EPR Properties (EPR) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the EPR Properties Q4 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Brian Moriarty, Vice President, Corporate Communications. Sir, you may begin.

Okay. Thank you everybody for joining us today. I’ll start the call by informing you that this call may include forward-looking statements as defined by the Private Securities Litigation Act of 1995, identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate, or other comparable terms. The company’s actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of these factors that could cause results to differ materially from those forward-looking statements are contained in the company’s SEC filings, including the company’s reports on Form 10-K and 10-Q. Now I’ll turn the call over to company President and CEO, Gregory Silvers.

Thank you, Brian, and good afternoon to everyone. I’d like to remind everyone that slides are available to follow along via our website at www.eprkc.com. With me on the call today are Mark Peterson, our CFO; and Jerry Earnest, our CIO. I’ll start with our year-end headlines, and then pass the call to Jerry to discuss the business in greater detail. Our first headline, strong year – strong finish, highlights the fact that for 2015, we delivered an 8% year over year increase in earnings, while achieving record quarterly and annual revenues. Second, record investment levels and opportunities remain robust. In 2015, we also achieved a record level of investment spending. This is a direct result of our extensive relationships, depth of knowledge and differentiated investment strategy. Additionally, we’re highly confident that our significant long-term opportunities exist within each of our primary investment segments. Our third headline and owed to our primary segment is you oughta be in pictures. It speaks to the long-term sustainability of the movie exhibition industry as the box office reached a new milestone by surpassing the $11 billion mark and witnessed a 5% increase in attendance. This segment has proven to be stable and consistent, exhibiting the long history of steady growth. And lastly, monthly dividend increase. Subsequent to the end of the quarter, we were pleased to announce a 5.8% increase in our monthly common dividend for 2016. This equates to a $3.84 annual dividend and represents our sixth consecutive year with a meaningful dividend increase. Now, I’ll turn the call over to Jerry and then rejoin you following Mark’s remarks.

Thank you, Greg. In the fourth quarter of 2015, we sustained strong investment spending momentum with approximately $122.5 million across all our investment segments. Total spending for the year reached $632 million, an all-time record for EPR Properties. The fourth quarter and the entire year spending totals reflect our continued focused investment approach for each of our three primary investment segments. In our entertainment segment, the theater box office hit a new record in 2015, with ticket revenues eclipsing the $11 billion mark, a 7% increase over last year and attendance growth of 5%. There were a number of reasons for such a great performance and we detailed five primary factors in a recent article on the EPR Insight Center found on our website. However, as the article highlights, the key driver was undeniably strong content. Whether it was the revival of the existing franchise Star Wars and Jurassic Park or the continuation of a current one, Furious 7 and Avengers, the movies of 2015 were well received and attended and continue to validate the strength and reliability of the industry. The early months of 2016 have started off strong; however, the very strength of the previously mentioned titles and their delivery in two-year cycles will make it difficult to continue with the same trajectory that we had in 2015. Current expectations are for 2016 to be a flat year when compared to 2015’s outsized performance. We continue to see quality opportunities within the entertainment segment, with the continuation of the exhibitors’ migration to expanded amenity theaters. These opportunities involve both the purchase and conversion of existing theaters as well as the build-to-suit construction of new theaters. For the quarter, investment spending in our entertainment segment was $23.2 million, consisting primarily of investments in three build-to-suit theaters, one of which was completed during the quarter and one theater acquisition. Further, [replaced and serviced] during the quarter one build-to-suit family entertainment center. Our portfolio of entertainment properties now stands at 139 theaters, which includes 8 theaters located within our 9 entertainment retail centers and 7 family entertainment centers. In our recreation segment, our TopGolf properties continued to exhibit strong performance which further strengthens our master lease structure. During the fourth quarter, two new TopGolf properties replaced and serviced, increasing our portfolio to 19 operating golf entertainment complexes. We currently have an additional five TopGolf properties under construction. Turning to our ski portfolio, while the West Coast has benefited greatly from the strange weather patterns brought by El Niño, the same cannot be said for the rest of the country. With unseasonably warm weather, the record performance of last year ski portfolio with a 2.4 times rent coverage will not be repeated this year. However, there remains a substantial portion of the operating season to complete and we do not anticipate any issues with the portfolio. As we have discussed previously, we underwrite multi-year averages with the understanding that weather events can and do occur. Early indications are that late season performance may be strong, with aggregate attendance increasing 15% on a year over year basis for the President’s Day’s weekend. With less than a full year of operating history, Camelback Lodge & Aquatopia Indoor Waterpark continues to exceed our underwriting projections. Located at the base of Camelback Mountain, this property features a four-season mountain adventure experience, combined with a largest indoor waterpark in the Northeast. Recreation spending totaled $43 million during the quarter, which mainly consisted of the two previously mentioned TopGolf properties that were replaced and serviced and the five additional TopGolf properties that are under construction. Note that 9 TopGolf properties were previously replaced and serviced with construction spending still being completed. During the fourth quarter, we generated substantial investment spending across our education segment, which consists of public charter schools, early education facilities and private schools. All three of our education property types continued to sustain a strong growth profile. Approximately 3 million children are currently enrolled in public charter schools and growth remains strong. Enrollment at our early education and private schools continue to meet or exceed our underwriting, as many of these properties are newly opened build-to-suit. During the fourth quarter, we invested $53.1 million in the development or expansion of 22 public charter schools, four private schools and 26 early education centers, as well as the acquisition of two public charter schools and two early education centers. Three early education facilities replaced and serviced during the fourth quarter. Subsequent to year-end, one charter school with a loan balance of $19.3 million was paid off by the borrower. As Mark will further discuss, in addition to the loan balance, we received a termination fee payment of $3.6 million. This charter school was previously in our 2016 guidance for investment dispositions. With regard to the Adelaar development, as we discussed on our investor call, we significantly de-risked our involvement in the project by reducing our capital commitment and development obligations. In conjunction with this update, we noted that the next major development in the project would be the successful equity raise by Empire Resorts to fund their casino resort. We’re pleased to report to you that Empire Resorts has completed its rights offering and raised approximately $290 million of proceeds. Additionally, we’ve made significant progress in the development and construction of the project infrastructure and we expect tax exempt bonds to be issued in the second quarter of 2016. Our overall occupancy remains strong at 99%. I want to reconfirm that approximately $75 million to $175 million in asset dispositions and capital recycling are included in our plan for 2016. Further, the sale of $50 million in Imagine School assets, which we anticipate to occur during the second half of 2016, are included within this disposition guidance. As I said throughout my comments, investment spending for 2015 was very strong, exceeding our initial guidance by over $100 million at the midpoint. With our guidance for 2016 at $600 million to $650 million, you can see that we expect our strong investment pipeline to continue. Each of our segments is contributing to this growth. With that, I’ll turn it over to Mark for a discussion of the financials and I’ll rejoin you for questions.

