EPR Properties (EPR) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Entertainment Properties Trust Earnings Conference Call. My name is Chanel and I’ll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. David Brain, President and CEO. Please proceed.

Thank you, Chanel. Thank you all for joining us. This is David Brain. I’ll start with our usual preface, and that is this afternoon let me inform you this conference call may include forward-looking statements defined by the Private Securities Litigation Reform 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 conditions and results of operations may vary materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause results to differ materially from those forward-looking statements is contained in the company’s SEC filings, including the company’s report on Form 10-K for the year ending December 31, 2011. All right. With that, I will thank you again for joining us. Good afternoon. This is David Brain, company's CEO. With me to go through the news of the quarter for the first quarter of 2012 are as usual Greg Silvers, the company's Chief Operating Officer.

Good afternoon.

And Mark Peterson our Chief Financial Officer.

Good afternoon.

I will remind you quickly that there are also slides to go with this presentation that are available via our website at eprkc.com, if you don't otherwise have them up already. First I will go through the headlines for Entertainment Properties Trust for the first quarter of 2012 and then elaborate on those. And they are first, that portfolio performance remains robust; second, strong transaction activity supports 2012 investment guidance; and third, company performance on track to support earnings guidance for 2012. Now these are fewer headlines than I usually have, but they are reflective, I think, of a very focused and consistent progress quarter. I will turn to our first headline now. Portfolio performance remains robust. The main news we have to bring you at this time of year regarding our primary industries of investment is concerning our entertainment investments in cinemas and is with regard to box office performance. Just as we reported to you last time, this measure of health for our largest category of investments remains very strong in its performance for 2012. Both through the end of the quarter and currently year-to-date, box office remains up and year-to-date about 15% over the same period last year. In our Recreational Investment category, our ski portfolio is as we reported to you last time, down substantially in its performance due to the national weather trend of a much warmer winter this year. Previously, we thought revenues would be off about 20%. Though our updated although not final information shows that revenues and cash flows will be off from 35% to 40%, our expectation is that even at that, our portfolio will achieve about a 1.4 rent coverage for the current season. This is not as strong as last year, but it is encouraging given the radically warm winter weather we experienced during the season. As the Associated Press reported in April, "Winter weather records were not just broken; they were deep fried." It's good to know that even with the Arctic Oscillation seemingly at its worse, our portfolio was able to achieve a sustainable coverage level. Now in education, our Charter Public School portfolio continued to perform well with the strong enrollment increases we reported to you earlier for the '11-'12 school year. As mentioned in our last call though, we do a have cloud in this otherwise sunny picture of performance due to a variety of factors including academic performance issues. It appears Imagine will lose a number of its charters for the coming school year. Greg has more on this, but I want to make the point that due to the financial strength of Imagine, the master lease structure of our investments, the potential for substitute properties with a large scale operator and our additional credit support in the form of a letter of credit, we do not expect this to interrupt or disrupt our rental income at all for the current or coming school years. Once again, it is not an ideal set of circumstances, but it is encouraging to see that our portfolio is able even with adversity to perform acceptably. We have constructed our investments throughout our portfolios with multi-unit master lease and cross default features to prevent some individual weak spots from affecting our income streams. Further, in this instance, we have substantial letter of credit support that can be called upon. I want to reaffirm that we do not expect any reduction in our rental revenues for our charter public school investments this year or in the immediate future. We may allow our client to substitute properties as contemplated in their arrangements, but this will only serve to improve our portfolio strength. We will keep you posted on these events if they take place. My last bit of portfolio news is an update on our 1,500 acres we own at the site of former Concord Resort in the New York Catskills, 90 minutes outside New York City. Not a lot of news here, but I do want to reiterate the press release of this recent quarter. EPR did publicly introduce its new master plan for the site along with plans from Empire Resorts for a horse race track, casino and hospitality complex to be located there. These plans were formally submitted and accepted into the process of approvals and entitlements necessary for construction. This is a fairly long road, but I did want to update you with regard to this milestone achieved, due to the press release in the quarter and because we often are asked about the progress of this property. Information and progress about this project can be found in our new website www.newcatskillsdestination.com. If you'd like to, please go there and register yourself, so you can get regular updates and breaking news when it happens. Now going to the second headline this afternoon, strong transaction activity supports 2012 investment guidance. During the quarter, we made an announcement detailing transactions that represent approximately $150 million of investment spending. Greg has details of these investments to go over with you shortly, but I will just leave it to say that I am pleased we are able to add all of our primary investment areas of entertainment, education and recreation. We continue to make progress with investment opportunities again in all 3 of these categories, and Greg will have information on this as well. Now beyond these additions, we also have some subtractions from our investment portfolio in terms of selling some of our wine industry assets. The terms have been finalized in a couple of deals and a couple are still pending as we have taken some adjustments and are carrying values for these investments to reflect these transactions. Mark will have more on these items, but I would like add that we view these events as progress as they are part of our express plan to exit this category of investment and redeploy capital to our other primary investment industries. Even at values below our original investment, these transactions hold the promise of increased future shareholder returns due to the increase yield achievable in our long-term strategic investment areas. Now turning to our last headline. Company performance on track to support earnings guidance for 2012. I am very pleased to tell you all the news and results of the company point towards achievement of the earnings guidance we have outlined for you for 2012. Our current guidance is for FFO per adjusted diluted common share of $3.50 to $3.70, which I will remind you on the midpoint represents an increase of $0.17 or 5% over 2011. This performance level also supports our new common dividend level of $0.75 per share per quarter for $3 a year which we began paying this quarter past, an increase of 7% and which represents about an 83% payout ratio. With that, I will turn it over to Greg and then we will go to Mark and I'll be back to join you at questions.

