EPR Properties (EPR) 2017 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Q3 2017 EPR Properties Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Brian Moriarty, VP of Corporate Communications.

Thank you, operator, and thanks to everyone for joining us today on our third quarter 2017 earnings call. As always, 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. Discussion of these factors that could cause the results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q.

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

Thank you, Brian, and good afternoon, everyone. Welcome to our third quarter 2017 earnings call. Before we get started, I'll 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 detail. Our first headline, resilient quarterly performance supported by solid fundamentals. Third quarter exhibited continued momentum as our top line revenue grew 21% compared to the same quarter previous year. Despite the challenges arising from the severe hurricanes, our attraction portfolio delivered solid results. Additionally, the long-term durability of our theater portfolio was illustrated even as box office results were down as predicted for the quarter.

Lastly, we were pleased to see the continued growth in our public charter school portfolio. Our stabilized enrollment growth in the portfolio continues to support our investment thesis of investing in the sector driven by strong parental demand for choice in education.

Our second headline. We delivered almost $300 million in quality investments across our investment segments. Adding to our record year, we had another strong quarter of investment spending. The investment spending, along with our 99% leased rate, continues to reflect the broad asset demand across each of our primary investment segments, supported by the strong momentum of the experience economy. While our spending varies by segment from quarter-to-quarter, we continue to source strong opportunities across all 3 of our differentiated and discrete segments throughout the year due in large part to our expertise, reputation and networks that we have developed over the years.

Our third headline. Increasing 2017 earnings and investment spending guidance and introducing 2018 guidance. Consistent with our theme of maintaining momentum, we are pleased to be increasing both earnings and investment spending guidance for 2017. Additionally, we are introducing earnings and investment spending guidance for 2018. As we mentioned previously, we are committed to quality execution and delivering highly sustainable long-term growth. Our commitment is to continue to build on the solid track record that we've established by persistently seeking out long-term investments that meet our underwriting criteria and deliver consistent and reliable cash flows. With this in mind, we are optimistic about 2018 earnings growth and investment opportunities, and Mark will provide more detail later.

Our fourth headline, EPR Properties 20th anniversary. On November 18, 1997, EPR held its IPO at the New York Stock Exchange and became a publicly traded real estate investment trust.

On that day, the company established an equity market cap of $255 million and had total investments of approximately $249 million. Formed as Entertainment Properties Trust, the company was the first and only REIT focused on investing in movie theaters. Due to the thought leadership, dedication and perseverance of our original team, 20 years later, the company has an equity market cap of over $5 billion and total investments of over $6.6 billion.

During this period, the company has delivered a total shareholder return of approximately 1,500% or about 3x more than the RMS index, and about 5x more than the Russell 1000. We are thankful to the employees, tenants and shareholders, who've helped make this anniversary possible. We are here today because of the insightful people who recognized the opportunity that exist outside the traditional REIT assets and those that believed in them. As we look ahead, we have enormous confidence in the EPR team and look forward to building on our success for the next 20 years.

Now I'll turn the call over to Jerry.

Thank you, Greg. During the third quarter of 2017, investment spending was $292.8 million, bringing year-to-date investment spending to $1.5 billion. Total year-to-date investment spending, excluding the CNL Lifestyle Properties transaction was $725 million. Investment transaction volume during the quarter was significant across all 3 of our investment segments. Our investment results confirm our thesis that a focused approach within defined segments provides us with the expertise and relationships to allow us to access quality opportunities that deliver consistent and reliable results. I'm pleased to announce that we anticipate the strong pace of investment spending to continue, and we are raising the midpoint of our 2017 investment guidance by $100 million to a range of $1.55 billion to $1.6 billion. Before I get into the detailed discussion of our investments and performance, I wanted to mention that our properties in Florida and Texas did not suffer significant damage from the recent hurricanes. However, these communities have suffered and our thoughts and prayers go out to them as they begin the process of rebuilding. Many of our tenants in these communities answered the call to help during these trying times, and we are incredibly proud and honored to be associated with such fine companies.

In the Entertainment segment, after 2 record box office years, projected box office revenues remained stable on a year-over-year basis, given the strong fourth quarter movie lineup, which was partially demonstrated this past weekend with the successful opening of Thor, the latest Marvel franchise movie. The film slate this year is heavily weighted to the holiday season, and it will continue with the D.C. offering Justice League, the new Pixar movie Coco and, of course, the highly anticipated Star Wars release, The Last Jedi. Please note that minor month-over-month or quarter-over-quarter movements in box office revenues have minimal impact on our rent coverage.