Thank you, Jerry. I’d like to remind everyone on the call that our quarterly investor supplemental can be downloaded from our website. I also want to point out that as we continually seek to enhance our transparency, we have added several new pages to the supplemental, including pages 29 and 30. Page 29 is entitled Net Asset Value Components and provides annualized cash NOI run rates by segment and subsegment. As reconciled in the appendix, GAAP amounts have been adjusted for non-cash items, in-service timing, and percentage rents and participating interest to provide annualized cash run rates that facilitate NAV calculations by subsegment. Page 29 also includes the other relevant components from our year-end balance sheet to assist in computing an overall company NAV. On page 30, we have also provided annualized GAAP NOI run rates by segment and subsegment to facilitate FFO modeling. These amounts are also reconciled to our GAAP amounts in the appendix. We hope investors find both of these pages useful. Now, turning to the first slide, FFO for the fourth quarter increased to $71.3 million from $63.5 million in the prior year. FFO per share was $1.18 this quarter compared to $1.10 in prior quarter. FFO as adjusted for the quarter increased to $70.7 million versus $65.1 million in the prior year and was $1.17 per share for the quarter versus $1.13 per share in the prior year, an increase of 4%. Now, let me walk through the key line item variances for the quarter versus the prior year. Our total revenue increased 7% compared to the prior year to another record quarterly amount of $112 million. Within the revenue category, rental revenue increased by $14.7 million versus the prior year to $90.6 million, resulted primarily from new investments. The increase from new investments was partially offset by the impact of the weaker Canadian dollar exchange rate versus the prior year of approximately 15%, which reduced rental revenue as well as tenant reimbursements at our Canadian properties on a comparable basis by approximately $1.5 million. Note that this decrease was partially offset on the total revenue line item by an increase in other income of $436,000 due to favorable settlements of foreign currency swap contracts. When combined with the impact of lower property operating expense as a result of the weaker Canadian dollar, FFO as adjusted per share was lower by $0.01 compared to the prior year as a result of the movement in Canadian exchange rates. Percentage rents for the quarter included in rental revenue were $1.2 million versus $363,000 in the prior year. The increase was primarily due to $357,000 in percentage rents related to one of our private schools. About $300,000 more than prior year in percentage rents related to our golf entertainment complexes and higher theater percentage rents. Other income increased by $910,000 during the quarter and was due to favorable settlements of foreign currency swap contracts discussed previously as well as a deal termination fee received during the quarter of $500,000. Mortgage and other financing income was $15.9 million for the quarter, a decrease of approximately $8.3 million versus prior year. The decrease was primarily due to the $76.2 million prepayment received in December of 2014 from Peak Resorts, which also included recognition of a prepayment fee of $5 million as well as $800,000 in participating interest in the prior year. Also contributing to the decrease during August of this year, the mortgage related to the Camelback hotel and indoor waterpark was rolled into the lease on the adjacent ski hill and outdoor waterpark at the tenant’s option. Therefore, rental revenue increased and mortgage financing income decreased. On the expense side, our property operating expense decreased by $1.2 million versus the prior year, due to the impact of the weaker Canadian dollar exchange rate versus the prior year discussed previously and lower bad debt expense. G&A expense increased to $8.1 million for the quarter compared to $6.3 million in the prior year, due primarily to an increase in our payroll and benefit costs, including additional personnel to support our growing asset base and an increase in incentive compensation. Our net interest expense for the quarter increased by about $800,000 to $20.8 million. This increase resulted from more outstanding borrowings, offset by an increase in interest capitalized on Adelaar of $2.4 million during the quarter, as well as a lower weighted average interest rate. Finally, income tax benefit of $936,000 for the quarter relates primarily to a recent Canadian tax law change. Because the effective rate on the income from our Canadian assets went up by about 4%, this increased the value of the deferred tax asset on our balance sheet and contributed to a non-cash deferred tax benefit of $1.4 million for the quarter that has been excluded from FFO as adjusted. The offsetting amount totaling $500,000 is current tax expense, which is included in FFO as adjusted. Now, turning to our full year results in the next slide, our total revenue increased 9% versus the prior year to approximately $421 million and FFO as adjusted per share increased nearly 8% versus the prior year to $4.44 from $4.13. Turning to the next slide, I’d now like to review some of the company’s key credit ratios. As you can see, our coverage ratios over the years have been consistently strong. For 2015, fixed charge coverage was 3 times, debt service coverage was 3.2 times, and interest coverage was 3.7 times. We increased our monthly common dividend by over 6% in 2015 and our FFO as adjusted payout ratio was 82%. Our previously announced monthly common share dividend for 2016 