Thank you, David. The first quarter of 2012 demonstrated our robust pipeline across the various segments of our business with approximately $70 million of capital spending for the quarter and a substantial number of commitments to fund future growth. I would like to spend a minute discussing our portfolio and then talk about our achievements for the first quarter. As you will notice in the supplemental and other filings, we are conforming our nomenclature to accurately reflect the various business segments as well as reflect how we are organized as a company, specifically rather than define our assets in a narrow fashion, we have logically grouped assets into larger segment categories being entertainment, education, recreation and other. As you might imagine, the entertainment segment includes our theater assets, our entertainment retail centers, family entertainment centers and other real estate in which the consumer is more passively engaged. Our education segment includes our public charter schools and the recreation segment houses our ski portfolio as well as real estate assets in which the consumer is more actively engaged such as our water park investments and TopGolf, our new golf entertainment complex. The other category is designated for assets that are in transitional phase either as a result of the company deciding to dispose of the assets such as our vineyard and winery portfolio, or assets that may not be part of our long-term hold strategy such as our Concord investment. We believe that these designations offer a more logical grouping of the assets and make for a more informative presentation for investors. With that background out of the way, I would like to discuss first quarter performance of our various segments. In the entertainment segment, box office revenues, the primary metric for our megaplex theatres, has rebounded sharply compared to last year’s first quarter performance. For the quarter, box office was up over 20% compared to last year and it continues to be up approximately 15% year-to-date. I caution everyone however that first quarter does not make or break the year. However, it is easier being ahead rather than trying to recover like last year. The film slate for the balance of the year continues to look strong with most studios forecasting continued upward performance for the year. With regard to our education portfolio, we continue to be very positive on the public charter school opportunity that has recently passed a significant milestone of enrolment in excess of $2 million students. However, we were disappointed that Imagine’s poor performance has jeopardized their charter status in 9 of our locations. The total exposure is approximately $78 million of carrying value. However, we have already started the process of swapping certain schools for performing assets. Given that these assets represent approximately 10% of Imagine’s total school portfolio, Imagine has the capacity and cash flow to service the assets until they transition to a new charter or a new operator. As a result of Imagine’s positive cash flow, their ability to substitute properties or operators, as well as the credit support features of our transaction including the master lease structure and letter of credit, we do not anticipate any financial impact from this situation. The facilities involved are quality educational buildings and we are actively working to substitute other quality collateral with Imagine or substitute other operators to put these assets in to use. Given that these closures were brought about by academic rather than financial performance, we have taken steps to strengthen and increase our evaluation and monitoring of academic performance. We continue to believe that public charter schools that deliver a quality academic experience and operate in a financially responsible manner are a very solid investment for EPR with attractive risk-adjusted yields. As I indicated previously, we continue to look for ways to increase both the geographic and operator diversity, and this quarter's investment, which I will detail in a minute, continue on this path. Our ski season is mostly complete and as we discussed previously, the unseasonably warm winter season has driven revenues down significantly, resulting in a preliminary rent coverage of approximately 1.4. This compares to last year's coverage of 2.2. While we're not excited about a significant drop in the coverage ratio, the weather pattern that caused this disruption has not occurred in the previous 30 years according to existing weather records. As a result, we are pleased that the portfolio can sustain this stress and still maintain acceptable coverage. Additionally, Peak has fulfilled its interest reserve requirements for the year and we hope next year brings a more traditional weather pattern. In our other category, we continue to make progress in the planned disposition of our vineyard and winery assets. Either during or subsequent to the quarter-end, we have entered into 2 sale contracts involving one of the former Cosentino assets and a portion of the Buena Vista Vineyards. Furthermore, we are in discussions on 3 additional assets. We are taking a more aggressive approach in reducing our exposure, especially on those assets which are not currently leased. As a result of this approach, we have taken additional impairments on certain assets. Mark will provide additional detail on this topic. However, we are committed to exiting this space and we are making strides toward that goal. With regard to investments, we spent approximately 70 million of capital in the quarter. However, we entered into commitments for additional spending that will grow this number significantly. Specifically, in our entertainment segment, we entered into 6 built-to-suit agreements with 6 different operators, all of which are new to this program. The theaters will be both traditional theaters with very established operator such as Regal and Carmike, and expanded amenity theaters with various regional players. As we indicated earlier, we anticipate that we will have an additional 2 to 4 build-to-suit theaters for the year and we are excited that this important growth vehicle has returned. We are pleased by the expansion of our operator diversity as we believe this expanded platform will continue to allow EPR to be the primary capital partner for the exhibition industry. We also expanded our family entertainment assets with our acquisitions and commitments to both Latitudes and Pinstripes. Latitudes is a dynamic family entertainment venue that offers a variety of options for all members of a family. We acquired an existing asset in Jacksonville, Florida as well as a build-to-suit project in Indianapolis, Indiana. Additionally, Latitudes will be taking space in our joint venture theater asset in Chicago, Illinois that is being downsized and repositioned. As we've previously done, these assets will be cross-defaulted for additional credit support. We also entered into a build-to-suit for a Pinstripes project at Oakbrook Mall in Oakbrook, Illinois. This is our second transaction with Pinstripes, an operator that can combines bocce, bowling and quality food into an entertainment and event space. Our existing Pinstripes property continues to perform very well and we are pleased to finance this asset in one of their premier retail locations in the U.S. In the education segment, we continue to expand both our geographic and operator diversity with the announcement of 3 build-to-suit projects and one expansion of an existing school. We are especially pleased with the transaction with Basis Schools, one of the premier operators in the public charter school space. We are hopeful that this initial deal will be with first of many with Basis, an operator that is recognized for its excellent academic performance. These projects represent total funding commitments of approximately $38 million and as I indicated previously, we anticipate that this number will continue to grow throughout the year. In our recreation space, we entered into a $20 million sale-leaseback transaction with TopGolf, involving 2 locations in Texas. TopGolf is another entertainment venue that use patented golf technology to create a fun, unique entertainment experience with universal appeal. Our overall occupancy remains strong at 98%. However, occupancy continues to be negatively affected by our vineyard and winery portfolio. For 2012, our capital plan remains the same at a range of $250 million to $300 million. For the year, we have announced approximately $150 million of acquisitions and commitments, which combined with approximately $50 million of planned carryover funding from last year and other close deals in the first quarter, means that we will have signed deals or commitments on approximately $200 million of our stated capital plan. With the progress of our first quarter, we have a high degree of confidence that we will meet or exceed our stated goals. We continue to see opportunities in all of our asset segments as indicated by this call and as stated earlier, we are especially pleased to see the return of the theater build-to-suit business as it has helped fuel our growth for a number of years. With that, I will turn it over to Mark.