The movie exhibition business remains solid, with product that remains well-received by moviegoers. Further, the consumers continue to seek the unique out-of-home entertainment experience represented by the theater business. We're pleased to report that during the third quarter, we extended 10 of 13 theater leases that had 2018 expirations. 8 of these leases were extended to 2030 and are being renovated into high amenity theaters and our rents will be in excess of the tenants' contractual renewal option. Of the 3 remaining lease expirations, 2 theaters are already under letter of intent for a lease extension and renovation and one theater is still under active negotiation.

We remain encouraged by the ongoing growth opportunity for us within the theater space supported by a couple of key factors. Deal flow remains strong, reflecting the benefits of our focused entertainment platform and depth of our relationships. The high amenity theater format continues to be well-received by consumers. Each of our top theater operators are pursuing plans to develop or convert to high amenity theater formats that provide us with additional opportunities.

For the third quarter, investment spending in our Entertainment segment totaled $150.7 million, consisting primarily of build-to-suit development, redevelopment and acquisition of megaplex theaters, entertainment retail centers and family entertainment centers.

In summary, at the end of the third quarter, the company had approximately $2.9 billion invested in the Entertainment segment, with 6 properties under development, 163 properties in service and 22 operators.

In the Recreation segment, during the third quarter, we continue with the successful expansion of our portfolio of high performing TopGolf properties. Further, we now have a larger portfolio of ski properties and attractions due to the CNL Lifestyle Properties portfolio acquisition. Our TopGolf properties continued to enjoy a strong consumer acceptance and operating performance. At the end of the third quarter, we had 5 TopGolf properties under construction with 28 open and operating properties. On an overall basis, despite challenging weather in many of our markets, the revenue performance of our attraction property portfolio was relatively flat with the prior year period. Seasonal reserves for all of our attraction properties have been fully funded. We also remain exceptionally pleased with the transition to new operators on a number of the CNL attraction properties, particularly given the adverse weather conditions this year.

Recreation spending totaled $85.4 million during the third quarter, with investment spending on build-to-suit development of golf course, entertainment complexes and attractions, and redevelopment of golf -- of ski areas as well as $117 million in acquisitions of other recreation facilities. In summary, at the end of the third quarter, the company had approximately $2.1 billion invested in the Recreation segment with 6 properties under development, 81 properties in service and 21 operators.

During the third quarter, we continued to find attractive investment opportunities across all 3 of our education property types, which include public charter schools, early childhood education centers and private schools. Each of these property types have continued to experience strong growth and increased enrollment. As we stated previously, our experience in the education sector and strong operator relationships combined with our build-to-suit program provides us with a competitive advantage to assemble a high-quality investment portfolio of education facilities.

As mentioned on previous calls, we have committed to increasing the tenant diversity of our public charter school portfolio and reducing our concentration of Imagine Schools. We currently have several Imagine School properties under contract, which we hope to close shortly after the end of the year. As disclosed previously, we continue to have discussions with an early childhood education tenant to restructure their lease terms and provide them the flexibility to deal with challenges brought on by the rapid expansion and related ramp up to stabilization. The restructuring discussions have been further complicated by the impact of recent extreme weather events, particularly Hurricane Harvey and the tenant having multiple landlords. In October 2017, we terminated 9 leases with the tenant, 7 of which have recently completed construction and 2 of which are unimproved land. The tenant continues to operate the 7 completed properties as a holdover tenant, as we assess leasing these properties to other early childhood operators. Our financials and forecast continue to reflect the anticipated impact of the restructuring, and this tenant continues to represent less than 2% of our revenues.

During the third quarter, investment spending in our Education segment totaled $56.5 million, consisting of spending on build-to-suit development and redevelopment of public charter schools, early childhood education centers and private schools as well as $11.1 million for the acquisition of one public charter school and an investment of $20 million in mortgage notes receivable. We expect that National Charter School enrollments for 2017 to 2018 school year when ultimately counted, will continue to demonstrate significant growth exceeding the 3.1 million student level achieved last year. Our charter school portfolio is 98% leased and capacity utilization has increased to 86% for the 2017 to 2018 academic year from 84% last year for the same period.

Overall enrollment in our public charter schools increased by more than 10% in the current school year. In summary, at the end of the third quarter, the company had approximately $1.5 billion invested in the Education segment with 8 properties under development, 147 properties in service and 64 operators.

Construction of a water park hotel located at the Resorts World Catskills development, formerly known as Adelaar, accelerated during the third quarter of 2017. We invested approximately $18 million on this development during the quarter. In terms of capital recycling during the third quarter, the company sold one public charter school property, pursuant to a tenant purchase option for total net proceeds of approximately $5.7 million and recognized a net gain on the sale of real estate of $1 million. For the 9 months through September 30, 2017, property dispositions and mortgage note payoffs totaled $140.3 million. The company also expects to receive an additional $45 million to $60 million of proceeds from property dispositions in the fourth quarter, primarily from the sales of public charter school properties pursuant to tenant purchase options and expects us to recognize an additional $11.7 million to $12.7 million in lease termination fees. Consequently, disposition guidance for 2017 overall is $185 million to $200 million. Property occupancy for all our properties remains strong at 99%.

