EPR Properties (EPR) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EPR Properties First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, operator, and thanks to everyone for joining us today for our first quarter 2017 earnings call. I'll start the call by informing you that this call may include forward-looking statements as defined in 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. Discussions of these factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports on from 10-K and 10-Q.

Now I'll turn the call over to company President and CEO, Greg Silvers.

Thank you, Brian. Hello, everyone, and welcome to our 2017 first quarter earnings call. I'd like to start by reminding 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.

As always, I'll start with our headlines and then pass the call to Jerry to discuss the business in greater detail. I'll rejoin you for questions following Mark. Now, I'll get started on today's headlines.

Our first headline, solid quarter continues momentum. Our focused investment strategy continues to deliver with top line revenues increasing approximately 9% when compared to the same quarter previous year. This builds on the exceptional results we produced last year and positions us to deliver on our 2017 FFO guidance. We also increased our dividend 6.25% in the first quarter, while maintaining a well-covered payout ratio marking our seventh consecutive year with a significant increase.

Moving to our second headline, healthy investment spending. Our strong quarterly investment spending was across each of our segments, led by investments in our growing Education segment. We also continued to find attractive opportunities in our Entertainment segment with increased focus on redevelopment to high amenity theaters. In our Recreation segment, we introduced new tenants and property types. Jerry will have more on these investments in his comments.

Our third headline, tenant industries continue to demonstrate strength. Whether it was the performance of the box office or the strength of this year's ski results, our tenants continue to demonstrate that today's consumer values and seeks the experiences they offer. We are excited by the growing recognition of the strength and reliability of our investment segments, while others are starting to identify the positive attributes of the experience economy, it's what we've been doing since our inception. This heritage gives us a clear competitive advantage.

Our final headline, CNL Lifestyle transaction completed. On April 6, we completed the CNL Lifestyle transaction, significantly increasing the diversity of our Recreation segment with high-quality ski and attraction assets. On April 20, approximately 8.8 million of our shares were distributed to the retail shareholders of CNL, and to those shareholders who may be joining us for the first time, I want to say welcome to the EPR family.

As we've spoken about in the past, we were very deliberate in our approach to this transaction. Our team of dedicated professionals spent countless hours getting the underwriting and valuation right to ensure the steady and reliable lease performance that will drive results for years to come. This transaction demanded support from all of our functional areas. It really was a team effort, and I cannot be prouder of their discipline, dedication and effort.

I'll now turn it over to Jerry for a further discussion of our investments and portfolio

Thank you, Greg. During the first quarter of 2017, investment spending was $227.2 million, and set a company record for first quarter investment spending. The strong spending pace for the first quarter reflects the continued momentum within each of our primary investment segments, and represents a compelling start toward our investment guidance for the year. Furthermore, we are excited to confirm the closing up the CNL Lifestyle transaction during the second quarter, which complements our portfolio of Recreation investments and accounts for more than half of our projected investment spending for 2017.

In the Entertainment segment, the theater exhibition business posted solid growth in the first quarter. Box office revenues are up 4% year-to-date over the same period last year. There is great excitement in the theater exhibition business for the balance of the year with eagerly anticipated movie sequels such as Guardians of the Galaxy II, the new Pirates of the Caribbean sequel, Cars III, Transformers, Spiderman and, of course, Star Wars: The Last Jedi among others. For the first quarter investment spending in our Entertainment segment totaled $30.1 million, consisting primarily of build-to-suit development and redevelopment of megaplex theaters, entertainment retail centers and family entertainment centers. The high amenity theater format has been a great success for consumers and increased revenue generation with these new offerings. We continue to partner with our exhibition operators with deployment of high amenity theaters.

Our strategy involves 3 primary avenues for investment. First, the redevelopment of theaters within our existing portfolio, of which we have 7 currently, and foresee increased opportunity as our operating partners increase the velocity of conversions. The second opportunity is the build-to-suit construction movie theaters and finally the acquisition of existing theaters from third parties with the commitment from theater operators to redevelop the theater and extend the lease term. Each of these strategies leverages our knowledge and relationships to further strengthen our portfolio. An additional benefit of these efforts is that we are substantially extending the lease term of our assets. We remain the largest landlord for the 3 biggest exhibitors in the U.S., AMC, Cinemark and Regal. This positions us quite well for both stability and ongoing growth opportunities.

