength with a growing pipeline of opportunities and as mentioned previously, we are increasing our investment spending guidance for 2015 to a range of $575 million to $625 million.

Additionally we are introducing 2016 investment spending guidance of $600 million to $650 million. This reflects our commitment to execute our plan of leveraging our industry relationships and knowledge to access and underwrite opportunities that deliver the consistent and reliable results that our shareholder and capital partners expect. With that I will turn it over to Mark to update our financial results.

Thank you, Jerry. I'd like to remind everyone on the call that our quarterly investor supplemental can be downloaded from our website. Also, please note that page 31 is a new page in the supplemental that provides detailed information regarding our 2015 and 2016 guidance that I will touch on later in my comments. I hope investors find this information useful.

Now, turning to the first slide, FFO for the second quarter increased to $67.4 million or $1.15 per share from $54 million or $1.00 per share in the prior year. FFO adjusted per share was $1.17 versus $1.08 in the prior year, an increase of over 8%.

Now let me walk through the key line item variances for the quarter versus the prior year. Our total revenue increased 10% compared to the prior year to $108.3 million. Within the revenue category, rental revenue increased by $11.3 million versus the prior year to $85.7 million, resulted primarily from new investments.

The increase for new investments was partially offset by the impact of the weaker Canadian dollar exchange rate versus the prior year of over 16% which reduced rental revenue as well as tenant reimbursements at our Canadian properties on a comparable basis by approximately $1.6 million. Note that this decrease was partially offset in the total revenue line item by an increase in other income of $540,000 due to favorable settlements of foreign currency swap contracts.

When combined with the impact of lower property operating expense as a result of the weaker Canadian dollar, FFO as adjusted per share was lower by $0.01 compared to the prior year as a result of the movement in Canadian exchange rates.

Percentage of rents for the quarter included in rental revenue were $1.4 million versus $1.2 million in the prior year and included about $200,000 in percentage rents related to one of our private schools. Mortgage and other financing income was $18.2 million for the quarter, a decrease of approximately $1.3 million versus prior year. The decrease was due to the $76.2 million prepayment received in the summer of 2014 offset by increased real estate lending.

We recognized approximately $1.5 million of participating internets income this quarter versus approximately $1.4 million in the prior year related to our investment in the Schlitterbahn water parks due to another strong season. Note also, as Jerry mentioned, during the quarter the mortgage related to the Camelback hotel and indoor water park was rolled into the lease on the adjacent ski hill and outdoor water park at the tenant's option. Therefore going forward rental revenue will increase and mortgage financing income will decrease by the same amount for this project.

On the expense side, G&A expense increased to $7.5 million for the quarter compared to $6.7 million in the prior year due primarily to an increase in our payroll and benefit costs, including additional personnel and an increase in incentive compensation. Our net interest expense for the quarter decreased by $272,000 to $20.5 million. This decrease resulted from interest capitalized on Adelaar of $2.1 million during the quarter as well as a lower weighted average interest rate. These decreases were partially offset by more outstanding borrowings during the quarter.

Turning to the next slide, for the nine months ended September 30, our total revenue was up 10% and our FFO as adjusted per share was up 9% to $3.27.

Turning to the next slide, I'd like to review some of the Company's key credit ratios. As you can see, our coverage ratios for the quarter remain strong with fixed charge coverage at 3 times, debt service coverage at 3.3 times, and interest coverage at 3.7 times. Our debt to adjusted EBITDA ratio was 5.3 times for the third quarter annualized and our debt to gross assets ratio was 43% at September 30.

Note that we incur a bit of a penalty in the debt to adjusted EBITDA ratio calculation with the $375 million we have in property under development at September 30. We've had to raise capital including debt to fund this amount which is the numerator, however the related EBITDA will not be part of the denominator until certificates of occupancy are issued for the buildings. Nonetheless as you can tell by all these metrics, our balance sheet continues to be in great shape to fund our strong pipeline.

Let's turn to the next slide and I will provide a capital markets and liquidity update. At quarter end we had total outstanding debt of $2 billion. All but about $271 million of this debt is either fixed rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 5.2%. We had $196 million outstanding at quarter end on our $650 million line of credit and we had $14.6 million of cash on hand. We are in excellent shape with respect to debt maturities. As of September 30 we had scheduled balloon maturities of less than $100 million in 2016 and $158 million in 2017.