Thank you, Greg. I would like to remind everyone on the call that our quarterly investors supplemental can be downloaded from our website. Note again, beginning this quarter, we have changed our investment classifications and supplemental to entertainment education, recreation and other, consistent with what Greg described earlier. Additionally our 10-Q will include a new footnote entitled Segment Information, which will provide information by each of these categories. Now turning to the first slide. FFO for the quarter increased to $40.3 million or $0.86 per share from $31.4 million or $0.67 per share in the prior year. Excluding charges per transaction and refinancing costs in the prior year, FFO as adjusted was $0.86 in the current quarter versus $0.84 last year. Before I walk through the key variances, I want to discuss a couple of items that are excluded from FFO this quarter. First, as Greg mentioned, we have had quite a bit of activity this quarter related to potential sales of certain of our remaining vineyard and winery properties. Two of these properties are now under contract and 3 others are in ongoing negotiations. While there is no assurance that any of these sales will close we evaluated the carrying value of these properties relative to their estimated fair market value of $47.1 million and an impairment charge of $12.8 million was recorded. Note that $0.8 million of this impairment is classified in discontinued operations. At the end of the quarter, the carrying value of our vineyard and winery properties was approximately $116 million, representing less than 4% of our total investments. We expect this number to continue to go down as we execute sales over the coming quarters and are encouraged by the progress being made toward the goal of redeploying this capital for higher yielding investments. The second item excluded from FFO for this quarter was a gain of $282,000 related to Toronto Dundas Square as we continue to settle up reserves established related to the sale of that investment. Note that this gain is included in discontinued operations. Now with that, let me walk through the rest of the quarter’s results and explain the key variances from the prior year. Our total revenue increased 6% compared to the prior year to $77.9 million. Within the revenue category, rental revenue increased by $2.9 million versus the prior year to $58.3 million and resulted primarily from new investments as well as base rent increases on existing properties. Percentage rents for the quarter included in rental revenue were $0.5 million versus $0.4 million in the prior year. Mortgage and other financing income was $14.7 million for the quarter, up $1.2 million from last year. This increase is primarily due to additional real estate lending activities including, as I had said to expect in our last call, the conversion of our $14.9 million equity investment in Atlantic-EPR I partnership through a mortgage note receivable at 9.5%. On the expense side, G&A expense increased approximately $1 million versus last year to approximately $6.5 million for the quarter due primarily to higher payroll-related expenses as we continue to support our growth as well as higher franchise taxes and professional fees. As anticipated, the quarter included about $700,000 in benefit costs that do not repeat over the remainder of the year. Our net interest expense for the quarter decreased by approximately $700,000 to $18.1 million. This decrease resulted primarily from a decrease in our outstanding borrowings as well as a lower weighted average interest rate versus last year. Equity and income from joint ventures decreased by approximately $700,000 to $47,000 for the quarter. This decrease was primarily due to the conversion of equity in Atlantic-EPR I to a mortgage note receivable as I discussed earlier. Finally, as David mentioned, our common dividend per share for the quarter was $0.75, representing a 7% increase over the prior year. Turning to next slide, I would now like to review some of the company's ratios. Please note that our supplemental summarizes key ratios on page 16. As you can see, our coverage ratios remain strong with interest coverage at 3.x, fixed charge coverage at 2.7x and debt service coverage at 2.7x. Our AFFO per share for the quarter was higher than our FFO per share at $0.88 and our AFFO payout ratio was 85%. Our debt-to-adjusted EBITDA ratio was 4.7x for the quarter and our debt-to-gross assets ratio was 39% at March 31st. This ratio remains just below the midpoint of our previously stated range of 35% to 45%. Our balance sheet remains strong and provides us great flexibility as we go forward. Let’s turn to the next slide. I’ll provide a capital markets and liquidity update. As previously announced, we closed a new $240 million 5-year term loan facility which includes a $110 million accordion in January. Similar to the revolving credit facility, pricing is based on a grid related to the company’s senior unsecured credit ratings, which at closing was LIBOR plus 175 basis points. We also fixed the interest rate at closing for 4 years at 2.66% through interest rate swaps. Turning to the next slide, at quarter end, we had outstanding debt of $1.2 billion. Over $1.1 billion of this debt is either fixed rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 5.7%. We had $58 million outstanding under our $400 million revolving credit facility at quarter end. When combined with cash on hand and only modest debt maturities in the coming years, we are in excellent shape from a liquidity perspective. Turning to next slide, we are confirming our guidance for FFO is adjusted per share of $3.50 to $3.70 and as Greg mentioned, previously we are maintaining our 2012 investment spending guidance at $250 million to $300 million. Now I’ll turn it back over to David for his closing remarks.