In summary, the company had over $2.7 billion invested in the Entertainment segment with 6 properties under development, 158 properties in service and 22 operators. During the first quarter, our Recreation segment continued to tap into the consumer preference for affordable experiences. TopGolf properties maintained their superior performance with strong overall lease coverage. We continue to be impressed by the compelling consumer acceptance, rapid ramp up and reliable performance of our TopGolf investments. We currently have 5 TopGolf properties under construction with 25 open and operating properties.

Ski operators are wrapping up what has been a very productive year. And although the final results will not be available until next quarter, we anticipate the portfolio's revenue and visitation to be up at least 15% and coverage to be at least 2x. Further, all of our tenants have fully funded their off-season reserves.

In addition, during the quarter, we invested $29.8 million in 2 fitness clubs. The fitness club businesses is a property type within our Recreation segment that we've been evaluating for a number of years. We've been patient and disciplined, waiting for the right fitness club opportunity and are excited to enter this growing business. We view the fitness category as a natural fit within our portfolio that taps into active lifestyle demographic trends.

We also acquired 2 iFLY facilities totaling $14.9 million during the first quarter. iFLY is an exciting indoor sky diving operator that pioneered this experience over 20 years ago and now has a total of 40 facilities worldwide. Our relationship with iFLY has been in development for several years. We are excited about the opportunity to invest in properties that combine a world class experience with a proven 20-year track record of success.

Recreation spending totaled $90.5 million during the first quarter, which primarily consisted of build-to-suit development of golf course, entertainment complexes and attractions, redevelopment of ski areas and the fitness and iFLY transactions I just discussed.

In summary, at quarter end, the company had over $1.2 billion invested in the Recreation segment with 7 properties under development, 46 properties in service and 9 operators. Subsequent to the end of the first quarter, we completed a major transaction with CNL Lifestyle and Och-Ziff Real Estate. The company acquired the premier Northstar California Resort, 15 water parks and amusement parks. Additionally, we provided a 5-year 8.5% secured debt financing to Och-Ziff for its purchase of 14 ski properties. Five small family entertainment centers that were part of the acquisition portfolio were sold simultaneously with the closing of the transaction.

The aggregate investment was over $700 million of which over 90% was funded with common equity. We are excited that this transaction significantly expands our investment from the Recreation segment with high-quality properties and a number of new operators. Further, this portfolio provides a high-level of diversification by product, geography and operator to our existing Recreation portfolio. This transaction also demonstrates opportunities to partner with investment firms such as Och-Ziff as they move with greater focus into the experience economy.

During the first quarter, we continued to see attractive opportunities for investment spending across our Education facilities platform consisting of public charter schools, early childhood education facilities and private schools. As we have stated previously, we believe that our experience in the sector and extensive operator relationships combined with our build-to-suit program provides us with a competitive advantage in further growing out high-quality portfolio of education facilities. During the first quarter investment spending in our Education segment totaled $105.9 million, primarily consisting of build-to-suit development and redevelopment of public charter schools, early childhood education centers and private schools.

As discussed on our last call, we are in discussions with an early childhood education tenant to adjust their lease terms and provide them the flexibility to deal with some challenges brought on by their rapid expansion and related ramp up to stabilization. The situation is complicated by the tenant having multiple landlords, but we have made progress in these discussion and anticipate having a resolution by our next earnings call. Both our first quarter results and our guidance reflect our best estimate this matter is likely to be resolved. As noted on our prior call, no early childhood education tenant contributed more than 2% of the company's revenues in 2016 and no early childhood education tenant is planned to contribute more than 2% in the company's 2017 plan. In summary, the company had over $1.4 billion invested in the Education segment with 18 properties under development, 133 properties in service and 57 operators.