Turning to the next slide, during the quarter we borrowed the remaining $65 million available under the $350 million term loan portion of this facility and prepaid in full seven mortgage notes payable totaling $66.3 million that had an average annual interest rate of 5.74%. Our secured debt as a percentage of total debt continues to decrease and now stands at about 15%. During the third quarter we issued about 1.9 million common shares under our direct stock purchase plan or DSPP for net proceeds of nearly $100 million.

Subsequent to the end of the quarter we also issued nearly 600,000 common shares under our DSPP for net proceeds of approximately $32 million. We have found this plan to be an effective, low cost way to raise equity capital to fund our ongoing build to suit business. Also subsequent to the end of the quarter we received a pay down of $45 million on mortgage notes related to Schlitterbahn water parks. Per the terms of the agreements and the final STAR bond allocation about half of this amount pays back previous advances plus accrued interest and the other half or approximately $22.5 million further reduces the note but has no impact on the interest income we were previously earning.

Thus this $22.5 million portion of the pay down has the effect on earnings and liquidity of a free equity raise. Going forward per the agreement terms we have the right to received an additional $28.1 million without reducing our interest income and we expect to receive this amount sometime in the next 12 to 18 months when current escrow amounts are expected to be released and future STAR bonds are expected to be issued for the project.

Turning to the next slide, as Jerry mentioned, we are increasing our investment spending guidance for 2015 to a range of $575 million to $625 million from a range of $500 million to $550 million. We are also increasing our guidance for FFO as adjusted per share for 2015 to a range of $441 million to $446 million from a range of $434 million to $444 million. This updated guidance implies that a FFO as adjusted per share range of $1.14 to $1.19 for the fourth quarter, about flat at the midpoint to that reported this quarter.

In comparing our fourth quarter estimate of FFO as adjusted per share to that reported this quarter, it should be noted that our combined percentage rents and participating interests are expected to be approximately $1.6 million lower in the fourth quarter versus the $2.9 million combined amount we recognized this quarter due to the seasonality in these amounts. Guidance for 2015 percentage rent, participating interests, and G&A expense is detailed on the guidance page on page 31 of our supplemental that I referenced earlier.

Turning to the next slide, we are providing guidance for 2016 FFO as adjusted per share of $470 million to $480 million, an increase of over 7% at the midpoint and guidance for investment spending of $600 million to $650 million. In addition to the same measures we detailed for 2015, the 2016 guidance also includes estimated amounts for dispositions and termination fees.

As you can see on the guidance page we are expecting dispositions of $75 million to $175 million in 2016 and as Jerry indicated, most of this relates to sales of public charter schools operated by Imagine and the expected exercise of tenant options to purchase other non-Imagine public charter schools. The sales of non-Imagine public charter schools in 2016 are expected to total $35 million to $40 million plus we expect to collect lease termination fees of $5 million to $7 million.

Note that lease termination fees are included in our guidance range for FFO and FFO as adjusted per share for 2016 and are expected recur in years beyond 2016 as we anticipate some additional schools will elect to exercise their early lease termination purchase options when such windows open for them.

I would also like to point out that the per share results for FFO and FFO as adjusted this quarter and the full years 2015 and 2016 include the effect of the conversion of the 5.75% Series C convertible preferred shares as a conversion would be dilutive to these measures.

Finally, although not detailed on the guidance page in the supplemental I wanted to provide information on what is included in 2016 guidance related to Adelaar. Recall that in December of '14 after Empire was recommended for a casino license we began capitalizing interest on portions of the Adelaar project. Capitalized interest is expected to total about $8.5 million for 2015 when offset by expenses, the net effect on 2015 FFO as adjusted per share is expected to be just under $0.14.

For 2016, we are assuming commencement of the ground leases with Empire on the casino, entertainment village, and golf course toward the end of the first quarter and we have included approximately $0.16 of FFO as adjusted per share in our 2016 guidance or about a $0.02 increase versus 2015. This includes the rental revenue we expect to recognize in 2016 that will be paid from previously deferred lease option payments less estimates for operating expenses and our portion of the special assessment expected to be levied to service the infrastructure bonds.