represents another strong annualized increase of nearly 6%. Our debt to adjusted EBITDA was 5.1 times for the fourth quarter annualized and our debt to gross assets ratio was 42% at December 31. As I discussed last quarter, property under development which totaled $379 million at December 31 creates a penalty to our debt to adjusted EBITDA ratio because we had to raise capital for these funds, but the related EBITDA will not be included in the denominator until the properties are put into service. Nonetheless, as you can tell by these metrics, our balance sheet is in great shape to fund our strong pipeline. Let’s turn to the next slide and I’ll provide a capital markets and liquidity update. At quarter end, we had total outstanding debt of $2 billion. About 86% of this debt is either fixed rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 5.2%. We had $196 million outstanding at year-end on our $650 million line of credit and we had $4.3 million of cash on hand. We are in excellent shape with respect to debt maturities. As of year-end, we have scheduled balloon maturities of only $64 million in 2016 and $158 million in 2017. Turning to the next slide, during the quarter, we prepaid in full two secured mortgage notes payable totaling $34.2 million with an average interest rate of 5.84%. And subsequent to year-end, we prepaid one secured mortgage note payable for $4.8 million, with an annual interest rate of 7.37%. Our secured debt as a percentage of total debt continues to decrease and now stands at less than 14%. During the fourth quarter, we issued 1.6 million common shares under our direct stock purchase plan or DSPP for net proceeds of $90.4 million. This brings the total issue under this plan during 2015 to 3.5 million common shares for total net proceeds of $190.3 million. As I have stated previously, this plan is an effective, low cost way to raise equity capital to fund our ongoing build-to-suit business. Additionally, subsequent to year-end, we took advantage of the timing of our recent inclusion in the S&P Midcap 400 Index and issued 2.25 million common shares in a registered public offering for net proceeds of $125 million. We were very pleased with the offering, especially given the recent market volatility. The proceeds from this offering were used to pay down our line of credit. Turning to next slide, we are confirming our guidance for 2016 FFO as adjusted per share of $4.70 to $4.80, and our guidance for investment spending of $600 million to $650 million. Guidance for 2016 is detailed on page 31 of the supplemental. On that page, note that in our current guidance, we have now broken out prepayment penalties related to early prepayment of public charter school mortgage loans from termination fees related to exercises of options to purchase public charter school properties. The reason for this break out is the different treatment between the two for GAAP and for the NAREIT definition of FFO. Prepayment penalties received related to mortgage agreements are included in mortgage and other financing income per GAAP and are included in FFO and FFO as adjusted. However, termination fees received related to leases where an operator exercises its option to purchase the property and terminate the lease prior to the lease maturity are included on the gain on sale of real estate per GAAP and thus are excluded from the NAREIT definition of FFO. Therefore, to be consistent with how prepayment penalties are treated and with the wording and intent of the lease agreements, we add this amount back to FFO to come to FFO as adjusted. Note also on page 31 that the midpoint of our guidance for combined prepayment penalties and termination fees related to public charter schools has increased by $1.5 million. This increase is primarily due to the earlier prepayment in January of a mortgage note receivable related to a public charter school that Jerry discussed in his remarks. As part of the $3.6 million prepayment fee, the borrower agreed to pay the interest that would have otherwise been due in the months following the early prepayment date through the originally scheduled prepayment date. Accordingly, the increase in prepayment fees as a result of this agreement is offset by lower mortgage and other financing income in subsequent months and thus does not result in an increase in our FFO as adjusted guidance for 2016. I would also like to point out that the per share results for FFO and FFO as adjusted this quarter and for the full year 2016 include the effect of the conversion of the 5.75% Series C convertible preferred shares as the conversion would be dilutive to these measures. Finally, while we don’t typically give quarterly guidance, I did want to give some guidance for FFO as adjusted per share for the first quarter of 2016. Usually we caveat that first quarter earnings are lower due to higher G&A and lower percentage rents and participating interest than expected for the remainder of the year. However, the first quarter of 2016 will include the $3.6 million in prepayment fees we received related to the prepayment of the mortgage note receivable I discussed previously. We still expect G&A to be approximately $350,000 more in Q1 than the full year divided by four. Additionally, combined percentage rents and participating interest are still expected to be much lower in the first half of the year versus the latter half. For Q1, we expect about $550,000 in such income. So putting this all together, our guidance for Q1 FFO as adjusted per share is $1.17 to $1.21, which at the midpoint represents an expected increase of almost 16% versus the prior year. Now with that, I’ll turn it back over to Greg for his closing remarks.