Construction continues to progress steadily with the planned opening of the Montreign Resort Casino by Empire Resorts on or before March 31, 2018. Montreign Resort Casino is designed to meet 5-star and 5-diamond standards and includes an 18-story hotel, a casino floor and entertainment space. Earlier this month, Montreign Resort Casino announced that it has entered into a license agreement to be rebranded as a Resorts World property, which we believe is a really positive move. The branding and licensing as a Resorts World property will enable Montreign Resort Casino to leverage the internationally recognized Resorts World hospitality and casino brand. Development also continues on the water park hotel site located in the Adelaar casino and resort development with an anticipated opening in early 2019. We invested approximately $1.7 million on this development during the quarter.

In terms of recycling capital during the first quarter, we sold 3 properties for $18.1 million, primarily consisting of 2 educational properties for a net gain of $2 million. In addition, during the quarter, there were mortgage note receivable paydowns of $7.3 million, bringing our disposition proceeds to a total of $25.4 million. We have a number of pending disposition transactions that we have previously discussed, which we anticipate closing during the second and third quarters. I want to reconfirm our guidance for 2017 disposition proceeds remains $150 million to $300 million including $50 million in sales of existing Imagine Schools to a third party. As mentioned on our previous call, with the closing of this transaction, our Imagine exposure, including the outstanding note and remaining properties, is expected to be less than 2% of our investment portfolio.

Property occupancy for all our properties remains strong at 99%.

In summary, the overall business in each of our segments remains strong and solid with consistent investment opportunities with durable growth profiles. We're maintaining our guidance for 2017 investment spending at $1.3 billion to $1.35 billion, inclusive of the recent (inaudible) investment.

With that, I'll turn it over to Mark for a discussion of the financials and I'll rejoin you for questions

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

Now turning to the first slide. Net income for the first quarter was $48 million or $0.75 per share compared to $48.2 million or $0.70 per share in the prior year. FFO was $72.9 million compared to $73.8 million in the prior year. Lastly, FFO as adjusted for the quarter increased to $76.5 million versus $73.7 million in the prior year, and was $1.19 per share for the quarter versus $1.17 per share in the prior year, an increase of 2%.

Before I walk through the key variances, I want to discuss certain of the adjustments to FFO, to come to FFO as adjusted. First, pursuant to tenant purchase options, we completed the sale of 2 public charter schools during the quarter for net proceeds of $16.9 million, and recognized termination fees included on gain-on-sale of $1.9 million.

Second, our transaction costs were only $57,000 for the quarter, lower than previously anticipated. Prior to this quarter, we had expected to classify the CNL transaction as a business combination and accordingly we expensed the related transaction costs as incurred. However, the FASB recently revised the definition of business allowing us to classify this transaction as an asset acquisition beginning January 1 of this year. Therefore, we capitalized CNL transaction costs in the first quarter and will do so for other related CNL transaction costs incurred subsequent to quarter end. Note that while this change impacts reported NAREIT defined FFO, it has no impact on FFO as adjusted as expensed transaction costs are added back for purposes of this calculation.

Now let me walk through the key line item variances for the quarter versus the prior year. Our total revenue increased 9% compared to the prior year to $129.1 million. Within the revenue category, rental revenue increased $13.3 million versus the prior year to $107 million, and resulted primarily from new investments. Percentage rents for the quarter included in rental revenue were $850,000 versus $610,000 in the prior year. The increase was primarily due to percentage of rents received related to our private schools. As in prior years, we expect percentage rents to be much higher in the second half of the year versus the first half. Other income decreased by about -- by around $500,000 for the quarter versus last year and was primarily due to insurance recovery gains recognized in the prior year that were excluded from FFO as adjusted. Mortgage and other financing income was $17.6 million for the quarter, a decrease of approximately $2.3 million versus the prior year. The decrease was primarily due to mortgage note payoffs in 2016 that included a $3.6 million prepayment fee in the first quarter as well as the sale of 9 public charter school properties in 2016 that were classified as direct financing leases. Our additional real estate lending activities during 2016 and 2017 partially offset these decreases. On the expense side, our property operating expense increased by $869,000 versus the prior year, primarily due to higher bad debt expense as well as higher property operating expenses at our multi-tenant properties versus the prior year.