In summary, the overall business in each of our segments remained strong as significant transaction -- with significant transaction volume across all 3 of our investment segments. As I stated previously, we are raising our 2017 investment spending guidance to $1.55 billion to $1.6 billion. Although we do not have another CNL-sized transaction for 2018, our investment spending remains robust with guidance for 2018 investment spending at $700 million to $800 million. Our disposition guidance for 2018 is $125 million to $225 million.

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

Thank you, Jerry. I would like to remind everyone on the call that our quarterly investor supplemental can be downloaded from our website. Today, I'll be going over the numbers for the quarter as well as our expected strong finish to 2017. We anticipate that momentum will continue, and I'll provide initial guidance for 2018.

Now turning to the first slide. Net income for the third quarter was $57 million or $0.70 -- $0.77 per share compared to $51.6 million or $0.81 per share in the prior year. FFO was $90.5 million compared to $78.2 million in the prior year. Lastly, FFO as adjusted for the quarter increased to $93.3 million versus $78.8 million in the prior year and was $1.26 per share for the quarter versus $1.23 per share in the prior year. Before I walk through the key variances, I want to briefly discuss 2 adjustments to FFO that come to FFO as adjusted. First, we amended the agreement that governs our unsecured revolving credit facility and unsecured term loan during the quarter and recognized cost associated with loan refinancing of $1.5 million that have been excluded from FFO's adjusted. I'll discuss the very positive changes resulting from this amendment in a few minutes.

Second, pursuant to a tenant purchase option, we completed the sale of a public charter school during the quarter for net proceeds of $5.7 million, and recognized termination fees included in gain on sale of $1 million.

Now let me walk through the key line item variances for the quarter versus the prior year. Our total revenue increased 21% compared to the prior year to $151.4 million. Within the revenue category, rental revenue increased by $20.5 million versus the prior year to $122.8 million. This increase resulted primarily from $23.5 million in rental revenue related to new investments, including the CNL transaction and was partially offset by a $3 million decrease due to property dispositions.

Percentage rents for the quarter included in rental revenue were $2.2 million versus $1.7 million in the prior year. The increase was primarily due to percentage rents related to 2 recreation properties.

Other income decreased by almost $2 million for the quarter versus last year and was primarily due to no insurance recovery gain recognized in the current year versus $1.8 million in the prior year. Note that insurance recovery gains are excluded from FFO as adjusted.

Mortgage and other financing income was $24.3 million for the quarter, an increase of approximately $7.3 million versus the prior year. The increase was due to additional real estate lending activities during 2016 and 2017, including the funding of a $251 million mortgage note receivable with Och-Ziff Real Estate last quarter in connection with the CNL transaction. This was partially offset by transactions related to our direct financing lease of public charter schools with Imagine, including the sale of 8 public charter school properties in the fourth quarter of 2016 and the restructuring of certain leases discussed last quarter.

Additionally, we recognized approximately $700,000 of participating interest income, down approximately $200,000 from last year related to our investment in the Schlitterbahn water parks.

On the expense side, G&A expense increased to $12.1 million for the quarter compared to $9.1 million in the prior year due primarily to increases in our payroll and benefit costs and professional fees. The increase in payroll and benefit costs is due to additional personnel to support our growing asset base as well as increases in amortization of share-based awards. The increase in professional fees is related primarily to legal fees for ongoing litigation with affiliates of Louis Cappelli as well as the restructuring work related to an early education tenant. Activity increase related to the Cappelli litigation as the case proceeded to discovery and depositions. We are pleased that this case is reaching its final stages, and we continue to believe that we have meritorious defenses against these claims.

Transaction cost decreased to $113,000 from $2.9 million in the prior year due primarily to a decrease in cost expensed associated with the CNL transaction.

Turning to the next slide. For the 9 months ended September 30, our total revenue was up 18%, and our FFO as adjusted per share was up 5% to $3.73.

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 charge coverage at 3.1x, debt service coverage at 3.6x and interest risk coverage at 3.6x. Our net debt-to-adjusted EBITDA ratio was slightly higher at 5.66x than our stated range of 4.6 to 5.6, mostly due to the high volume of investment spending during the quarter, the shifting of proceeds expected from public charter school dispositions pursuant to tenant purchase options from the third to the fourth quarter, and the higher G&A expense discussed previously. Note that adjusted net debt to annualized adjusted EBITDA, which annualizes the impact of acquisitions during the quarter and eliminates the penalty for build-to-suit projects under development, was 5.38x or about 30 basis points lower and well within our stated range. Lastly, our FFO's adjusted payout ratio was 81%.