Thank you, Mark. In summary, 2015 demonstrated the strength of our investment segments and our ability to combine knowledge-based underwriting skill and relationships in the sustainable long-term growth platforms. It also assured recognition that consumer behaviors are shifting to reflect new demographic changes. No longer does the consumer simply want more stuff, but rather they value more experiences. This movement bodes well for our experiential investment segments and should create significant opportunities for the future. As we discussed before, we have the knowledge, the relationships and the balance sheet to convert these opportunities into quality investments that will not only strengthen our portfolio, but also provide the reliable income stream to grow our dividends. With that, I’ll open it up for questions.

[Operator Instructions] And our first question comes from the line of Nick Joseph of Citigroup.

What were the cash cap rates on the acquisitions in the quarter and if you can break it out between theater, the charter schools and the early education centers?

I would tell you and Jerry you can jump in, but I’d say mid-8s for that area, our TopGolf, as we talked about, is pursuant to an agreed upon deal. Those are probably at 9 area. And the theaters are probably in the mid-8s to 8.25 range.

And then you mentioned that you expect no issues in terms of rent coverage for the ski hills due to the warmer weather earlier this winter. But can you put some numbers around where 2015 finished and your expectations for 2016?

As we talked about, 2015 was our, let’s call it, last key season because it generally bridges two actual calendar years was 2.4. As we discussed before, we underwrite these to a range and we’ve seen that range in 2011, 2012 to be like 1.25 and we’ve seen the upper end at 2.4. We look at these, Nick, on a five-year moving average. We think within that range, we’re going to have – within that period, a good year, a great year and they’re all going to balance out to around that 1.7, 1.8. So we think that we will be within that range for this year, which will comfortably allow our tenants to pay their rent and to move forward, fill our reserves as we require for our next season. And so we don’t anticipate any issues.

And our next question comes from the line of Dan Altscher of FBR.

I think the new NAV disclosures are really helpful, there’s a lot of detail in there. But Mark, I was wondering if maybe you can give us little bit of a cheat sheet in terms of – because there is a lot of adjustments in terms of what’s included – something like that goes [indiscernible] quarter and you’re annualizing it, is there – if you can...