G&A expense increased to $11.1 million for the quarter compared to $9.2 million in the prior year, due primarily to increases in our payroll and benefit costs and professional fees. The increase in payroll and benefit cost is due to personnel to support our growing asset base as well as increases in amortization of share-based awards. Our net interest expense for the quarter increased by $7.4 million to $30.7 million. This increase resulted primarily from higher-average borrowings. Income tax expense of $954,000 for the quarter primarily relates to our Canadian-owned properties and taxable REIT subsidiaries. Current income tax expense for the quarter was $320,000 versus $458,000 in the prior year and is the amount included as a reduction of FFO as adjusted. The remainder in both periods relates to deferred income tax, which is excluded from FFO as adjusted.

Now turning to the next slide, I'll review some of the company's key credit ratios. As you can see, our coverage ratios continue to be strong with fixed coverage at 2.8x, debt service coverage at 3.1x, interest coverage at 3.3x and net debt-to-adjusted EBITDA ratio at 5.9x. These ratios were less [prior] year on our typical levels as it was anticipated that significant equity would be issued post-quarter-end in conjunction with the CNL asset acquisition and that this equity issuance would have the impact of significantly strengthening these ratios. This, in fact, happened as anticipated upon the close of the CNL transaction on April 6 as we issued approximately 650 million of common shares. Accordingly, our balance sheet continues to be in great shape.

Lastly, as Greg mentioned in the headlines, we increased our monthly common dividend by over 6% in the first quarter to an annualized dividend of $4.08 in 2017 and our FFO as adjusted payout ratio was 86%. This marks the seventh consecutive year with a significant dividend increase.

Now let's turn to the next slide for a capital markets and liquidity update. At quarter end, we had total outstanding debt of $2.6 billion. 91% of this debt is either fixed rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 5.1%. We had $150 million drawn at quarter end on our $650 million line of credit and we had $14.4 million of unrestricted cash on hand. During the quarter, we prepaid in full 2 secured mortgage notes payable for $17.9 million with an average interest rate of 6.1% and subsequent to year-end, we prepaid in full 5 secured mortgage notes payable for $117.2 million, which were secured by 15 theater properties. After these paydowns, we have $36 million in maturities through 2018 with manageable maturities thereafter. And we expect to be substantially out of existing secured debt by the end of 2017.

Additionally, during the quarter, we issued approximately 928,000 common shares under our direct stock purchase plan for net proceeds of $67.9 million. Combined with the shares we issued in the CNL asset acquisition, we have issued over 700 million of common shares in 2017 at very little cost.

Turning to the next slide. We are confirming our guidance for 2017 FFO as adjusted per share of $5.05 to $5.20 and our guidance for investment spending of $1.3 billion to $1.35 billion. Our earnings guidance continues to take into account expected dispositions in 2017 of a range of $150 million to $300 million, as Jerry discussed. Guidance for 2017 is detailed on Page 28 of the supplemental.

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

Thank you, Mark. As I've previously stated in my headlines, our unique business model of focused execution continues to allow us to identify, access and acquire quality assets that are supported by strong underlying demand. We believe that these trends will only get stronger and that we are uniquely and well positioned to take advantage of it. With that, I'll open it up for questions. Operator?

(Operator Instructions) And our first question comes from Anthony Paolone from JPMorgan.

I guess first question is on Children's Learning Adventure and it not being on your major tenant roster any more. Can you just tell us how you're accounting for it or just how that plays into guidance numbers at this point?

Tony, what we said and what we continue to say is that, there is no doubt, we have reduced the number based upon our estimates of discussions of how this will resolve itself. As you point out the numbers are pretty readily apparent that we have -- we've taken a reduction in that. I don't think, as this is still in negotiations, to kind of talk about specifics of what, in fact, that we have done is to our benefit to discuss it on the call. But it is noted that we have been conservative in our approach, we believe. And we'll have more details as we reach finalization of that.

Okay. And then in the meantime, though, thinking about maintaining your guidance, what was the offset or was this contemplated when you gave guidance, perhaps?

I think, again, we did kind of contemplate it as we talked at the end of the year, we were aware of it. I think there is -- we think there is strength in the rest of our ability to deliver on what we've talked about and we kind of -- at the time we talked at the end of the year, knew what was coming and contemplated it and as we discussed on our fourth quarter wrap-up call, gave our best estimate of how we thought this would resolve and we still feel comfortable with that.