This estimate for 2016 also includes significantly reduced capitalized interest as we only expect to capitalize interest on the water park hotel project after the Empire ground lease is commences. Looking forward to years beyond 2016 we expect the Wilderness water park hotel upon completion will contribute another approximately $0.04 per year of FFO per share net of the cost of our new invested capital.

Additionally, we will have the opportunity for percentage rents on the Empire lease after the casino opens and we also have remaining developable land for lease or sale. In summary, over the last couple of years we have taken Adelaar from an idle project that was a drag on earnings to what we expect will be a significant contributor to earnings in 2016 and beyond. Now with that I'll turn it back over to Greg for his closing remarks.

Thank you, Mark. Thank you, Jerry. With that why don't we open up the call for questions and see what people want to know further about? Operator?

(Operator Instructions) Dan Altscher, FBR.

Thanks. Good afternoon, everybody. I wanted to actually start very high level first. I remember when we started, before we ended 2014, there was a lot of talk about 2015 box office being another record year with a great box office slate and that's turning out to be the case. How do you think 2016 is shaping up with the box office slate that we're aware of?

Dan, it's Greg. I think what we're seeing right now, 2016 looks probably, from our early indications, probably closer to flat to '15. It's actually '17 right now that people are projecting as another big up year. If you think about the cycle of the kind of sequels to everything that occurs in '15 will come back again in '17. So, there's a couple of franchise films, again you'll get another Star Wars. You'll get some of the repeats that we have this year. So, '15 right now, at least early indications are flat.

Okay. Good. Thank you. Mark, just wanted to ask a couple modeling questions about the guidance. Thanks for laying out that page, by the way. I think that's really, really helpful. But can you give us a sense of what your capital plans are or how that's incorporated in the guidance for the rest of this year and predominately 2016?

Sure. We have spent investments to date of $510 million, talking about '15. And to get to the midpoint of guidance is about another $90 million of spending over the balance of the year. Remember, as I discussed, we did raise $31 million of direct stock purchase plan shares subsequent to the end of the quarter and also received that $45 million Schlitterbahn payment.

So, we don't have a whole lot of capital needs. My line of credit at the end of this quarter was under $200 million on a $650 million line. So, I'm in pretty good shape as we close the year. We could raise some additional equity if we decided to or we don't have to. We have a lot of flexibility in that regard.

As you move to '16, we have the midpoint of guidance is $625 million. And we have about $100 million of debt payoffs. So, say $725 million of uses. We did model, as Jerry and I discussed, $125 million at the midpoint of dispositions so that leaves about a $600 million of needs. Think about that, we generally do one debt deal. Think of that around $300 million and the rest is a combination of equity and cash flow as we look into '16. So, kind of more of the same, keeping the leverage low 40s, just like we did this year and the year before. And I think we've got a lot of flexibility as we finish this year and go into 2016.

Okay. Good. Thanks. That's helpful. Also during the investor day you touched on the asset sales and we got a lot more color into what you're looking to do I guess predominantly with the charter schools but something that I feel like doesn't come up very often within entertainment are the family recreation centers and so forth. You guys -- how committed are you really to building that part of the entertainment business out at this point?

I think for us it's an element of opportunity. But I don't think it's going to be -- could we make that a $25 million to $30 million a year segment within our entertainment? Yeah. But it's never going to be an exclusive growth option. But we feel that it's a natural extension of what we do. It's consumer discretionary. We think we have a good understanding of the operators, how to underwrite that, Dan, and we see it, as I said, as a natural extension.

Right. Okay. And just a final one, related to the asset sales, the capital that's coming back, good disclosure on the termination fees that are coming in. But that capital that's coming back, is it right to assume that's probably going to be used to fund more built to suit? And maybe that's actually a bit of a drag on FFO and earnings for '16 and it's more about '17 then as that capital starts to come, actually starts being earned if you will on deployment?

Interesting. If you think about it, the termination fees, kind of $6 million at the midpoint, if you take the dispositions, which as you said relate mostly to charter schools which carry a higher GAAP rate, assume midyear on that, you get to sort of a $6 million impact that's sort of offset by the termination fees. So, they tend to offset each other. As far as in that calculation I'm assuming a bit of deleveraging from the proceeds. So, a bit conservative because we don't know if they're going to happen. So, I guess you could say it's a bit of a drag but it's kind of offset by the termination fees this year.