Let me walk you through that. I was trying to – you’re right. There is a lot of detail, but at the end of the day, what we’re really doing is taking the GAAP amounts by segment and subsegment, megaplex, ERCs, et cetera, and we’re adjusting for what went into service during the quarter, so you get a full run rate of something went in mid-quarter, we want to show the annualized run rate of that, which you’d have to estimate otherwise, maybe using a mid-quarter convention or some such way. So we’re making that easier. For percentage rent and participating interest, importantly, it’s not a projection of the future, but there is some seasonality to our percentage rent and purchase of bidding interest. So what we’re doing is taking the number that happened in the quarter and just putting it back on a 12-month trailing basis. So whatever the trailing 12-month was for percentage rent and participating interest, we’re normalizing that, if you will. And finally, on the NAV schedule, we’re also removing non-cash revenues. We’re eliminating the impact of straight line rent. The only difference between what’s really happening on the NAV schedule versus the GAAP schedule is the GAAP obviously is going to leave that non-cash revenue in there. But it is still going to make the in-service and percentage rent and participating interest normalization adjustments. That’s really the top of the schedule. Then, we provide other components in the middle of the page off the balance sheet that we think are relevant for computing an NAV, so you maybe apply cap rates to the upper numbers, you then pick up the other numbers on the balance sheet to compute an NAV. And importantly, property under development, we’re not doing anything with that in the upper part of the schedule. So if there is property under development, the only thing what normalizes is those projects that went in service during the quarter. There are different ways to look at that property under development. I realize some people might put in other cost, others may give more credit than cost. But we’ll let you guys determine that. So that’s really the gist of those two pages.

And that’s also all the run rate cash numbers are also prior to any rent [terms] that’s happened or will be happening through the year, so it’s not like the forward look?

It’s not a forward look. It’s cash, so if it happened during the quarter, it’s in there. But if it’s a future bump, no, it’s not a projection. It’s what’s currently has happened already.

There was some commentary or color on your Imagine sales and I think the [indiscernible] stated as being the second half of 2016. I guess, is that just because maybe you already have buyers or contract wind up for those and just takes time to close or they haven’t really started marketing those yet, just what’s driving the timing for back half of the year?

I think part of it is we just started gearing up, interviewed all the brokers, selected brokers, they are putting packages together and just anticipating what that timeframe will look to roll from actually interest to LOIs to contracts to sales.

The warm weather impacting ski a little bit, I think we get, but on the opposite side, is that or has that impacted TopGolf at all in the early parts of – or late part of last year and the early parts of this year at all from a positive standpoint?

They are running at – as their strong coverage indicates so much of capacity. We haven’t seen, as Mark pointed out that we had some additional percentage rent that really had to do with new properties coming into service. Like I said, when we’re looking at between 3.5 and 4 times coverage, it’s hard to meaningfully improve that even further from our standpoint, but I would assume that warmer weather probably is helping them out somewhat. But we haven’t seen those reporting numbers yet.

One just last one from me, when you look at the equity of Peak Resorts, the equity markets are certainly saying one thing. When you guys had discussions with them, what are they telling you, are you having any conversations in terms of trying to help them out at all or just how are you talking or what was the tone from them in relation to your position?

I think from us, I think they are thinking that the second half of the year – that there is resilience in these properties and that the second half of the year will be strong. As I said, they had strong President’s Day weekend. We’re not having conversations about helping them out in that sense. They funded their rent to date, they’re funding their reserves. So everything for us looks to be coming along fine. I get the idea that their equity maybe trading around, but they are in a different volatile position than we are. As I said earlier, we underwrite this to create consistent and reliable cash flows and that’s why how we price our capital, but we’ve had no discussions about any help and it doesn’t appear from their performance that there would be anything to discuss there.

And our next question comes from the line of Craig Mailman of KeyBanc.

Mark, on the guidance, did you guys have the equity offerings already baked into your prior range?

Yes, we did. We didn’t have the exact same timing, but substantially yes, and we did have equity. So it was already included in the guidance. There was no real change as a result of updating our capital plan. Our total investment spending really hadn’t changed and we had the capital being raised in the plan. So that really didn’t have an impact on the guidance.

And then just on the investment spending, I think if I’m looking at the sup at your construction page 20, it looks like about $460 million of the $600 million to $650 million is in the bag, is that the way you guys are looking at it?

Actually I think the number is about close to $300 million. If you’d look at the top part of the schedule and add up [2016], it comes up to like about $273 million. And then if you look at mortgage build-to-suit spending estimates for 2016, you get about another $25 million and that’s how you get closer to – it’s about $300 million. It’s a little less than 50% of our spending related to projects that had already been started as of December 31. There is other names and other approvals beyond that, but these are ones that have been physically started as of the end of the year.

Craig, that number is consistent with where we’ve been before, going in with about half of our year already in process, knowing that there is this cyclical nature of what we do with the build-to-suit. And if you think about if we do the same level again will fill that other half in part of the year in that half will roll over into next year again.