Okay. And then, on both the Fitness side and with iFLY, can you talk about whether there is any unique arrangements with either of those tenants for future stores or anything like that, kind of like what you did with TopGolf or were these just straight up deals?

There is what you kind of figured us out, Tony. We do kind of do that. They're not nearly as large a TopGolf. I mean, again, Fitness as a category, is something that we would probably -- if we expand more, would want to go further out with more operators, but we do have some degree of exclusivity upwards of kind of, I think of 75 -- around $75 million, $100 million with an operator. That's probably the exposure we'd want to keep with 1 operator. With iFLY, we're probably closer with the uniqueness of that concept around the $50 million to $70 million of exclusivity. We kind of negotiate those with the mind of what we would like our exposure to be. We think it's a good concept, as Jerry indicated. We've spent years talking to them, asking them to kind of prove the concept out further. We have seen repeated examples of their success, and we're ready to make some -- some of these initial investments. But I wouldn't anticipate that we see the length of that investment being a TopGolf-like investment. This is just a nice add-on to our Recreation segment.

Okay. And on iFLY. What's the dollar investment and physical size of like a typical store and what do yields look like?

The yields are kind of mid-8 type yields, and the store is a kind of 12,000 to 18,000-square-foot kind of traditional box with the equipment that they need interior on that. But it's again not significant. We did 2 during the quarter for $14.7 million. So you can see that a substantial amount of investment is the owner-operator equipment that we're not part of.

Okay. And then just last question. As we kind of hear a lot about malls and retail and department stores and anchors and stuff like that these days. Do you see that is being competition for some of our concepts, whether it's TopGolf going into a reworked anchor at a mall or any of the other verticals? And how's that -- what are your thoughts there these days?

At this point, I would tell you, right now, we are probably getting more inbound calls from people who want to work with us and want to know can we use part of their site for development rather than them competing with us on that. So at this point, it's been more about opportunity than it has been about competition.

And our next question comes from David Corak from FBR.

Can you guys give us some color on the demand and transaction volumes for charter schools, early education assets out there? Maybe just some data points on cap rates, yields would be helpful. Has volume or pricing or competition changed much over the past 3 or 6 months?

Sure. This is Jerry. The charter schools, I mean, it's still an initial cash yield of 8% to 9% for us, on new projects, typically build-to-suit. There is not a lot of an acquisition market there, though there is some, in an increasing amount. Volumes in the industry slowed down in terms of net new schools and so forth over the past 12 months, though that appears to be reversing some. And the competitive environment, really not from people that do what we do so much, but from the tax-exempt bond market has been pretty hot, though seems to be cooling off a bit here recently. So we kind of view this as a bit of a slowdown. We sort of anticipated this a while back. And I think we're going to have a steady pickup from here and it's a really, still, very solid underlying business for us.

Okay. And I think on the last call you guys had mentioned something along the lines that you had names and projects in all of your guided spend this year. Is that still the case or has any of this fallen out or has any of it been replaced?

Again, all of our projects for our investment spending right now, we have -- we do have, we have names and projects identified through that. Now what that will do is create the opportunity potentially to drive better numbers for the latter half of the year as we get more visibility to additional transactions. But as we sit right now, we are very comfortable with our spending guidance and our ability to access the deals that will drive those numbers.

Yes, just to talk more about that. If you take out CNL, which has already happened, we have about $625 million roughly of guidance for non-CNL activity and if you count in the first quarter versus what you see on our development pipeline schedule, we have about a little under $500 million of things that have already happened or have been started and they just need to be completed. Now timing can change on that. But we feel pretty good about that relative to our guidance, obviously ,when we have started such a high percentage of the projects that we have in the plan.

Sure. That makes sense. And then you guys mentioned affordable investments in Recreation, [incremental] spend in Recreation. Can you just (inaudible) on what the average kind of revenue per person is at a TopGolf per visit and how does that compare to a run-of-the-mill driving range or some other sort of competitor there?