Now let's turn to the next slide for our capital markets and liquidity update, as it was a very productive quarter in which we further enhanced our balance sheet and financial flexibility to support our ongoing growth. As I mentioned previously, during the quarter, we amended the agreement that governs our unsecured revolving credit facility and our unsecured term loan. The amendments to the unsecured revolving credit facility among other things increased the borrowing capacity to $1 billion from $650 million, extending the maturity date by nearly 3 years to February 2022, with a 7-month extension option and reduced the interest rate spread and facility fee pricing at closing by 30 basis points in total.

The new rate on the revolver is LIBOR plus 100 basis points, the lowest spread we have ever had in our revolver. Similarly, the amendment to the unsecured term loan among other things increased the initial amount to $400 million from $350 million, extended the maturity date by nearly 3 years to February 2023, and reduced the interest rate spread by 30 basis points to LIBOR plus 110 basis points, also a new record low spread for us on our term loan.

Subsequent to quarter end, we entered into swap agreements to fix the interest rate at 3.15% on the additional $50 million of term loan from November 2017 to April 2019 and on $350 million of the term loan from April 2019 to February 2022. Thus combined with our previous hedge, from now until April 2019, the blended fixed interest rate on $350 million of the $400 million term loan will be 2.71%. It should also be noted that we see significantly more value in the covenant calculations for the assets we hold, as lower cap rates were assigned across all of our segments, recognizing the strength and durability of our asset types. Finally, in conjunction with these changes, at closing, we released the subsidiary guarantors on all of our senior unsecured notes, including those offered in our private placement transaction last year. Going forward, this will significantly reduce the administrative burden and cost incurred to maintain such guarantees.

Turning to the next slide. At quarter end, we had total outstanding debt of $3 billion, including the impact of the additional term loan swap I discussed earlier. 92% of this debt is either fixed rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 4.8%. We had $170 million outstanding at quarter end on our $1 billion line of credit, and we had $11.4 million of unrestricted cash on hand.

During the quarter, we also prepaid in full 3 mortgage notes payable for $24.9 million, which were secured by 3 theater properties and had a weighted average interest rate of 5.8%. After these paydowns, we have only $12 million in maturities through 2019 with a manageable maturities thereafter, and we are now substantially out of secured debt. As you can see, our balance sheet and liquidity position just keeps getting stronger.

Turning to the next slide. As Greg mentioned, we are increasing our guidance for 2017 FFO as adjusted per share to a range of $5.15 to $5.20 from a range of $5.05 to $5.20, an increase in our guidance for investment spending to a range of $1.55 billion to $1.6 billion from a range of $1.45 billion to $1.5 billion. Disposition proceeds are expected to total $185 million to $200 million for 2017, as we expect $45 million to $60 million of disposition proceeds in the fourth quarter, primarily from sales of public charter school properties, pursuant to tenant purchase options, and we expect to recognize the associated $11.7 million to $12.7 million in termination fees in the fourth quarter.

Turning to the next slide. We are introducing guidance for 2018 FFO's adjusted per share of $5.33 to $5.48, and guidance for investment spending of $700 million to $800 million. Disposition proceeds are expected to total $125 million to $225 million for 2018.

Note that dispositions in 2017 and again in 2018 fit into 2 categories. Exercises of purchase options by charter school tenants and strategic sales, where it is the right thing to do to maximize shareholder value over the long term. Because we are not in a capital constrained environment, these dispositions do not enable incremental investment opportunities, but rather become a source of capital for funding the opportunities we have previously identified.

The result in the near term is a loss of the positive spread between our revenue and cost of capital, and thus such dispositions are dilutive to current earnings. The annualized impact of the roughly $200 million in dispositions we expect for 2017 and add in the partial year impact of another roughly $200 million in dispositions we expect for 2018, there is roughly $0.10 to $0.12 or about 2% dilutive impact to 2018 FFO as adjusted per share.

Lastly, while our board has not yet approved our dividend rate for 2018, we continue to target an FFO as adjusted payout ratio of 80%. Taking into account the midpoint of guidance and further considering that we are projecting to be slightly below 80% for this ratio for 2017, this implies that our dividend growth rate will be approximately 6% in 2018. Guidance for 2017 and 2018 is detailed on Page 30 of the supplemental.

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

Thank you, Mark. As we've discussed today, 2017 has been a very productive year for EPR so far, and we are excited about our team's ability to continue to deliver such outstanding results for the balance of the year and beyond.