I guess it sounds like you guys are pretty bossed there on the outlook to put money to work. But it sounds like at this point it’s a little bit too early with what you guys have in the pipeline to say that it could be that much better than the investment spending from 2015?

I think that’s a fair statement. I think what you saw us do last year is a similar idea that at this early point we guide to what we feel very comfortable with as we get greater confidence as we move through the year just like last year, maybe we’ll have – we hope and think that hopefully we’ll have the opportunities to continue to grow that as we go through the year. But at this early point, in our mind, there is no value to throw a big number out there just to create a lot of interest. We have great confidence in what we can deliver with that number and we also have a good team here that feels that we have a very good opportunity set. It’s just a matter of converting opportunities into investments.

Also, important to point out that most of what we do is build-to-suit, so if we increase that number, from an earnings perspective, it’s usually – will probably impact more the following year than the current year, just to keep that in mind, unless it’s an acquisition that comes along.

And then just the termination related to the school that you guys are getting, you said that’s related to one that you are selling. It was already planned in the sales. Does that change your timing at all, or do you guys look to try to secure a tenant on that before you look to sell it, or just additional color on that.

I’ll let Mark to jump in on, but remember this is the actual school buying their school back and then bonding it out under a bond deal. So this was a note. And as Mark indicated, I’ll let him talk a little more, remember what they did, they wanted to take advantage of a bonding opportunity. So if they had the opportunity like in our plan in September, they went ahead and paid us nine months of rent plus the penalty they would have paid in September to go ahead and take advantage of that.

That’s accurate. So they prepaid the note, like you said, plus this $3.6 million prepayment penalty. And then they prepaid, as part of that $3.6 million, as Greg said, they paid nine months of interest in advance. So while from an FFO perspective, the termination fee is higher, interest income going forward is lower and we get a little bit of economic benefit as far as getting cash earlier, it really doesn’t have much FFO impact. But it is a slight economic benefit in getting the cash earlier than having to wait for the nine months to play out.

And then just lastly, with the FASB rule changes, looking like they’re coming down the pike, any different conversation you guys are having with any of your public tenants on the movie theater side or elsewhere about their attitude versus future rent versus own conversations?

Not really, Craig. I think most of our theater tenants in that way – a lot of – I think the majority of our tenants are – they have committed to being in a real estate-light balance sheet and they’ve been in that scenario for a number of years. And there is really no real discussions about reversing course on that. In fact, we are not having – I look to Jerry, but I haven’t had any calls, any discussions on that.

And our next question comes from the line of Anthony Paolone of JPMorgan.

I saw the Empire Resorts got their equity deal done and you mentioned now they will have to do a tax exempt bond deal. And I was just curious, is that market actually open right now or is there any risk to that?

Tony, let’s make sure – two different issues. The tax exempt bond, as we talked about, was to fund the infrastructure that we’re responsible for. So it has nothing to do with the gaming facility. They actually have a commitment for a debt piece that they are going out to syndicate on, but the two don’t relate. The bond issue is a tax exempt bond for the infrastructure and they’ve raised their equity piece and now they will, I don’t want to speak for them, but I think shortly they will be in the market for their debt piece that may be syndicated bank loans, that maybe some other structure, but they filed some documents related to that and they feel, like I said, they have a commitment for it and they have a great degree of confidence on their ability to successfully raise that.

For that infrastructure bond, that tax-exempt market is open and in great shape right now.

And then over at Schlitterbahn, can you just update on – I think some more cash is expected to come in from that deal this year. Do I have that right?

Actually we don’t plan to have it this year. I mean, it’s possible towards the end of this year, but we are planning that more as a 2017 event. It could happen earlier, but we’re not baking into our guidance.

Tony, some of that is related to, so you understand, even though the properties may have been sold and leased and their construction is underway, that there are some escrows that dollars get released upon them opening. So it really is going to be a timing of them getting opened and properties coming online, of which we’re no longer involved. We are involved monitoring it, but it’s not our money going into it. We just have a trigger there to keep us involved to make sure they are progressing.

And how much is that amount when it does open and it gets released?

All together, it’s about $10 million, $12 million of money in escrow, yes. We get to have – there is plenty of bonding capacity left. I think the next tranche might be like $40 million.

I think there is another, the property is broken down into actually four segments, which they each can then – and the point of that was that was, Tony, these bonding cycles have think of them as 20-year amortization, so you don’t want to issue one – you issue a bond by project segments, so you still have 20 years on the other three. So when you find somebody to go on that property and there still remains probably, I’d say, close to slightly over another $120 million or so, right in that range, of capacity related to those other three parcels.