Again, Dave, it's all good questions, I would tell you, you may have noticed that we didn't quote a specific coverage and talking about a specific average spend per customer. I think, TopGolf, as they mature and become more thinking forward about how they're driving their business, has asked us to move away from quoting their specific results, because we are actually quoting their performance as opposed to when we talk about the theater business when we're blending multiple operators together, when we talk about the average spend at TopGolf or the average spend -- or the coverage at a TopGolf gets directly to kind of their performance numbers. So again, I would tell you that they have a very strong contribution from their food and beverage component. If you look at, kind of, it's multiples higher than a driving range, if you think about what's the offering, if you think about from -- kind of performance kind of levels that we've been talking about, the activity at TopGolf is -- renting a bay is $40 an hour, between 6 people is $7 per person. For the revenue generation that you are doing, there is substantial kind of revenue in the food and beverage component that is much higher than what you would see at a typical driving range.

And our next question comes from Craig Mailman from KeyBanc.

Just quickly, to start out. Can you remind us what the lock-up period is for the CNL shareholders?

There is no lock-up period. They began freely trading April 20.

That's helpful. And then, just a follow-up on the Fitness and the iFLY. Are those going to be more sale-leaseback or are those all kind of newbuilds?

These were all acquisitions. Again, we made what is typical of kind of our -- as opposed -- what you saw with what we've done with new concepts, we are generally not immediately buying build-to-suit, it's more, let's build -- let's buy something that's existing and then cross-default it and create credit support if we go into a build mode. So our initial undertaking generally with a new tenant is to buy something existing and proven.

Okay. That's helpful. Can you guys identify the fitness operator?

The fitness operator is a group called Genesis, that is a dominant player here in the Midwest. They are the market leader in some mid-markets and we acquired properties in Omaha and Kansas City.

And then, just lastly, I know it's been talked about for years, there's potential risk out there. But just looks like chatter is heating up on maybe new release time frames being shortened. Can you kind of talk about what you guys are seeing there, kind of conversations with operators and kind of how you think that affects the business and maybe the pace of redevelopments and newbuilds for the higher amenity theaters?

Yes. I would tell you, we were at the CinemaCon which is the exhibition conference about 2 or 3 weeks ago, meeting with the exhibition and distribution. Again, this issue of release windows comes up every 3 or 4 years. Again, I even -- at the point they're talking now, there is a discussion of something below 75 day. There are lot of opportunities if you saw what happened last year with AMC and Cineplex in which there were some specific genre type titles, mainly last year was horror, which again people wanted to get out of the market and get off as soon as it wound down in October, the studios worked in agreement with the exhibitors hand-in-hand and it really was kind of triggering an opportunity to take it off the theater schedule when it's income potential fell below a certain level. So those discussions continue on. I would tell you that, every one of the distributors who presented, and I went to all their presentations, again maintained the importance of the theater exhibition cycle and preserving that for value and their commitment to creating a window that was sustainable for them and profitable for them, them being the exhibition industry. So I think, again, this noise comes up, we've dealt with it before, the theater exhibition industry has and understands how to do and deal with it. And at this point, we don't see it as a substantial threat again, but they will continue to monitor.

Have you guys seen numbers that kind of looks for a blockbuster in general, how much is made in the first 3 or 4 weeks and what the trail-off is as it stays in the theater longer?

What I can tell you is that for the industry, generally, about 95% of all theater exhibition, first-run theater exhibition revenues are made within the first 75 days.

That's helpful. And then just last one for Mark. Could you give us a breakdown of the balance of the lease term fees when you guys think they are going to flow through?

So, the biggest chunk is in the third quarter. And that -- we don't control that exactly, so when we say third quarter, it could be September and it could flow to the next quarter, fourth quarter. But it's third and fourth quarter primarily where those will hit and (inaudible) plan now is primarily third quarter.

And our next question comes from Rob Stevenson from Janney.

You've got 18 theaters, around 7% of revenue rolling over '17 and '18. At this point, based on your conversations with tenants, how is that looking in terms of new lease rental rates versus expiring, and what are you sort of expecting in terms of a mark-to-market there?

I think we feel confident and I will hope to have an update for you next quarter that we have substantially moved every -- all of those into extensions, most of those being upgraded to high-amenity theaters. So we are working through the documentation on those right now. And as I said, for most of those, that will be putting out capital, getting paid on capital and extending the lease for a minimum of 10 years.