Thank you, Mark. Thank you, Greg. As we go to your question, I just want to draw your attention again to the primary investment areas as they’ve been identified from our recent press releases that I drew attention to in my remarks and Greg defined for you those of entertainment, education and recreation. We have high level of transaction and activity in all 3 of these areas and we’ll continue to look to report results to you on a continuing basis along these lines and you will find the supplemental for this quarter organized along these lines as well. With that reinforcement point, I guess, Chanel, we’ll turn it over for questions.

[Operator Instructions] The first question comes from Anthony Paolone, JP Morgan.

On the Imagine situation, can you just walk through just a little bit bigger picture, put some parameters around, just what their finances look like and what kind of impact shutting down 10% of their schools has on sort of their profitability? How many other schools do they own that they thus have the ability to substitute that collateral in? And just give us just a little bit more of the numbers around that situation.

Yes, Tony, I’ll turn it over to Greg to give you some of the specifics and, but I want to introduce, we thought Imagine was a very strong way to enter the industry, because they are probably one of the strongest finance profiles we’ve seen in the industry and we still think that. There will be bumps in the road along this way as we said, but we think we’ve got the strength to overcome, and Greg can give you some of the specifics about how we're handing this.

Sure. Tony just to kind of give you some of the specifics, what we've looked at is if they had to carry all of these properties without any substitution or without any substituting of operators, they still would be positive cash flow. So they have the ability just on their free cash flow to cover them all. On your other question, there is probably somewhere between 3 and 7 assets that we think are swap eligible that they have that we will be considering and as compared to the 9 assets that we talked about. So we think the majority of that can be handled either via swap or substitute operator. So as we said, we don’t think there is any issues. Everything points to the fact that there's not going to be a problem. We are already touring people on some of these assets. We have already, as I said, identified assets to swap with and we are working through the issue and we do not see it as a systemic long term problem.

I might note even in St. Louis where the most pointed promise for Imagine are, those schools increased in their enrollment last year and are very popular and this is one of the I think durabilities of the investments even though we’ve said the operators may have trouble in certain markets from time-to-time.

Thus far there has been no interruption in the cash payment of rents or anything.

Not at all.

Okay. On these other entertainment concepts that seem to be fairly new to the portfolio like TopGolf and Latitude; can you give us a little bit more color on, say the credit behind those? I guess I can look it up on the Internet and see what these things are like, but maybe just a little more description about the size of the average box?

Generally, you're talking about a kind of 30,000 to 35,000 square foot box that they operate out of. I would tell you Tony, on these other issues that we are heavily looking at additional or what I would call greater coverage, all of these are above a 2-0 cover and so some of them substantially above a 2-0 cover and also they are all involved in real quality real estate. Real estate that we think is even if there was an issue, that is highly valuable; however, their operations indicate that they have been very successful and they continue to be very successful. We think as we said in lot of these scenarios, we are putting these family entertainment options into some of our existing downsized theaters as you see with latitudes going into our Cantera location in Chicago. So we're able to create a cross-defaulted portfolio against some really high-performing assets that they have and strengthen our overall portfolio with strong performers who have high coverage with quality real estate.

You know the other, and Tony, I will just tell you that TopGolf may be the most difficult to understand and I won't try and relay the entire concept. I invite you or anybody else to look at it, look it up and look over it. It is not a golf course; it is a golf venue, but it is not fair to call it a driving range. It is something very different and much more and has a technology overlay that's very interesting and we're excited about it. So that's -- I'll just leave it at that, otherwise I have to get you a lot more detailed information.

Got it. How many stores does TopGolf have and Latitude have now?

Latitude has, they have 5 under, either in or under process. TopGolf has 7 locations. And so again, as David said, TopGolf I didn't go into much as he said is, it's truly an entertainment venue; it's much more than just the golf. It's got, one of the primary partners of it is Callaway Golf. So it's got some very strong sponsors and has demonstrated history of being very successful and we are excited about the opportunity that it brings to what is our traditional admissions and concessions business, our entertainment segment.

Yes, TopGolf started in the UK and has really been in operation over 7 years I think.