And as we said when we last talked about, we got the proceeds, the first tranche that came through, the next roughly $25 million we get and doesn’t reduce our interest income. So it is a nice benefit when that money comes in it’ll be like a free equity raise, but we don’t anticipate that. We’re not planning for that yet in 2016, it’s beyond 2016.

So maybe you get that first $10 million sometime in 2017 and then there would be like another $15 million potentially thereafter at some point before interest income changes?

Yes. I think the first $10 million is easily identifiable as escrow and those construction of projects that are substantially already started. If you came out and saw the project, you could see a lot of construction going on. The next $15 million we get is part of that – one of those other phases in which we’ve got to identify a new user for either lease them the property, sell them the property and then issue the bonds on those. Those bonds are available, they haven’t been issued. So to get to Mark’s point, we’ve got $10 million of bonds that have been issued and that cash is in an escrow. That’s easily definable and the conditions to get it out being that these properties get built, so that’s something that, as that construction finishes and, as Mark said, as we get into early 2017 that money will be accessible by us. The next group of money of which the first $15 million we get without any reduction of any of our economics really is contingent upon another phase of development going forward.

And on the asset sales, and you guys, I think said you have New Roc City in the market, is that not in guidance for sales?

Do you know what, I think the issue is – we didn’t necessarily say one asset or specific assets, we didn’t try to match those up. We have a couple of things. And without commenting on a specific, as we said, there are some of our portfolio that we thought and we talked about we wanted to lower our exposure to Imagine. We also thought that there was some really cap rate awareness and some price awareness on some other assets. So it fits within the entire range of what we said, if we remember $75 million up to $175 million, so it fits within that range, but we’ll see if it comes to fruition and if we like the price and if we move forward.

But if that works in some of these other things, is it safe to – is my thinking right that you guys could actually go above the high end of the range potentially?

If you think about what we talked about, there is the potential for it depending upon sale. But if you look at $50 million, what we talked about, of potentially of Imagine and then other and we said the range is $75 million to $175 million, then you’re starting to look at the potential range. Could we go above that? If we get what we think are very attractive prices that are good for our shareholders, for recycling capital, then we’ll take – definitely take a look at that. And if it makes sense for us, again, as we said, in some of those situations, it’s a recycling of capital. If it’s cheaper equity than issuing equity, then we have an obligation to our shareholders to recycle that capital and take advantage of that and we will definitely take a look at that.

And last question on the other side, on the acquisition side. Given where your implied cap rate is and there’s been some market volatility, at least on our screens, does the acquisition environment straight up look any more interesting or do you find yourselves more competitively positioned at this point?

I think we feel good about how we’re positioned. I mean, clearly, there is people who are having challenges and don’t feel like they can effectively raise money. So I don’t know that I think that there is something that we can definitely take advantage. So we live in our lanes, we know our specialties, know where we’re investing at. We’re dealing, as I said, far more directly with the operators than we are on in our sales. We’re hopeful that some other people who have engaged in some of our areas and maybe they are not able to close or maybe they are pulling back, that will create opportunities for us. But at this early part of the year, we’re not necessarily forecasting it, but we do feel really good about how we’re positioned, how the opportunities are coming to us, and that if this continues to play out that we’ll see more.

And our next question comes from the line of Rich Moore of RBC Capital Markets.

Are you planning to unencumber those four loans that – or just put those four loans on your line of credit as they come due later this year, Mark?

We had [indiscernible] secured debt. We would, as part of our normal financing, probably put it on the line and then ultimately we would permanently finance it. So we would initially use the line of credit as our warehouse and then we’re going to permanently finance likely with long-term unsecured debt.

So in general, you’re just going to keep using that model?

Yes. That’s what we’ve been doing.

So I think it is kind of interesting because you guys – and Tony kind of alluded to it a bit, you’re in sort of an interesting spot because you’re doing all of these dispositions which raises equity, which is great. Your line of credit doesn’t have much on it after the recent equity offering and you don’t have that much that you would be adding to it. So I’m kind of curious, what do you think about equity issuance? Your stock has obviously done very well lately, but there’s not all that much to do with the equity if you issue any on the ATM or if you did a bigger equity offering. There’s just not much to do with it. So I’m wondering how you guys think about do you keep pushing that line down to zero or what do you guys do exactly?

I think we got a lot of flexibility. We can be opportunistic. Like you said, we had almost $200 million on our line at the end of the year. We raised $125 million subsequent to end of the year, so call it $70 million net. But we still have $625 million of investments, we have the loan maturities that you mentioned, and then offsetting that the disposition of free cash. But there’s still quite a bit of capital raise, both equity and debt, and the good news is with having such a low balance on our line, we have a lot of flexibility to do it when it makes sense. So we do have equity and debt, additional, both in the plan, but we have flexibility as to when and how we do that.