Okay. I know, it's little early, but anything coming out of DeVos or the administration in terms of you're hitting your -- likely to hit the Education business positively or negatively, that we should be thinking about?

Right now, we haven't seen a whole lot. Clearly, the tone and tenor is positive for school choice. And so -- but they really have not had any education initiatives that they have led with, within the first 100 days.

Okay. And then just lastly, how big are the boxes we're talking about for Genesis? Is this one of the sort of smaller square footage, the medium-size guys, or one of the gigantic 100,000 square foot fitness boxes?

These are more of the medium-size kind of market penetration of the area. It's not one of the big, huge boxes. It's not the retail box either on just the corner. These are more the medium-size, embedded within communities and strong base of participants.

Is that like 20,000, 30,000 square feet?

I think 30,000 is probably -- right around that area, is the right number.

(Operator Instructions) And our next question comes from Nick Joseph with Citigroup.

It's Michael Bilerman here with Nick. I appreciate your commentary on the theatrical release window. It just feels as though there is more momentum at this point to shorten this up. And you as the landlord, right, if you take the extreme example of what's happening in e-commerce in bricks and mortar retailers, the amount of sales that they're generating in their stores. How can't [that] have an impact to your coverage levels, to your percentage rents, and ultimately, the distributor who is going to come up with some revenue sharing with the studios, right? So they're going to get protected by shortening that window, so they'll be made whole. How do you get made whole owning the box, which arguably would have less revenues coming into it, because there is an alternative to watching those movies?

Well, Mike, I get the point. The issue is though, it's different. We think it's different in retail. And I think most people do that there is actually never been a good example of direct-to-video that has been successful. Again, when you look at that model, the model has been built on the ability to do Netflix or to do a direct download for $3.99. When you're talking about downloads that are $49.95 to $69.95 to get the first run product, this becomes, I truly believe, more of a discussion of negotiations for film rental terms and using the window as a leverage point than it really does about people wanting to stake out and go to direct to the consumer, because that model in every situation that it has been tested in has not been successful.

Right. But at some point, as you shorten the window, there would be less revenues, right, that tail, and certainly that technology is improving, data speeds are improving and people's desire in terms of pricing levels may change. I'm not doubting that the theater is still going to be a place that people want to go and have an experience and go see a movie. I love going to see a movie with my wife. All I'm saying is, that there's an element that at some point, there's just reduced revenues potentially within your box that the operator is being compensated for separately? How do you get that share, right? So the mall landlords talk about sales, right? They want to get a piece of the sales that are effectively generated by e-commerce within their trade area, okay? How you are going to protect yourselves and protect EPR from the potential where revenues could go away? And the coverage levels go down, and then the rents that the operators can pay you will be diminished?

Well, I think, it's -- first of all, I think there is little bit of something I want to make sure you understand about the model. Our operators, if the distributors go direct without a release window, our operators don't participate in that either, because again they've got a model that would be direct from the distributor leaving out the exhibitor. But part of the other issue that -- and it's part of what you are seeing, Michael, with the high amenity conversion where more and more of the revenue stream is being converted from box office revenue to food and beverage and the ability to offset some of those -- some of the what could potentially be diminished box office returns with a higher component of the food and beverage spend.

Which you share in because it's done on percentage rents?

Yes. That's correct.

And our next question comes from Dan Donlan from Ladenburg.

Just going back to Michael's question, these agreements, are they kind of -- between the studios and the operators, is that something that's kind of renewed on a yearly basis, how does that work? In other words, if they try it out and, let's say, they find that it kind of cannibalizes their own revenues, can they move back to something -- typically, how long are these agreements?

These actually are agreements that are done film by film by film. I mean, if you think about actually the distribution of film product is art, not like a good. So now, most of these contracts, the form of the contracts are negotiated for a year or longer, but each film and the kind of the rental terms as far as what the percentage each one of them will receive is generally on a film by film basis.