Okay. And then just on the deal pipeline, it seems fairly well skewed towards these build-to-suits and add-ons on the existing kind of projects you have, but just wondering are we done with seeing portfolio trades of just traditional movie theaters and some of the stuff that was just your typical wheelhouse historically?

I don’t think so. I mean I think if you look at it, I mean if you go back and look, build-to-suit business has been a driver of our business from about 2005-2006 on forward, but we still think there are opportunities for some acquisitions from standing portfolio. However, for a lot of these operators, whether they will be the ones that we mentioned, they just don’t have inventory on their books. So if we are going to do business with the operator, it's going to be driving their build-to-suit business. Remember that even though when I said they're new operators to the build-to-suit, we have an extensive relationship with Regal and some of these other operators. They're just new to that program. Historically they've built in other fashions, but we're really glad to add such quality names to that, that we are able to have a what we think is a more visible pipeline. You always have the ability and we’re still looking at portfolio things, but those pop up intermittently and you just have to wait and see how they come to you. But with the build-to-suit, we have a much greater visibility to how the capital is going out.

Okay. And just last thing on the deals, the yields both, just refresh my memory on what the yields are during the construction process on the money you're advancing, and then kind of, if there is any change thereafter once the thing is completed.

Yes, generally the yield is a little lower. I'd say it’s a couple hundred basis points lower than when they go to and that’s mainly driven because probably we'd rather them not use a traditional lender and use us as a takeout, but we can take the whole process, but our cap rates are still going to be 9.5 to 10.5 when they get to opening and when they go into service.

And our build cycles are generally...

9 to 11 months.

Yes, shorter than a year.

Your next question comes from Conor Fennerty, Goldman Sachs

I guess coming back to the charter schools, what gives you guys comfort that these problems are confined to these kind of select, I think you mentioned 9 or 10 schools?

Well I think the issue, I think Conor, as we've said, I think part of the issue is specifically to academics. I think when you see, if you follow what’s going on in St. Louis. The issue is not the financial capacity of the schools. The schools as David said actually grew at enrollment. We had actually up close to 10% enrollment growth in St. Louis last year. So we have demand for the charter school space, what we have is this operator. And this scenario with these principals and these teachers, we're not delivering the academic quality that they need to be, whereas if we can look at the rest of our schools and see that academic progress, they're not similarly situated. So we do not think this is across the board, a systemic problem but it is more that we can identify it with specific schools.

Okay. But isn’t that a little worrisome that, in theory, one of the best operators is having academic issues, because isn’t that the kind of core kind of crux of the argument behind charter schools?

I think if this is the point we would make and we can talk about this much as you want is, what we would agree with you is that Imagine is clearly probably has the best balance sheet in the space. However, we have come to understand that they need to have, do some work on their academics. And therefore, we have increased our underwriting and our focus on that to validate those processes as we acquire new assets and you see when we introduce Basis and some of the other operators, the quality academic performance that they have. So when we define Imagine as one of the better operators. When we came into this space, Conor, we came in with what we thought was a beachhead operator who had strong balance sheet that could provide a cross-defaulted portfolio and had a substantial, as I said, cash flow to withstand any sort of issues. That's proven to be true now. Have they expanded potentially a little too fast, got into some things that stretched their resources and they need to be improve that? No doubt. Have we learned as part of the process that we needed to refine our underwriting and do a better job on academic evaluations? No doubt. But I think, again, as we structured the deal, everything continues to work. We do not think that we're going to have any hiccups in our financial payment responsibility from Imagine and that we will go forward and continue to be very positive on the category.

Okay. And not to beat a dead horse, but just you mentioned kind of strengthening your academic controls, your academic underwriting. Is that looking at the operators kind of national performance? Or how can you kind of get comfortable at the local level? Or is it more getting comfortable with the operator?

It is all of the above, what you said. It's looking at their national performance. It's actually evaluating their local board and seeing if they have the right people on their board to have an academic focus and do they have the right sort of individuals from a governance perspective who not only focus on the business side of it, but also focus on the academic side of it. And so we've got some best practices that we've been part of, being shared with us with the National Charter Alliance that we're trying to make sure that we find those in all of our new kind of developments.

Okay and then just switching gears, David, you guys have, the past couple years I guess, been negatively impacted by macro volatility in terms of investment volume, but obviously it seems like your investment volume is picking up despite the fact that I guess macro concerns are still out there. I mean, is the disconnect merely that box office trends are pretty positive? Or how do you kind of bridge that gap there?

Yes, I think all of our industries are not highly correlated to what would be general macro indicators. I mean, they tend to be maybe even negative performers relative to those in terms of movie attendance. Certainly, schools are not subject to really to the macro cycles, because kids still are going to go to school and also our ski areas tend to be those at the lower cost alternatives and although the winter was bad for us, it was really worse in the resort areas, so the higher cost resort areas. So we feel like even given the prospect of a fairly slow or more difficult economy for some period of time, we have the ability to prosper and these industries will have opportunities for us and our clients to continue to consolidate in because capital may not be available for all players in the field.

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

Jordan Sadler is on the phone with me as well. Just one quick one on Imagine. Not to beat it to death, but in the master lease agreement, does Imagine get charged a higher rate or any type of penalties for the substitutions?