Right. Okay. Great. Thanks so much, everyone.

Thanks, Dan.

Nick Joseph, Citigroup.

Thanks. I appreciate the quarterly walk through for forward investment spend but it's missing obviously the fourth quarter of '16. So, I'm wondering big picture what percentage of the 2016 investment spend guidance has already been identified through built to suit projects? And what is the actual acquisition assumption within it?

I'll answer the first question. So, the midpoint, $625 million, if you look at that schedule, there's not a lot that's not disclosed. There's $30 million that kind of moves $15 million, $16 million, over $200 million of spending for 2016 is for projects that were started. Here we are at the end of third quarter, that will carry into '16. So, I'd say that's roughly a third of the guidance right there. That number will grow as we approach the end of the year but today it's about a third.

I would say, Nick, historically that's been 40% to 50% as we go through the fourth quarter, as we move into '16 of these projects that are already started, that are just funding in through '16.

And then the mix of build to suit is predominantly build to suit, it's predominantly build to suit. We do have some acquisitions, probably 80-20.

Yeah. I'd say it's around 15% to 20% of acquisitions. For us it's actually acquisitions become a little more opportunistic and it's easier to plan and budget on our build to suit pipeline.

Thanks. And then in terms of the acquisitions this quarter, this theater and the public school. Can you talk about the cap rates on those deals?

Sure. On the theater acquisition was around an 8% cap deal. We felt it was a very strong theater. It's an AMC theater that we had a good relationship with and a commitment that was being renovated with a new lease. So, we were pleased with that. The charter school was -- I'm looking to Jerry.

Upper 8%. Around 9%. Initial cap. Total yields around 10%.

That same thing on the theater. That was the initial cap.

Thanks. And then just finally on guidance for G&A, what's bringing it up about 10% next year?

You know, we've added quite a few people as we've kind of bulked up and we're growing fast. And I also think if you look at even '15 versus '14, we have quite a bit more incentive compensation planned in '15 and '16 given the strong performance that we expect. We've had FFO growth to date of almost -- of over 9%. We expect strong FFO growth next year. So, that's primarily it. We'll see some leverage of G&A next year. We expect revenue to grow by more than G&A expense. We'll see some leverage there and I think all in all I think we'll be in the low 7% range of G&A as a percent of total revenue which I think is very good level of G&A relative to your total revenue.

Thanks.

Tony Paolone, JPMorgan.

Thanks. Good afternoon. Just staying on page 20 with that pipeline that you were just discussing with Nick, you've got about $200 million of the $600 million for '16 basically identified on that schedule it seems. The other $400 million, at what stage does that feel like that's in at the moment? How much of that do you feel is identified and you're just getting it through the pipe versus being more speculative that you presume will happen?

I would say, Tony, we're at about an 80% rate on the identified but not yet closed. Some of that begins, just stage when you take the land down and how that moves out. But we feel real confident in our ability to hit those numbers based on where we're at right now.

And we don't have -- just to further that, we don't have large speculative acquisitions. As Greg said, there will be some unidentified that we plan to have names for of build to suits but to the extent those don't happen there's not a lot of earnings impact in 2016 that would be more of an earnings impact on the following year when the project was supposed to be completed.

It sounds like then, just to paraphrase and make sure I understand it, if I were to think about a $600 million bogey, $200 million is ongoing and then another 80% of the $400 million you guys have pretty good brackets around right now.

Yes. And that $200 million will grow by the end of the year. So, as Greg said, that's generally more like 50% by the end of the year. And then the other one, the rest of it, we have good names around but for a small piece.

We don't do, as Mark said, we don't do it -- probably the speculative of our pipeline is probably 15% to 20%. At this point in the year we've got to have names on everything. Now, the timing of that can be effected as far as when our tenants want to begin projects or they clear the ability to begin construction with permit issues and things like that. But they're identified, Tony.

Then just sticking on that page, on TopGolf I think in the press release you mentioned 15 ongoing projects. I'm just trying to tie that to the schedule.

I think that meant we spent on 15 projects in the press release. That doesn't mean there's 15 still going. We have a lot finished.