Okay. That's very helpful. And then just kind of on the Fitness. This is a category that a lot of the net lease guys plan. So I'm just curious from a competitive standpoint, is there something that you're looking for that some of your peers are not? Is there a certain component to these fitness centers that maybe make them more unique. I'm just looking at Genesis' website and it seems like it's a much larger box, high amenities, pools, things like that. I mean, just kind of curious if you could dive a little bit more into what you're looking from that segment?

Sure. I think what we're looking for and have with them is market dominance within an area, to where they are -- they control the major part of the market, and again have established their brand as opposed to -- that they're developing allegiance as opposed to some of the retail shopping that you see in that. So again, whether it's by amenity, by -- or offerings, we look at it and say, how much of that market do they control? And if you look at some of those markets, they may control, 60%, 70% of the market share. So again, we're not buying every facility they have, we are buying a facility up where they have market dominance within an area, which gives us, we think, really strong performance and protection.

Okay. And then, from a cap rate perspective, should we assume that these cap rates are going to be probably south of 8%, historically kind of where -- your typical investments have been between 8% and 9%, are these going to be towards the low-end of the range or even slightly below 8%?

I would say right at around 8% is where we would be looking at these at.

Okay, okay. All right. And then just curious on the enrollment levels at your charter schools and maybe private schools, I'm not sure if it's something that you track school by school. But just curious, what type of trends that you have seen there. I would imagine you have the data on the private schools, but anything you can kind of offer us there would be helpful?

I mean, we have really reported, the numbers typically come in the counts in October, November, of the fall. There's a lag sometime in reporting some of them. So we really reported these, I believe, on the last call. But overall, charter school enrollments are solid, private school enrollments are solid. We really are -- certainly with our portfolio, are meeting expectations and exceeding in many cases. So we feel very good about where we are. Overall, the industry is pretty solid when you look at charters as an industry, in particular. So there is a lot of demand still out there for these core products, early ed, private schools as well. We've picked up a number of them with acquisitions in the fourth quarter and first quarter, in the last 6 months. So we feel very good about where the portfolio is.

To answer your question though a little more. Yes, Dan, we track enrollments for every school that we have. So again, I would say, generally, the trends are positive and upward. It doesn't mean that there's not an exception or 2 out there, but we talked about our private school enrollment, again, when we started with Brooklyn a couple of years ago, we said it might take 4 to 5 years for this to build up to full enrollment, well their third year this year, they are going to be full. So again, the enrollment, the parents still are looking for quality education and if you can deliver that, especially at our private school, at values that are greatly below kind of some of the market. We have seen substantial kind of movement to fill those seats.

And then just kind of given that growth relative to your expectations, have you talked with the operator that you work with, to maybe do -- it seems like you're kind of on a pace to do 1 basis private school a year. Have you maybe talked to -- with them about increasing that or where does that stand today?

I think it's, while that again fits our needs to kind of grow faster, I think we respect the idea that they want to maintain kind of the fidelity of their operation and be able to execute and deliver on that and deliver on the quality that they want to achieve. And part of that is their kind of discipline and how they identify and locate teachers and staff these appropriately and don't put stress on the system. So I think the answer for us is to find more [basis-es] as opposed to drive basis to do more. We need to find and we continue to look to expand to find other private school operators who similarly can deliver on their academic kind of requirements without trying to push a tenant to exceed what their capabilities are as for as development.

And we have several new operators in the last 6 months we have done business with.

Okay, that's helpful. And then just last question for Mark. Just curious on the guidance, you kept it the same, it hasn't been narrowed. What kind of gets you towards the low-end and high-end? It feels like given your disposition range is $150 million to $300 million, is it really just going to be kind of timing around those potential sales? Just kind of curious if you could give us a little bit of color there?

I would say couple of things. I'd say timing of sales, that's accurate. Also percentage rents has some fluctuation depending on performance. Frankly, the resolution of the early ed tenant and that has some range to it that we think we've got accounted for in a conservative fashion, but that has some range or bounds to it as well. So that's really the primary reasons.

And at this time, I'm showing no further questions.

All right, well again, we want to thank everyone for their time and attention. And we look forward to talking to you again next quarter. Thank you.

Thank you.

Ladies and gentlemen, thank you for your participation today's conference. This concludes the program, you may now disconnect. Everyone have a great day.