With that, I'll open it up for questions. Joey, are you there?

(Operator Instructions) Our first question comes from the line of David Corak from B. Riley.

I'll start with AMC, before moving on to some other topics. But just looking at their kind of CapEx plan for '18, they talked about on their call, just trying to balance it against maybe your '18 spend guidance to see where that overlap would be relative to previous years. It looks like they're going to spend a little bit less next year, but still a relatively high figure and renovate a bunch in the United States. So can you just walk us through the overlap to the extent you can and maybe what your guidance assumes on the spend front?

Sure. Without referencing them, what I can tell you David is that they are not slowing down or have not put on any delays on any of the projects that we've identified. So I don't want to speak to their specific spin. But I think the bigger is that the schematic side of, we're not seeing a slowdown on our theaters with them. They may be pulling back in some other areas. But to date, we are not seen any of that and we just met with them over the last several weeks and are not seeing any pullback.

Okay. That's helpful. And then, you guys have noted you would like to do 50% to 75% of your theater, assuming that's still the plan as of now?

Yes, that's still. And as I said, if you look at our big 3 of AMC, Cinemark and Regal, all 3 are very active. And we mentioned earlier, and I think Jerry mentioned, we had 13 leases that were expiring in '18. 8 of those were extended to 2030 with renovations, 2 of those just took their extension options and continued on, and 2 of the others are -- we are in active negotiations to renovate and extend a minimum of 10 years. And the third one, which is kind of later in the year, we're in negotiations with. So we are seeing across the board and that covers all 3 of those operators. They are all actively still wanting to invest in these theaters, because they are their productive theaters.

Okay. Fair enough. So switching over to kind of the disposition front. Mark, can you talk a little about the prepayment fees assumed for the Education segment in 2018? What exactly that's going to be related to? And then with the termination fees this year, I think, they're coming in $2 million higher on the midpoint, but you're selling less than initial guidance, so just some color on the balance there would be helpful, maybe just a refresher on the math on how those work would be useful?

Yes. First of all, for this year, we're actually selling an additional school. So kind of tightening the midpoint of guidance wasn't related to the charter school terminations. And as you go forward, next year, kind of the midpoint of guidance for termination fees is $20 million. That's several schools kind of split between early in the year and kind of third quarter, probably more focused on Q1 than Q3. And then there is also prepayment fees, if you notice, which is also a school. So what happens is, these guys have stated option periods. They can exercise their option, but they've got to pay us the significant penalties, call it, 25%, and that's what you're seeing in these fees. It shows up as gain on sale on our income statement, but we treat those termination fees just like we would a prepayment penalty on a loan as a penalty because that's what it is called in the lease and that's what those relate to. So yes, there is an increase next year, as there is a couple larger schools and a little bit more volume there than the current year.

Okay. But just after the onboard math, if you're going to sell $100 billion to $110 billion this year, given what you're going to do in 4Q, and it's going to be $19 million in fees, and we have nearly $25 million in fees between the 2 types of fees next year. Does that imply upwards of $150 million of education sell next year?

Yes, that's probably a decent number. But as Mark said, he gave you a general fee. There are some that have higher fees, and so some -- and on a year-to-year basis, it's school-by-school, what the premium is. And so it doesn't -- it's not a uniform kind of premium.

Yes, in some cases, they are actually coming to us and will prepay the rent all the way to a future option period, and we're letting them because it's an economic decision to take the rent now plus the prepayment on the lease. So like Greg said, it doesn't necessarily correlate exactly.

Your next question comes from the line of Craig Mailman from KeyBanc Capital.

Mark, I guess, could you give us a little bit more clarity on kind of the ramp and disposition in '18? And also a little bit more color on when you think those term fees will hit?

Yes, sure. Let me take the second one first. Termination fees, the $20 million in termination fees, roughly 2/3 Q1 and 1/3 Q3. But I will tell you as you saw this quarter, they can move around between quarter. So -- but that's our expectation is 2/3, 1/3. And then the prepayment fee, which is also a school that's paying off its loan early and paying a prepayment penalty, that's more slated for third quarter. So that's how those breakout.

The other question was, last year's guidance was $185 million to $200 million is what our current guidance is for 2017. And in this year, not much difference, $125 million to $225 million. So while there is -- the mix is probably more towards public charter school options this year than it was last year because we had a theater sale and so forth, the absolute number isn't that much different year-over-year.

And candidly, we have some more Imagine dispositions put in for that as we continue as Jerry stated our intended commitment to lower that exposure.

Right. That's fair. I guess, just a way you guys give guidance question, given the kind of fluidity of when some of these term fees hit, I get adding it back, but why not just give a just guidance after the fact because that's why you guys kind of missed this quarter relative to the Street, I think, there's probably a higher level of term fees in there and just optically it looks like a bigger miss than it really is because it's basically all term fees.