We had five finished in the quarter. So, that would imply that there was spending. Remember that there are, even when they open, we may have a little trailing that goes on.

Yeah. Some of it could open in third quarter and still have a little bit of trailing spending.

My guess it that we have probably five to seven ongoing projects right now that are in construction.

Okay. Remind me, if I think about what you guys have left on your option or your right of first refusal I think you guys have about how many more projects is that and dollars that could be spent on those?

We currently have with the five that opened -- I'm going to get this. I think we have about 14 or 15 open. We think the total number that we will complete will be 30. So, think of it about in that sense we're probably $250 million into what will be $500 million and we probably have $250 million to go.

Okay. Any sense of timeline as you think about their cadence of opening stores?

Yeah. I think that will take '16 and into '17 probably. And that will probably be -- year '16 and '17, we'll probably exhaust that.

Okay. And then just on the charter school sales, are these purchase options typical across all of them? Or this is just a sub bucket of those? How does that work?

This is typically with most of the schools we have. We do have some schools with no purchase options. We have some schools with longer initial purchase options. But this is if you will an early wave of schools we did years ago.

Is there a mechanism on price or is there a guarantee or any sort of minimum IRR? Like how do the economics work?

In effect we set a significant exit fee or termination fee really that, yes, it does enhance our IRR in a sense that it allows to have a higher yield for having less duration. In a sense it's a form of compensation for not being in the asset as long as maybe we wanted to be but it's also a reality of the business that some of these schools are offering opportunities through not only bonds but also some states will be running kind of blue plate specials, if you will, enhancements to bonds and things that make it attractive for some of these schools at time to hit these earlier Windows.

Does it assure you a price that's at least what you paid for these?

Oh, yeah.

It's typically a multiple. It's a percentage on top of our original basis. We're well covered. I would say it probably enhances our yield by anywhere from 150 to 200 basis points over our original yield.

Yeah, we're talking 15% to 25% over initial costs.

Okay. Got it. And then just last question, Mark, you gave us a lot of good numbers but I couldn't write them all down. What did you get so far in terms of cash in the door on the Schlitterbahn revenue bond proceeds?

We received $45 million and the final allocation, about half of that. It all reduces their note balance but half of it we get paid back on and not reduce their interest income. So, about half of it, like I said, is kind of like a free equity raise when it comes to liquidity and earnings in that I get half of it for free without reducing my interest income. The other half pays back advances related to the bond.

So, there is a corresponding reduction in interest income. I think the other exciting part is going forward I have another $28 million that I expect to get not in the near-term but in the next 12 to 18 months that I get in effect that free equity raise again where I get $28 million in the door without a change in the forward interest income or in the interest income that I was previously recognizing. So, a little benefit now and some more benefit to come.

Okay. So, you got $45 million of cash in the door of which half effectively is free, half reduces advance. And then the $28 million is 12 to 18 months and that's free?

That's correct.

Got it. Thank you.

You're welcome.

Thanks, Tony.

Dan Donlan, Ladenburg Thalmann.

Thanks. I appreciate you taking my question. I know you guys might have some place to go tonight potentially. So, just going back to the buy outs on the charter schools. How much of that is in dispositions in terms of your guidance? If you're at $125 million, what do you expect of the purchase options being exercised?

We ranged it as three to four schools, ranged it from $35 million to $40 million.

And the termination fees, as shown on the guidance page is $5 million to $7 million. And that's where you get into that 15% to 20% premium that we were talking about a little while ago in terms of the penalty we get paid if they exercise early as compensation for them getting out early.

Okay. And so, the loss in rent on the $35 million to $40 million, I would think it would be less than $5 million to $7 million though. Right?

There's no doubt. But we also, as we said, as Mark said earlier, Dan, we plan for some sale of some Imagine charter schools. As we've said, those are pretty high earning. You remember those were in the effected interest method at about a 12. So, if you start to take those off and you sell, just kind of back of the napkin and Mark can jump in here. If you say you sold $50 million of those at a 12 and you're at $6 million and you're getting $6 million of fees, there's kind of almost a wash there.

The simple math, maybe take a blended 11, we have Imagine up over 12, other charter schools, and we have some other sales. Average of $125 million of midpoint at an average 11 cap for half a year? That's about $6 million roughly which is the termination fee. So, while there's termination fees, they somewhat buffer sales not only of the schools that are being sold for which we get a termination fee but the other sales in the plan.