No, Craig it’s totally at our evaluative process. We have the ability to, they have the ability to propose it and we can decide whether we want to take it or not based upon what we think is the quality of the real estate and is it a kind of same-to-same kind of performance issue for us. So it’s totally at our discretion, but there is no penalty.

Okay. And then just switching gears, some of the new build-to-suit programs, did you guys expand that? I just noticed a regional operator in Idaho, I mean, how do you guys underwrite that credit versus a more national operator in sort of a denser location? Are you guys just trying to get to the higher end of the 9.5 to 10.5 range? Or kind of just some thoughts on that.

Craig, it’s a good question. As we've said before, we don't underwrite operators; we underwrite theater location. And if you look at that operator, Cinema West is a regional player in Northern California and in the West has very, very strong performance. The theater that you're tracking there should be we think upwards of 2.5 coverage. So it’s a very strong theater, it’s a newly redeveloped mall in the area. We think it’s the right size. We think whether that’s in Utah or any of our regional operators across the country, we’ve had a very good success at underwriting theaters, not theater operators, but the theater because in the end, that's where our credit value is and that's how we’ve developed the highest performing theater circuit in America.

Would that type of location though, maybe -- it's one of the larger cities in Idaho, but I am…

Notwithstanding what you think, you're not going to get a better cap rate. The cap rate stands pretty much the same, 9.5 to 10.5 kind of across the operator spectrum. We make all of our operators whether you're big or small put in an equity component into their building with the FF&E and commit to that. Now we may do some credit support in the sense that some of the smaller guys, we will not allow them to pledge their FF&E, so that, that stays in the building and there is no removal of that; whereas some of the larger guys may have -- may want to pledge their lease or something like that. But generally speaking, the market for a good theater performing asset whether you are a regional player or a national player doesn't vary that much from our standpoint.

Okay. And then on the recreations there, how big do you guys want that to get as a percentage of the portfolio, either by book or whatever metric you kind of want to measure?

Craig, I just have to emphasize the point we’ve said before often on the call, we don’t really run the portfolio on an asset allocation model. We don’t drive to certain specific target with regard to investment. We look for good deals in areas where we know there is solid history on the concepts of high competency of the operators, cash flow coverage is very strong and we will take those as in different amounts and we don’t drive -- we don’t lead the dance, so it depends on our operators and the amount of opportunities they have before them. So it's hard to say. We’re not driving it specifically, we're very comfortable in all these categories we invest in and we're willing to let them grow proportionally. We clearly -- we started the company with very high concentration of single operator and single tenant-type cinemas, and so we're not going back to 100% in any one thing, but we will grow all of these, and I don’t really have a target to give you.

It's Jordan. Just following up on sort of the box office. The results year-to-date are obviously very strong per your commentary. I was surprised to see last week that the reports that AMC has scrapped their IPO plan given this backdrop. Any thoughts on that in terms of what you are seeing in sort of the theater business in terms of opportunity?

I can only say that, Jordan, that I think everyone -- we were just out at CinemaCon, which is the theater exhibition conference, and the studios are all very optimistic about their summer slate. And so the only thing I can say is that I think all film exhibition companies think their performance will be better after this summer than it was last year. So maybe anybody who is looking at something like that whether it’s AMC with an IPO or anybody looking to sell, that they think the valuations are going to be much stronger after the summer given the slate that’s out there.

So it might be a matter of timing.

Does that factor into your calculus at all in terms of the bid-ask with potential sellers or what have you in terms of where you may want to be on the investment side with theaters?

No, not at all. I mean, what we want to own is real quality theaters. Again, I know Craig asked this. It’s like I said; we don’t look at theater so much as they are an AMC theater or a Regal theater; we want to own really high quality cash flowing theaters, as David said. When we get to really strong, as we have talked before, if you have the #1 theater in LA, which we do, it doesn’t matter so much who operates that. But those are the kind of properties that you want to own which are consistently the high performing properties and that’s why we continue, as we say, to underwrite theater locations, not theater operators.

I follow that. I guess my question is more along the lines of, if the industry in general is looking for upside in the summer, are you a seller into that or not likely a buyer, because their expectations on price may be higher near term and into the back half of the year? So should we not expect many theater transactions out of you guys?

No, no, no. I am sorry, I misinterpreted your question. I think it’s not a seller or buyer for us. If there's a buyer, it’s more selling on the operations side and people are -- most theater deals even when we're buying them are fixed rent, maybe with some percentage rent components. So it really doesn’t change that much on a year to year. Now on the operating side, yes, the revenue, a good summer can significantly enhance the EBITDA and the corresponding value of an operator.

Jordan, these are long-term assets. We have very long-term perspective. The seasonal change in performance of the box office is really a good basis on which kind of to trade equity positions and the operators, but it’s not really a driver for our business. Just the long-term trends are, and this is part of the long term trend of very positive performance of this industry that still continues to amaze most people.

Your next question comes from Paul Adornato of BMO Capital Markets.

So looking at the charter school business, now that we’ve had this experience with Imagine and as the industry matures and more and more charters come up for renewal, I was wondering if this changes your hurdle rate for investment going forward.