Yes, I guess, we didn't give quarterly guidance per se. So they have not moved between quarters. So far they haven't moved between years and we could sort of give an annual guidance, but I hear what you're saying.

Okay. And then just, Mark or Jerry, just on the early education tenant, could you kind of let us know what's in guidance for '18 from a holdover rent perspective, kind of where it shows up?

So Craig. I think it's -- again, there is not much related to these that we've terminated because we've got to work through there, putting as we are actively in restructuring kind of on a -- I don't think it's probably wise of us to tell them the number we've included for their rent. So I think we'll hold back on that. But I would tell you, there is not a lot for these. We've terminated because we've got some re-leasing time to lease those up. So there is -- there could be a positive upside to that, if we're more successful and ramp those quicker.

I guess, then may be limited on what you could say, but just what's the progress there in backfilling? Are there tenants lined up to potentially take the take the space yet or are you guys still...

We have active negotiations with regarding to several of the properties. Again, for us, it was about kind of -- there was a lot of things going on. This was taking longer than we had hoped. And it was really for us, Craig, about taking control and kind of lowering our exposure where we thought we had good opportunities to put some people and diversify away from this exposure.

Your next question comes from Anthony Paolone from JPMorgan.

I'll start with just the termination fee discussion. I guess, a few years ago, you didn't have much of any of that. And if I look at the 2018 guidance, it seems to add up to about 6% of earnings. So how do you think about that just on an ongoing basis, like, will this be just a continual flow of sales and recognition of that level of income? Or do you get through a certain portion of the education assets and then that just tapers off because they are gone?

No, I mean, I think what we've said -- Tony, it's Greg, is that those are a part of this business given the fact that they want to have that ability to access that public debt or our tax-free municipal bond market. So I think there will be -- it will continue. Again, it's a fair question that we're looking at the idea of the level of these and our ability to -- as Mark said, we've had people who have -- who are concerned about certain tax events or rates, who have kind of prepaid a year in rent and their prepayment penalty. So we are spending time internally, talking about how we can get a less volatility in that and give you guys a better view to that and we're working on that right now.

Okay. Got you. And then, if I look at your investment expectations for '18 at the midpoint, the $750 million, and it seems like we're going to get the expected spending remaining on what you have underway right now. That leaves you about $400 million. Can you talk through kind of where you see that coming from? I think in prior years, a lot of that even at the outset of the year you had was pretty visible. And so I was just wondering about that piece that...

Yes, I'd say -- I would -- I'm sorry, Tony. I would say that it's still consistent with that that we have great visibility, we have names on projects for all of that. So again, it's not our nature to kind of -- to throw out a lot of things that we don't think that we've got. It's fairly evenly balanced between the 3 segments for the year. But our confidence at this point remains high with regard to that number.

Yes, what you don't see on Page 20 is the fourth quarter of '18 because it's in the thereafter. But if you were to add in the fourth quarter, you probably have nearly 40% is carryover from this year. That might not be quite as high as in prior years as a percentage, but still a healthy percentage that's carryover. And as Greg said, with regard to the remainder, it's pretty evenly split between the 3 segments, and we feel pretty good about it.

Okay. And can you talk to expected cash and maybe even GAAP yields on the investments for 2018 and how those are shaping up?

Sure. I would say in the theater business, we're still, again, kind of the high 7s, low 8s realm. Very similar, I would say, kind of the mid-8s in the recreation space and then probably around 8- or- so in the education space.

Okay. Got it. And then just last question on the theater front. Can you -- is it possible to give us just a rough sketch as to what the economics of a highly amenitized theater box looks like and maybe EBITDA coverage there versus maybe more traditional megaplex box? And just if there is a greater skew as to where the revenue and profits come from between those 2 theaters?

Yes, there is no doubt that there is a greater recognition of the food and beverage and predominantly, I mean, that's going to skew to the alcohol sales. There is a lot of -- it's high margin low spoilage business. If you look at what we've talked about before, we've seen four-wall revenue increases of about 40%, which corresponds to significantly higher coverages. So we think that, that mix is a little bit different, if you look at the per cap spin from a concession standpoint from an amenitized theater to a non-amenitized theater, that's significant. And you are seeing those pickups in terms of spin in the food and beverage.

And so if you get 40% more, I guess, profits in the box, do you just get that extra coverage? Or do you -- or is your per foot basis or however you want to think about it, up a bunch as well in those?