So, you're thinking 11 on the GAAP is -- is the cash significantly lower? Like 9 or something like that?

On the Imagine, the cash is in excess of 10 and on the other charter schools the cash is probably closer to -- what do you think?

9.

About 9? Plus? Because there's been escalators. So, cash is less. Of course I was talking about GAAP earnings.

Right. Right. I'm just trying -- is there any reason why the -- so, the Imagines that you're selling, are those comparable to the existing portfolio? Or -- ? It seems to me if you're selling them for cash somewhere north of 10, it seems to be high relative to maybe what I thought the portfolio might be worth.

We're not talking about what we think we'll sell them for or hope to sell them for. We're talking about what the earnings would be currently. That could change dramatically. We just picked the current value and what we're earning on it now. We didn't actually make a prediction as to what we could sell those for. Because you're correct. If we sell those and then we redeploy that capital or even take it against our cost of capital, it could be better than that but we just took a static number of our original costs going in, original costs going out for planning purposes, Dan.

Okay.

The Imagine batch we sold 18 months ago we did sell at a premium.

That's what I thought. That's very helpful. And then with the water park hotel, I'm just curious how that works. I know it's just recently been delivered. I would imagine this is kind of the off season. Is there any type of seasonality to that? Or is it just a straight triple net lease? Is there any percentage of rents or participating interest? How does that work?

It is just a straight triple net. And actually there's less seasonality than you might anticipate. The actual, the Poconos region has a pretty robust summer season. So, it is pretty much year round. There are participating aspects of that but those are kind of out in front of us. We're not near those at this time.

You will see those as line items because we converted $120 million mortgage at completion to a lease and it's now a master lease with the existing ski hill and indoor water park. So, it's now all under one master lease.

Okay. And then as I'm looking at your page -- I think it's page 22 or wherever you have the in service stuff -- actually it's page 20. It looks like entertainment's kind of 8% of your build to suit and service estimates, recreation's 18%, so education's 74%. Is that roughly kind of how you feel like the next few years are going to trend? What kind of moves that one direction or another? Or is just education really where you're seeing the best opportunities? Or is more or less there just hasn't been as much opportunity as in other places?

I actually think over next year when we look at it I think we look at it as probably education 50%, recreation 30% to 35%, and entertainment 15% to 20% next year. Now that can change in the sense that as I said we don't load in a lot of acquisitions and we're looking at some portfolio deals in entertainment which if we were successful with those could -- as occurred to us a couple years ago when we did the Regal portfolio and that came in.

It would materially change that. But most of our -- as we said, our build to suits now are -- they're heavy conversions. And so we're extending lease term. We're spending smaller dollars but we're actually extending the life of our existing assets but there are not as many true ground up construction opportunities.

Interestingly, those numbers are not that dissimilar from what we expect to finish '15 as far as a relative range. Maybe a little bit higher to education next year relatively. But pretty much the same kind of context of that break out.

Okay. Thank you very much. I appreciate it.

Thanks, Dan.

Craig Mailman, KeyBanc.

Hey, guys. Just a clarification. On the sale options to the school and what you guys -- the termination fees where you're getting the premium on sort of the sale price versus your basis, it's in line. Is that the right way to think about it? I guess I'm just trying to see, are there taxable gains that you guys need to shield from these sales?

There will be some gains if you think about it because it will have depreciated and then I'm going to get kind of my minimum cost plus a premium termination fees. But in the grand context, the grand scheme of our total tax situation, I don't think we have any particular big planning to do because it's not that big. We can handle it.

Okay. And then, Mark, can you just -- you kind of ran through the Adelaar stuff a little quicker. Can you run through the $0.16 kind of where it hits and the different components?

Yeah. We get a little bit hesitant about the different components because as we said before, the lease itself is -- we're supposed to keep that confidential until the award is issued. I did think it was appropriate to give you a guidance, at least FFO per share in terms of how it would impact next year but there will be revenue, higher revenue, because we'll start booking revenue as I said.