Paul, I don’t think it changes our hurdle rates and like as I said, I think it does change how we underwrite. I think the model does show that if you have quality academics and a good fiscally responsible school, that, that is in reality an investment grade credit. So I think like I said, we have recognized, we went in, did a very strong transaction with a very strong balance sheet. We probably needed to improve our academic underwriting more; we have taken steps to do that and I think if you look at the quality of the performance of the schools that we’ve done subsequent to that, we have indicated that and those schools are performing very well. So I think as we moved into this space, we’ve learned, in education, it kind of sounds funny, but we have learned and we’ve evolved and I think we are doing it better than we had before. But I still think we believe that this space is fundamentally a very strong space, that we can underwrite it correctly and that it's delivered a very attractive risk adjusted return.

And as Greg included in his comments, the overall macro picture here is very strong with increasing enrolment. As I indicated, we have had increasing enrolment even in these schools that are going to need a substitute operator, but it hasn't changed or dimmed our enthusiasm in the category at all. We have improved and learned a lesson in how we're going to -- some of our structuring and some of our underwriting, but the hurdle rates really, it was not a yield question. We still think it's an attractive yield point where we are and we think we had enough backstop in the equation and as we indicate to you, we are going to be fine in this transition to some new operators or substitute properties.

And as David said, Paul, I mean these schools were financially operating very -- I mean these were filled nearly completely full schools that had...

Good ratios.

Great ratios, so this was truly more like I said of an academic performance issue.

And can you help us understand a little bit how you would underwrite the academic performance? I mean how can an outsider evaluate that or try to predict that?

I think one, that we've engaged academic professionals who have helped us improve our underwriting to that, to look at both their quantitative measures meaning how the schools or how the operator has performed and also as I said, their qualitative measures, how, what kind of academic program they have, what kind of structure they have put, what individuals are involved and how they're structured to create an emphasis on academics and the feedback loop by which they are willing to take criticism and improve that and there is a fairly substantial body of work on how to evaluate academic platforms and we’ve engaged various professionals to help us improve our underwriting going already and we’ll continue to do it as we go forward.

Your next question comes from Rich Moore, RBC Capital Markets.

On Imagine, going back to that for a minute, I mean 10% of their schools is what they have closing. Is that right?

Yes, that’s no. The 10% of that we think have the potential; we don’t know that the school -- they may substitute to other operators. We don’t know that the schools are going to close. We’re just making you guys aware of a problem.

Those are probably making a substitute offering.

Right exactly.

So not exactly closing.

So Imagine definitely won’t be at those 9 schools though. Is that right?

That is correct.

What we've seen Imagine do this successfully before is bring in a -- leave the scene and the school stays intact with a substitute offering.

Absolutely.

So they have about 90 schools, so if 9 of them are academically poorly run, why would we have confidence in the other 81?

It’s a fair question. I think first of all, remember that the majority of these are in one designation. So I think it's in St. Louis, now with the background of St. Louis, you need to understand that there's no getting around, every school -- every public school in St. Louis is failing. These schools are just not doing as well as some others, but they are all. Imagine took a very aggressive approach and came in and opened a large number of schools in a very challenged area and have not delivered on that promise. Now that probably is a result of them biting off more than they could chew, not been as responsive as they need to be. However, we do not believe necessarily that it is across all of their schools. That part of it is systematic to the challenge that they faced in St. Louis.

Okay. So it would be reasonable to think that they might not actually find a replacement at the schools there because it could be more than simply the operator. It could be the location.

Yes. But the kids still have to be educated, Rich. Somebody has got to come in and do it.

So the school won’t close is what you're probably getting at.

We are hopeful. I mean, there's 3,800 kids that were part of these schools in St. Louis. I mean, when I say, Rich, that the public schools had failing grades, I mean both the traditional public schools and the charter schools. So this isn't like there was -- clearly what we’ve indicated is there is a perennial movement for choice in St. Louis. That parents want a difference to the traditional public schools. The challenge is it may be difficult for one operator to successfully educate 3,800 kids in one challenged city, maybe we need to break this up and get multiple operators operating out of those different schools. It is a challenge, but there still are 3,800 kids that need to be educated there.

Okay. So does this, Greg, this doesn’t create some sort of backlash against Imagine do you think where other schools and other locations besides St. Louis see what’s going on and say, "I would rather not have Imagine as my operator?"

I don’t think so. I mean, I think we'll have to see how that goes. I mean, like I said there has been some published articles about Imagine. But like I said, there has been published articles about the failing of St. Louis schools in general. But I mean, I don’t want to excuse Imagine for -- I mean, they needed to deliver and they didn’t. Now as I said, they got a ton of schools where they haven’t had this problem. So I don’t know that we believe that this is -- that they have 80 to 90 problem schools. We just don’t see -- the evidence doesn’t indicate that.

I mean, Rich, your question is do we have a problem with 10%. Should we generalize from the 10% or generalize from the 90%? I think we are still generalizing from the 90%. We're certainly heightened in our concern due to the 10% but we don’t think that’s a case to generalize from the 10%.

And I think we are, as we’ve indicated now and we indicated previously, we are expanding our operator diversity to give us the flexibility to deal with these issues, should they arise.

Imagine, as a large portion of these problems do relate to St. Louis as Greg indicated. They were a very large scale operator in St. Louis. St. Louis has some very significant problems. As Greg indicated, the answer may be -- and by virtue of being a large scale operator in a failing market, you have kind of a bullseye on your back and it may be a need to break this up into less than a single large scale operator.