Again, it's a good question. I mean, generally we reset the percentage rent factors as well. But we are -- for the amenitized often we're coinvesting, so the rents are escalating as well. So when we are escalating rents and escalating coverage, we feel really good, and the coverage is escalating at a much higher pace than the rent is. So we're growing coverage, even though, we are getting higher rents.

Your next question comes from Nick Joseph from Citi.

It's Michael Bilerman here with Nick. Just a few questions. As I think about just the term fee change, Mark, I think you talked about the dilution from asset sales from '17 and '18 being about $0.10. So if I just add up the prepayment and the term fees, you're looking at about $0.34 in the guidance for 2018 relative to about $0.25 in '17. So all the dilution that you anticipate is being offset by the prepayment penalties and the fees, correct?

Yes. I would say about $0.08 -- I would say the sales are about $0.11 and the termination fee and prepayment penalty increase is about $0.08. So you are right, there is an offset there, that's correct, but it's not quite offsetting the dilution of the sales.

And then how are you -- I mean, what's your math to get to that $0.10 on the dilution? I mean, what are you assuming that capital is being going out the door at and where it's being reinvested?

On the -- so we do it precisely, but you can do at high-level. On the dilution, if you take -- our last year's sales, were about $200 million. This year sales, call it, $200 million. So just say, at around $200 million is going to hit the P&L at around 375 basis points, because on average these are about 10 cap that we're selling, because these theaters have grown in terms of cap rate. We sold some Imagine Schools. We sold some theaters. So it is about 375 basis points spread over our cost of capital. So if you were to take the $200 million and multiply by 375 basis points and then divide by the shares, that's how you get the roughly $0.11. We do it more precisely, but that gives you a high-level thumbnail of the number.

Okay. And then I mean just thinking about the prepayment fees and the termination fees. And I think, you talked about how they won't runoff completely. I mean, at some point you sell for these assets that you're not only losing the income from the assets, but the fees go away too because you don't have the assets to sell to generate the fees? Why do you take it to that point?

Yes, but we're -- because we're reinvesting in charter schools, we continue to...

We're actually adding more than we're taking out.

That's why they are recurring in nature.

Theater coverage, where does it stand on a trailing basis this quarter?

Again, I would say, we're about 1 6 3. We told you we were at 1 7 the theater -- if you think about it, theater box office was down about 5%. So on a purely -- if it was actually apples-to-apples, we should have been at about 1 6, right at 1 6, but we are about 1 6 3 on a portfolio is consistent what we talked about staying within that 1 6 to 1 8 range.

Right. And you've talked a lot about the confidence you have within box office and talking about the renewals that you had, which I believe you disposed last quarter in the south. So I don't think that was new news, as a way that sort of deflect some of the weakness that people perceive. And clearly with the stock market, you don't have to go far to look at how AMC and Regal and Cinemark are trading, right. They're at near all-time lows, even after they reported recent earnings. So I'm just trying to reconcile those 2 things together, sort of your overall confidence relative to the way the operators are talking, the exhibitors are talking about their business?

Yes, I think, it's a fair question, Michael. I think what all the exhibitors have talked about is the quarter-to-quarter kind of narrative as opposed to the annualization. And I think, if you go back and you listen to, as I'm sure you have, all of their calls, they are talking about a very robust fourth quarter. So they are all anticipating that we will get back to near 2016 levels if the box office performs as expected. So I think what they've all discussed is that, the idea that content is -- matters and the idea we've talked about within that plus 5 to minus 5 box office performance is a lot content driven, and the second and third quarter, it didn't deliver on the content. So I don't think they think there is anything fundamentally wrong with the business. It is just coming off 2 record years that the content was not as strong as it could have been.

As we can think about the 153 megaplexes, $235 million of rental revenue, how much of that has been highly amenitized at this point in terms of redeveloped into newer theaters? I'm just wondering how much of the portfolio has been touched in that way.

My guess is, we are starting to approach near 40% of ours. As we talked about, some of ours are so high performing that they don't -- they are not really a candidate for it. So we still anticipate that we'll get to around 3 quarters of our portfolio being amenitized.

And if you noticed any differences upon which -- where your theaters are located. I'm sure its major market, on-mall versus off-mall, stand-alone. Is there anything that you can discern over your 153 theaters based on the entire retail landscape? How those assets are performing based on where they are located?

Like I said, we haven't seen the biggest -- there is no doubt I would tell you is, the biggest indicator is, are you first mover, second mover, third mover, fourth mover type as opposed to the setting that you're in. And so I think we've not -- the other thing is it's all -- we use the term and we need to probably be more closely defined and when we talk about amenitization, because there is -- if we talk about the introduction of expanded food and beverage, including alcohol, we're probably over 90% of that. So when we talk about high amenitize, we're really talking about the introduction of the fully reclining and removal of seats. But we have not necessarily seen. It's been well-received both in urban and suburban markets that we've seen.