We'll start having probably higher operating expenses. We'll have lower capitalized interest. And at the end of the day, the impact on FFO for the year will be about $0.16 which is $0.02 higher than this year. If you think about it, this year we're pretty much just booking capitalized interest. So, that's what I meant. As far as the break out, I'd love to give that to you but we'll probably wait until we have the call on Adelaar or need to wait until we have the call on Adelaar, when we have the actual award in hand or Empire has the award in hand.

Okay. That's fair. And then just lastly, the $0.04 difference between what you guys have for kind of the adjusted FFO versus the headline, how much of that transaction cost versus the deferred tax?

The $0.04 difference from headline I think is really due to a couple of things. Higher percentage rent. You think about it, we were a little more conservative on Schlitterbahn because they had a wet June and they came out even higher than last year. We also got that percentage of rent, on that one private school.

We also had some in service a little bit earlier than we expected, particularly the British School of Chicago and a couple of the TopGolfs. So, I don't think it's so much -- the deferred taxes were right in line with what we expected. Transaction costs aren't in -- our FFO is an adjusted number. We exclude that. So, those really weren't the FFO as adjusted difference. It was more due to really operations.

It's kind of a true --

I was getting more at the 2016 guidance, the ranges.

So, 2016 guidance we have transaction costs again are excluded from FFO as adjusted which is what we like to focus on and taxes are very similar to this year because they relate to Canada and nothing in particular is happening up there that would change that number dramatically. So, those two numbers are about the same. The increase year over year is all about in service, higher percentage rents, higher participating interest and --

-- investments this year.

I guess I'm just getting at the $4.66 to $4.76 versus the $4.70 to $4.80. That $0.04 difference you guys said is transaction costs and deferred income tax expense. I'm just trying to get what's the $0.04 mainly comprised of. Is that all transaction costs with minimal deferred income tax?

Oh, we reconciled that on -- sorry. We reconciled that. There's -- transaction costs is the $0.04. The deferred income tax expense isn't big enough to reach the rounding to $0.01 so to speak. So, the $0.04 is transaction costs. We had higher transaction costs this year than we expect next year but we never know what is before us in '16. We're just banking on a more normal year next year.

Perfect. Thank you.

Rich Moore, RBC.

Hello, guys. Good afternoon.

Good afternoon, Rich.

Good to see you, Greg. I'm getting kind of mixed signals I guess from the marketplace on what's happening with theaters. I mean it seems for a little while there the analyst community if you will was downgrading the theater operators and there seemed to be some big concern there that everything was going crazy. And then Regal comes out with a pretty good quarter just recently. So, I'm wondering what have you heard from the operators? Are you sensing any softness even though obviously the box office, it sounds like another record year. But are you sensing anything might be wrong in the theater business?

Right now the discussions that we're having is very positive in the sense that I think what's going on is a lot more reinvestment dollars and I think you're seeing them spend more money. You've had, as I said, over the last 12 to 18 months, you've had Regal and Cinemark both announced 35 to 40 redevelopments, remodels.

So, I think there is, especially some of those that are a little more dividend paying, where people were thinking this might be a means to raise the dividend, that those dollars are getting refocused back into and getting paid in reinvestment, in the redevelopment of the enhanced amenity theaters. So, I think that could be -- people may have thought there might have been some dividend increases that are not getting directed that way, Rich.

Okay. So, you're not hearing any pull back?

No. Like I said, everybody seems very, very positive as far as directionally where we're going.

Okay. And then on the same line, on page 27, where you guys show your expirations, you don't have a huge number in any particular year. But you do have 16 in 2018. As these come up are you finding that you're converting some of these? Or are these just straight renewals of leases? Are you doing -- amenity theaters? What exactly is happening?

It's kind of -- I will tell you mostly they're being extended. Some of that may involve also a conversion and them changing it. '18 has a master lease portfolio in there with one operator. I will tell you they're spending significant dollars themselves right now enhancing all of those theaters. So, we feel very good about that renewal. And do not anticipate any issues with that master lease portfolio.

Okay. So, none of these near-term guys are losing -- you're not losing anything to these guys?

We don't think so. Like I said, we may have to rework some of those into high amenity theaters. We may put more money into those. I mean, I'm not telling you as we look forward, if there are issues, if we do -- and not all theaters are as good as other theaters. They're one-off issues. They're not -- there's nothing systemic at all. Systemically it's very positive.