What we do know, Rich, is that we have quality educational facilities and parents who wanted their children to attend these facilities, so we need to find the right marriage between operator and performance and get them back into service.

Okay, that’s good. That’s fair. On TopGolf and Latitude, you sort of alluded, I think, David, to the idea that either these were going into or something like this could go into downsizing theaters. So as you take a 24 FX screen down to, say, a 14, these are the kind of tenants that would -- you would consider kind of like Toby Keith's I Love This Bar & Grill.

Yes, that’s correct we are actually doing that with Latitudes in Chicago.

Probably less so with TopGolf. Just specifically, even more so with Latitudes than Pinstripes and Toby Keith.

Okay. So how many, just out of curiosity, give us some idea of how many theaters you might, how many theater complexes might be impacted by the need to, obviously the 14 screen theater is more popular now than the 24. How big an impact is that do you think to you guys?

You know what we've said, Rich, is we probably have 1 or 2 a year for the next 2 or 3 years that are impacted that way. I mean like Cantera, the one that Latitudes is going into in Chicago was owned by ourselves in a joint venture with a German group, but it was a 30-screen that's going to a 17 screen. So we do have some of those, but we have 30 screens that have renewed and we have 24 screens that are renewing. So it's really an asset-by-asset depending upon the competitive balance, but it looks maybe 1 to 2 a year that we will reposition for a couple of years and then we have a whole period of time where we don't have any sort of renewals coming up.

And, Rich, I am going to add that some of these 24 screen, for example, or a 30 with 4,500 to 5,500 seats, some of these will be downsized in their seat count by conversion to luxury seating, which more operators are finding more success with and therein if you, they didn't need 5,000 seats in the market but they may need 2,500 seats in the market and by virtue of reconfiguration, they may use the whole box again and just seat less ,and so therefore we may not have a reuse of any portion of it.

And then the last thing I was going to ask you was on the digitalization of the theaters. I know your guys are all digital. Is that going to really be done by 2012, year-end ’12?

Yes, it will be substantially done, I think, for almost every major operator, they will be substantially digital because I think you've got the studios who have said that they will no longer support celluloid after 2014. So most people, if you do not have your digital, the general feeling, as I said at the Cinema Con, which is the exhibitor conference, was that if you didn't have your digital in place this year, you were not going to make it. So I think it will be this year.

And you do have a follow-up from the line of Anthony Paolone of JP Morgan.

Mark, I just wanted to go through the vineyard and winery numbers real quick. I think you had mentioned the carrying value now is a $116 million. Did I get that right or did I…

Correct. Yes, that's correct.

And that's the stuff -- that's the book that's both on the books as well as in discontinued ops.

Yes, correct.

And what was NOI or EBITDA from those assets in the quarter? I was having trouble tying that together.

On an annualized basis, it’s around 6.5 million. So it would have been 1/4 of that, call it $1.6 million or so.

Okay, and how much of the $116 million do you think can get sold in the next couple quarters?

Yes, we think with offers and purchase and sale agreements we have signed, probably near-term we're looking at 20 million to 25 million of sales and the good news is that those are not part of that $6.5 million. They're unleased properties at this point. So we expect, hopefully, the near-term sales related to those 4 to 5 deals that we talked about in our comments. So 20 to 25 in the near term and then we continue to market certain of the remaining assets -- well, all the remaining assets. Some of them are under lease and those are less likely to sell in the near-term just because there are more strategic buyers out there than there are income buyers at this point in time.

Okay, got it. And then the $42 million of notes receivable that come due in 2013, April, 2013, what does that relate to? It’s a 10% coupon; it's on page 26 of your supplemental.

Yes, the $43 million, that's our development note at Peak Resorts, so really some out snow [ph] and that’s a $43 million just got extended till April 2013 which was inherent in the agreement that they could extend for a year to April of 2013.

You expect to get repaid on that? Or does that convert to something else? Or what happens there do you think?

We'd expect to be repaid on that. I mean, I think that was when that was one of the uses of proceeds when Peak was considering an IPO this year was to repay that development note, for sure.

Okay. And then just last question, the theater expirations over the balance of this year, I think you’re down to 3 theaters. One, what are the prospects for those? And then two, I think you had 4 last quarter; you’re down to 3. What happened to the one? Was that the Chicago one you referenced?

Yes, I think all the ones from last year we've now dealt with, and they are in -- they're either renewed or we have signed new tenants with them to reposition and going into this, at the end of this year, I think we have 3 in 2012 towards the end of the year. I think we think there will be one renewal, one we’ll have to rework and one we are evaluating, haven't heard from AMC on. So we think probably 2 out of the 3 of those we think we will know something here in the next quarter or so.

Yes, then there is 4 in 2013, none in 2014, so I think for the next ‘12 and ‘13, there's a couple.

Yes, I think it will be a couple we have to rework over the next couple years.

But the one that -- because if I looked at your supplemental from last quarter, it had 4 scheduled for 2012 and now there is 3, so would that one...

We had an early renewal on one already from AMC.

And that concludes the Q&A session. I would now like to turn the call back over to Mr. David Brain, President and CEO.

All right. Well, I want to thank everybody for joining us again. It’s a pleasure to get together with you quarterly to report this information and as always, any specific questions please feel free to contact the company. We look forward to answering your questions and we will see you next quarter. Thank you very much.

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.