I think what – I reiterate what Mark said. It’s nice to have a lot of arrows in the quiver. And we’re looking at the most effective cost of capital, whether that’d be through disposition of assets, raising equity and taking advantage and be nimble enough to take advantage of that and deliver the best value to our shareholders.

So would you guys have a cash drag at any point do you think during the year as you go along? The way you’re modeling it, you obviously know what you need for development and the timing of that. But is there a point where you might actually – or did you model in any cash drag or is it always...

We don’t model it a lot. Historically, we haven’t had a lot of that. Our timing has been more in sync with having a line of credit that you’re able to use the cash immediately. But to your point, if the market is right to have a little bit of cash drag for a period of time, we’re not opposed to. I think we have that flexibility. In the plan, we haven’t built in a lot of raises and carrying cash for long periods of times if that’s your question, but in the short run, depending on the cost of capital, it can make sense. So I think we the flexibility to do that within our guidance range.

And then just one thing on Camelback, are you done with that? Is there no additional spending for Camelback?

I think there might be a little bit as it winds up. And again, we will, as with all of our tenants, as they look and say, I mean I would tell you that I think the owners there would say that they are exceeding their expectations. So might there be room for further expansion or further amenity? We are talking to them on that. That’s the same group that’s going up into Adelaar. So that relationship is very strong. We feel very good about their professionalism as operators. Their performance is not to be ignored. They have just really, as I said, greatly exceeded and really demonstrated their power of a Four Season resort and actually split their revenues about evenly over summer and winter. So it actually creates a very risk reward profile that we’re interested in.

And our next question comes from the line of Dan Donlan of Ladenburg Thalmann.

I got on a little bit late, so I might have missed this. But just going back to the guidance, I was looking at page 31 and then I was looking at page 31 of the prior, and it looks like you are adding back termination fees for public charter schools which hadn’t previously been an add-back. So I’m just trying to figure out what changed this time versus last time or is there some type of accounting thing that I’m not understanding?

I’ll explain that. Let’s start with when we have prepayment fees on loans, those go in mortgage and other financing income, they fall through to FFO and they stay in FFO as adjusted. So when we have these prepayment fees on a loan, that’s the way it’s treated. When you have an owned asset, what GAAP will make us do is take the proceeds versus your carrying value, so your carrying value is kind of your net book value straight on and that entire difference though requires us to book that as gain on sale. So however, in our minds, it is no different than the prepayment situation. So what we do for a owned asset is bifurcate, and it’s clearly outlined in the contract that it’s a penalty for early option exercise. The difference between what we received and the development costs, that’s a termination fee. And the gain on sale really becomes the difference between the development costs and that carrying value that I said, net book value and straight line rent. But because GAAP calls it a gain on sale, FFO NAREIT definition requires us to back that out, and by the way, we determine that with our accountant subsequent to the end of the third quarter. That’s why the change and that’s why there is no impact on FFO as adjusted. We’re backing out the gain on sale for FFO NAREIT definition, but then we’re adding it back in for FFO as adjusted treatment, which is consistent with what our original guidance was and consistent with what we think the right way to look at that similar to a loan prepayment.

So you thought you’d be able to keep it in the NAREIT definition of FFO, then you realized that wouldn’t happen, and that’s why the FFO as adjusted is not changing, is that roughly correct?

That’s exactly right.

And then just curious on the – and I’m sorry if you talked about this earlier – on the build-to-suit on the school side, did you break out what was charter versus private versus early education? Are you seeing any difference there than maybe you have in years past?

We did, if you follow the presentation online we talked about, we had 26 early eds, we had 22 charters, so there is a breakout there. I don’t know if we’ve broken out in the supplemental, but it was out there. I think, again, we’re seeing – not really that much different, I think the quality of the opportunities we’re seeing, we really like. And the opportunity to grow and build our private school as we’ve demonstrated, our strength in that ability and to deliver product on time, so again, we’ve seen that education segment continue to grow and we think it will grow again this year.

And just the supplemental and the changes I appreciate, but I kind of like the old one a little bit better. I’m just kidding.

We didn’t take anything else. There was a lot of work for that.

I know, I’m just kidding. I really appreciate it. It’s very helpful to be able to kind of mesh the cash run rate with what we have been doing previously.

I figured I’d make it easy on you, Dan, that was the whole point of it.

I’m showing no further questions at this time. I would now like to turn the call over to Mr. Greg Silvers for closing remarks.

Nothing really special, just want to thank everyone for attending today. And we appreciate your time and attention. And we look forward to talking to you next quarter or at the end of the first quarter. So thank you and talk to you guys soon.