Okay. And then I kind of lost track. How -- the box office is doing very well and it sounds like everything's good. So, I would think we get more of the theaters into the percentage rank category but I always kind of lose where you guys are with how many of these guys are getting percentage rent or giving you percentage I guess is the way to look at it, and what it takes to get more of them into that sort of level?

Right. I think the number is about ten theaters that we have right now. Keep in mind that break point keeps moving as rent goes up. So you kind of are chasing -- you need an increase an increase in box office greater than 2%. I mean, if we're getting 2% escalators, I think as we evolve into more high amenity theaters, I think you'll see an opportunity set there that's greater because the food and beverage spend increases.

So, the per cap spending is going up. Those are still in the early stages and the conversions are going on. So, we anticipate that as we extend these leases we're definitely looking at those percentage rent factors and making adjustments to those as we see that can be a material enhancement as we go forward, Rich.

Okay. Very good. Thank you, guys.

Thanks.

Tony Paolone, JPMorgan.

Thanks. Sorry to keep hounding on this purchase option for the charter schools. But I got confused with one of your answers to another question earlier. So, if I just think about this simplistically, one of these schools you built or bought for $10 million and you went in at a 10 cash cap rate and maybe your GAAP was 12 or something I'm guessing. Is it like a year five option that's being exercised? What's the timeline? And so what is the exit economics in that example?

I think, Tony, your first question is correct. It's generally like they open up around year five. They can be -- some are seven, ten. Some have none. But at different points. And, Mark, you can help me on this. We're going to recover any sort of straight line difference out of that fee so that we're made whole and then the remaining balance of that is just a -- is kind of a lease termination fee.

So, think of the gain or loss on a sale as being the original price we paid minus depreciation plus straight line versus the original cost. That's what they're paying to buy that theater. So, if the appreciation is greater than straight line, there's a gain. Which is what we expect. To gain on sale.

Separately, then we get that premium which is the termination fee on top of that gain if you will to the extent depreciation is greater. You kind of clear off your assets related to the sale which is a straight line and the book value and versus that purchase price which is the original cost. And the premium becomes kind of the gravy, the payment for the fact that we're shutting down -- the lease isn't as long as we anticipated because they're taking an early option.

Okay. So, I guess there's two things. The accounting which I guess you're suggesting there's some write down on the straight line accrual and there's this kind of wash out adjustment that happens? But then on just from an economic point of view though, again this $10 million box, you went in at a 10 cap, cash on cash, you had a few bumps along the way. It's year five. What is the actual sale price? And then what is the lease fee in this sort of an example?

Sale price is kind of set mechanically in the lease at original cost. That's the sale price of the asset. And separately you get the -- if it's early on, you might get a 20% premium in year five or seven depending on how it's written and that premium declines over time. So, that's how it works. You paid your original cost for the asset and you have a premium on top of that.

Okay. I understand. So, effectively you're exit cap may be a little bit higher by way of the ramp ups along the way?

Yes.

Got it. I understand now. Thank you.

Dan Donlan, Ladenburg Thalmann.

Sorry. Thanks for that clarification as well. If we exclude the $35 million to $40 million that you expect could be purchased back by your charter school tenants, what do you think the cap rate range is for what you're selling the reaming portion of what you're selling? On a cash cap?

I think -- that's interesting. I think on the Imagines, that's -- we break this down as an opportunistic, as Jerry referenced, kind of price awareness and derisking. I think we look at the Imagine as a derisking. And we've said those are generally -- the last trade that we did was kind of an 8.5 to 9 on those Imagine assets. The other sales that we think in there we think will be more of that kind of price awareness, kind of opportunity set which we've had discussions all the way, 6.5 to 7.5.

And that's for charter schools too?

No. That's probably other assets in the portfolio, be those in our entertainment area and our recreation area, but probably not in our education segment.

Okay. That's extremely helpful. Thanks so much.

Thank you.

I'm showing no further questions at this time. I would now like to turn the call back to Greg Silvers for any further remarks.

Well, I want thank everyone for their attention today. And all the good questions. As Dan kind of alluded to, we want to leave you with one final thought and with one slide. And that's -- Go Royals! We appreciate your time and attention and we look forward to talking to you next quarter. Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.