Last question just is on guidance, in terms of equity market. I recognize that you talked a little bit about the balance sheet being in your range. It's probably, maybe, I would say, probably a little bit above the average of the range or probably where you want it to be and as you start modeling forward the additional investment spend. And I recognize you got some free cash flow from -- after the dividend. But do you have equity baked into the forecast for '18, currently?

Absolutely. Yes, we have a combination of debt and equity. Like you said, equity and cash flow, and then a debt as well to -- really we have a net $575 million of fundings. If you think about $750 of guidance midpoint for CapEx, $175 million guidance for sales, so $575 million to fund. You could think of that kind of being a large bond offering and then the other kind of equity and cash flow to pay for the rest. So yes, we do have equity in the plan next year.

And do you have a desire -- is that secondary versus ATM? I recognize the last deal you did was via the merger, you being able to delever that way and raise equity. But I just don't know going forward, whether you have an appetite to just match fund on the ATM versus doing the traditional secondary offering?

We really plan a combination. We use both alternatives, the ATM or what we call a direct stock purchase, very inexpensive. At the same time, we recognize that sometimes we want to raise larger amounts. And so we -- when we plan, we kind of plan a blended cost of those 2 in our 2018 plan, because we use both as we have done in the past.

(Operator Instructions) Our next question comes from Daniel Donlan from Ladenburg Thalmann.

This is actually John Massocca on for Dan. So just kind of clarifying, the $106 million of multiplex theaters you bought in the quarter, were those in that kind of 7 to 8 range -- the cap rate range, do you kind of mention the market being or was there some reason, it was above or below that?

No, they were in that range. I would call them high 7s range. Those were both kind of near top 100 theaters in the country. So we -- those are what we think are very attractive cap rates for those kind of high performing group of theaters.

And given the high performing nature of the theaters, I mean, are those things you look to amenitize? Or just the amount of money they manage to -- amount of revenue they are doing, make it less likely you'll amenitize those in the near term?

I would say in the near term, they are probably less likely, because they are so high performing. But it doesn't mean that over time they will not introduce amenities. And as I said, alcohol is already there and you will see -- it truly gets down to a question of can you -- does it make sense to take seats out or not.

Okay. And then switching over to kind of education. Occupancy ticked down a little bit in the quarter. I mean, was that tied -- is that just all tied to the early education operator? I know you've put them in as -- call them as a like a temporary tenant, but...

Yes. I think it was primarily that. And I think the other thing is to note that our overall actually -- what we look at when we talk about utilization factor actually has ticked up. So we had some -- as we talked about some occupancy, some issues that we're dealing with. They're pretty well known as we've discussed. But we also -- the actual underlying drivers of kind of the schools that we own, the occupancy, especially in our charter schools was -- and the utilization ticked up from 84 to 86 from a utilization rate and then overall enrollment was up 10% across our charter school portfolio.

But from the individual kind of charter school, property performance, I mean, none -- no charter schools went dark in the quarter?

Yes, we did have 1 charter school that were -- it was 2 charters and 1 school, and we're working to replace the other charter in the other building. So it was a partial.

That makes sense. And then Jerry kind of alluded to it earlier in the call. But just you said you have a few Imagines that you think are under contract and you're looking to sell kind of at the beginning of next year, was that the kind of $50 million of Imagine dispositions that you have alluded to on prior calls, possibly closing in 4Q?

It was. Yes, it was, that there's been some delays in that closing, and so we've now got those under contract, and we anticipate that those will close in the first quarter. They could close earlier. It's just we're putting that out there as the target.

It makes sense. And then -- so there is other Imagine dispositions in '18 guidance then on top of that as well or would that kind of...

Yes. Beyond that we've also got an idea that we would -- what we've talked about is continuing to work down that exposure. We talked about at our call that we had restructured some other leases to 8 and selling those. So we are actively marketing a group of Imagine. We have a certain group that we have under contract now. We anticipate or hope to have others that we will be able to exit from. And it's probably more just a marker right now for a number and we can't. The group that I talked -- that Jerry talked about, we can tie to a specific contract. The other, we've got several in the market for sale and we're just kind of pick a number disposition proceeds, and then we see if it's -- what combination of those that are being marketed.

It makes sense. But none of the $50 million that you have under contract, those weren't leased -- those leases on those properties weren't restructured, right, so just the ones you're looking to sell beyond the $50 million?

That is correct.

I'm showing no further questions at this time. I'd now like to turn the conference back to Greg Silvers.

Thank you, Joey. And again, thank you, everyone, for the time and attention. We look forward to seeing many of you next week at NAREIT. So thank you for your attendance.

Thank you.